Salman Ranch Ltd. v. United States

Opinion for the court filed by Circuit Judge SCHALL.

Dissenting opinion filed by Circuit Judge NEWMAN.

This is a tax case. On April 10, 2006, the Internal Revenue Service (“IRS”) issued a Final Partnership Administrative Adjustment (“FPAA”) adjusting the 1999 partnership tax return filed by Salman Ranch Ltd (the “Partnership”). On July 5, 2006, the Partnership and William J. Salman, the Partnership’s tax matters partner (together, “Appellants”), filed suit in the United States Court of Federal Claims, challenging the validity of the FPAA pursuant to 26 U.S.C. (“I.R.C.”) § 6226.1 In due course, Appellants moved for summary judgment on the ground that the FPAA was untimely under the three-year statute of limitations of I.R.C. §§ 6501(a) and 6229(a). Therefore, according to Appellants, the adjustments in the FPAA were of no effect. The government cross-moved for partial summary judgment, seeking a ruling that the FPAA was timely. Ruling on Appellants’ motion and the government’s cross-motion, the court rejected the argument that the three-year statute of limitations controlled the issuance of the FPAA. Instead, the court held, the IRS was entitled to the benefit of the six-year statute of limitations of I.R.C. §§ 6501(e)(1)(A) and 6229(c)(2). Salman Ranch Ltd. v. United States, 79 Fed.Cl. 189, 204 (2007).

On December 6, 2007, the Court of Federal Claims certified its ruling for interlocutory review pursuant to 28 U.S.C. § 1292(d)(2). Salman Ranch Ltd v. United States, No. 06-CV-503, slip op. at 6-7, 2007 WL 4707751 (Ct.Fed.Cl. Dec. 6, 2007). Thereafter, on March 11, 2008, we granted Appellants permission to appeal. Salman Ranch Ltd. v. United States, 273 Fed.Appx. 926, 927 (Fed.Cir.2008). For the reasons set forth in this opinion, we now reverse the decision of the Court of Federal Claims that the IRS was entitled to the benefit of the six-year statute of limitations. Since it is undisputed that, without the benefit of that limitations period, the FPAA was untimely and thus invalid, the case is remanded to the Court of Federal Claims with the instruction that it enter judgment in favor of Appellants.

BACKGROUND

I.

The pertinent facts are set forth in the decision of the Court of Federal Claims. Salman Ranch (“Salman Ranch” or the “ranch”) operates in Mora County, New Mexico. Salman Ranch, 79 Fed.Cl. at 190. On January 1, 1987, the owners of the ranch formed the Partnership. Principal shareholders included William J. Sal-man, the Partnership’s tax matters part*1364ner, David M. Salman, Frances S. Koenig, and the Frances D. Salman Testamentary Trust. Other shareholders included various Salman and Koenig family members. In exchange for partnership shares, the owners transferred their interests in the ranch to the Partnership.

On October 8, 1999, the Salman Ranch partners entered into short sale transactions involving U.S. Treasury Notes. In these transactions, the partners borrowed Treasury Notes from a third party and sold them for cash to another third party. A short sale gives rise to an obligation, known as a short position, to replace the borrowed security. See Zlotnick v. TIE Commc’ns, 836 F.2d 818, 820 (3d Cir.1988) (explaining a typical short sale).

The short sales generated cash proceeds of $10,982,373. Salman Ranch, 79 Fed.Cl. at 190. William J. Salman, in his capacity as tax matters partner, declared in the Court of Federal Claims that the Salman Ranch partners transferred both the approximately $10.9 million in cash proceeds from the short sales and the accompanying short positions (the obligation following the short sale to replace the borrowed securities, i.e., Treasury Notes) to the Partnership on October 13, 1999 (DecU 13). Some time thereafter, but before November 30, 1999, the Partnership purportedly closed the short position on the Treasury Notes at a cost of $10,980,866 (Decl-¶ 14). Specifically, the Partnership sold the Notes, which it had received from the partners, for $10,982,373, and then used that money to pay back the party from whom the partners had borrowed the Notes.

On November 30, 1999, the Salman Ranch partners contributed a portion of their partnership interests to three newly formed family partnerships. Salman Ranch, 79 Fed.Cl. at 191. As a result, each family partnership held a partnership interest in the Partnership. The Partnership in turn held the ranch.

