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In Colony, Inc. v. Commissioner, 357 U.S. 28, 37 (1958), the
Supreme Court, interpreting section 275(c), I.R.C. 1939, the
predecessor of section 6501(e), specifically stated that the
result that it reached is in harmony with the language of section
6501(e)(1)(A):
We think that in enacting section 275(c) Congress
manifested no broader purpose than to give the
Commissioner an additional two years [now three] to
investigate tax returns in cases where, because of a
taxpayer’s omission to report some taxable item, the
Commissioner is at a special disadvantage in detecting
errors. In such instances the return on its face
provides no clue to the existence of the omitted item.
On the other hand, when, as here, the understatement of
a tax arises from an error in reporting an item
disclosed on the face of the return the Commissioner is
at no such disadvantage. * * * [Id. at 36.]
The precise holding of the Supreme Court in Colony, Inc. v.
Commissioner, supra, was that the extended period of limitations
applies to situations where specific income receipts have been
“left out” in the computation of gross income and not when an
understatement of gross income resulted from an overstatement of
basis. The Supreme Court stated:
In determining the correct interpretation of sec.
275(c) [now sec. 6501(e)] we start with the critical
statutory language, “omits from gross income an amount
properly includible therein.” The Commissioner states
that the draftsman’s use of the word “amount” (instead
of, for example, “item”) suggests a concentration on
the quantitative aspect of the error–-that is, whether
or not gross income was understated by as much as 25%.
This view is somewhat reinforced if, in reading the
above-quoted phrase, one touches lightly on the word
“omits” and bears down hard on the words “gross
income,” for where a cost item is overstated, as in the
case before us, gross income is affected to the same
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