The partners’ transfer of interests in the Partnership to the three family partnerships triggered a technical termination of the Partnership under I.R.C. § 708(b)(1)(B).2 This technical termination allowed an adjustment in the basis of the ranch under I.R.C. §§ 754 and 743(b)(1).3 The adjustment purportedly increased the Partnership’s basis in the ranch to $6,850,276 — a step-up in basis reflecting the original basis in the ranch, plus an allocated portion of the value of the short-sale cash proceeds contributed to the Partnership. Salman Ranch, 79 Fed. Cl. at 191.

On December 23, 1999, the Partnership sold a portion of the ranch and an option to acquire the remainder of the ranch. In its final partnership return for the period ending December 31, 1999, which was filed on or about April 13, 2000, the Partnership reported the sale of the ranch.4 The Part*1365nership’s return reported the gross sales price of the ranch as $7,188,588, the basis of the property as $6,850,276, and the resulting gain from the sale as $338,312. For the 1999 tax year, the individual tax return (IRS Form 1040) of each partner reported an amount purporting to be the respective share of each partner from the sale of the ranch.

“The IRS may challenge the reporting of any partnership item on a partnership tax return (Form 1065) by issuing an FPAA, which serves as a predicate to its making individual partner tax assessments. I.R.C. §§ 6223(a)(2), 6225(a).” AD Global Fund, LLC v. United States, 481 F.3d 1351, 1352-53 (Fed.Cir.2007). On April 10, 2006, the IRS issued the FPAA in this case. In it, the IRS stated:

Salman Ranch Ltd. was availed of for improper tax avoidance purposes by artificially overstating basis in the partnership interests of its partners.... The transactions involving short sales of Treasury Notes, including the formation of Salman Ranch Ltd., the acquisition of short positions in said Treasury Notes, the contribution of said Treasury Note positions to Salman Ranch Ltd. and the assignment of partnership interests to [the family limited partnerships] had no business purpose, lacked economic substance, and, in fact and substance, constitutes an economic sham for federal income tax purposes.

In other words, the FPAA asserted that a series of sham transactions, involving the technical termination of the Partnership, served to understate reported gains from the ranch’s sale and to reduce the partners’ aggregate federal tax liability. By inflating its basis in the ranch by a portion of the short sale proceeds while failing to offset that basis by the assumption of its obligation to close the short sale, the Partnership allegedly created an improper tax shelter.

Accordingly, to account for the short sale transactions, the IRS proposed an adjustment to the Partnership’s treatment of its sale of the ranch on its December 31, 1999 partnership return. The adjustment reduced the basis in the ranch by subtracting the Partnership’s obligation to close the short position on the Treasury Notes. This resulted in a corrected basis of the ranch in the amount of $1,917,978. Id. at 6. Thus, the IRS took the position that the Partnership’s capital gain that resulted from the sale of the ranch should have been $4,906,261 instead of $338,312. The IRS therefore found capital gain understated by $4,567,949. This resulted in increased tax liability for the partners arising from their reporting, on their individual 1999 tax returns, their proportionate shares of the Partnership’s gain on the sale of the ranch.

H.

On July 5, 2006, Appellants filed their complaint for readjustment of partnership items in the Court of Federal Claims, pursuant to I.R.C. § 6226, challenging the validity of the FPAA. Thereafter, Appellants moved for summary judgment, seeking a determination that the FPAA was untimely and therefore could not result in an adjustment of Partnership items. The government cross-moved for partial summary judgment, seeking a ruling that the FPAA was timely.

*1366The general statute of limitations for assessment and collection of taxes is at I.R.C. § 6501(a), which provides that “the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed.” The three-year statute of limitations in I.R.C. § 6501(a) also applies to taxes imposed for partnership items. See AD Global Fund, 481 F.3d at 1354 (“Section 6501 explicitly provides that it applies to any tax imposed by the title, which would include tax imposed for partnership items. No exception is provided for assessment of taxes for partnership items.” (citation and footnote omitted)); see also I.R.C. § 6229(a) (setting forth a minimum period of three years for assessments of partnership items).5 In the Court of Federal Claims, Appellants argued that the time for the IRS to issue the FPAA was governed by the three-year statute of limitations set forth in § 6501(a). Salman Ranch, 79 Fed.Cl. at 192. Thus, according to Appellants, the FPAA should have been issued on or before December 31, 2003, no later than three years after the last day the Partnership’s return could have been filed.

Pursuant to I.R.C. § 6501(e)(1)(A), however, the limitations period for assessment and collection of taxes is extended from three to six years if the taxpayer’s return reflects a “[s]ubstantial omission of items”:

(e) Substantial omission of items. — Except as otherwise provided in subsection (c)-

(1) Income taxes. — In the case of any tax imposed by subtitle A—

(A) General rule. — If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. For purposes of this subparagraph—

(i) In the case of a trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services; and

(ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.

I.R.C. § 6501(e)(1)(A). Language paralleling § 6501(e)(1)(A), but without subsections (i) and (ii), may be found in I.R.C. § 6229(c)(2). Section 6229(c)(2) states that “[i]f any partnership omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in its return, [§ 6229](a) shall be applied by substituting ‘6 years’ for ‘3 years’.” In opposing Appellants’ motion and cross-moving for partial summary judgment on the grounds *1367that the FPAA was timely, the government argued that the time period for assessing taxes attributable to partnership items was open because the FPAA was issued within the six-year statute of limitations period set forth in I.R.C. § 6501(e)(1)(A), or in § 6229(c)(2). Salman Ranch, 79 Fed.Cl. at 192.

Appellants responded that the six-year limitations period did not apply because an overstatement of basis, assuming there is one, does not constitute .an omission from gross income. Id. at 193. Specifically, Appellants argued that the word “omits,” used in I.R.C. § 6501(e)(1)(A) for individuals, or in § 6229(c)(2) for partnerships, has a settled interpretation that does not include errors arising from an overstatement of basis. Id. at 194. In support of their position, Appellants relied primarily upon Colony, Inc. v. Commissioner, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958).

In Colony, the IRS assessed deficiencies in Colony, Inc.’s income taxes for fiscal years 1946 and 1947. 357 U.S. at 30, 78 5. Ct. 1033. There was no claim that Colony had inaccurately reported its gross receipts. Rather, the contention was that Colony had understated its gross profits on the sales of certain lots of land for residential purposes as a result of having overstated the “basis” of the lots by erroneously including in their cost certain unallowable items of development expense. The issue before the Court was whether the assessments were barred by the three-year statute of limitations in I.R.C. § 275(a) or whether they were covered by the five-year statute of limitations in I.R.C. § 275(c). Id. at 29, 78 S.Ct. 1033. These statutes were the predecessors to present I.R.C. §§ 6501(a) and 6501(e)(1)(A).6 The Court interpreted the statutory language “omits from gross income an amount properly includible therein” in § 275(c) as referring “to the specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes.” Id. at 33, 78 S.Ct. 1033. After concluding that “it cannot be said that the [omits from gross income] language is unambiguous,” the Court resorted to the legislative history of § 275(c). Id. Examining that history, the Court located references in committee reports and statements to situations in which taxpayers left items out of their returns, overlooked an item, failed to report a dividend, or reported as income for one year an item of income which properly belonged in another year. Id. at 33-35, 78 S.Ct. 1033. The Court found these references to be “persuasive indications that Congress merely had in mind failures to report particular income receipts and accruals, and did not intend the five-year [now six-year] limitation to apply whenever gross income was understated.” Id. at 35, 78 S.Ct. 1033 (emphasis added).

*1368The Colony Court rejected the government’s argument that “in enacting § 275(c) Congress was primarily concerned with providing for a longer period of limitations where returns contained relatively large errors adversely affecting the Treasury.” Id. at 36, 78 S.Ct. 1033. The Court explained that “if the mere size of the error had been the principal concern of Congress, one might have expected to find the statute cast in terms of errors in the total tax or in total taxable net income.” Id. The Court then stated:

We think that in enacting § 275(c) Congress manifested no broader purpose than to give the Commissioner an additional two years [now three years] 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 disadvantage. And this would seem to be so whether the error be one affecting “gross income” or one, such as overstated deductions, affecting other parts of the return.

Id. Accordingly, the Court held that the three-year statute of limitations of § 275(a), rather than the five-year statute of limitations of § 275(c), applied to the deficiencies asserted against Colony. Id.

Appellants argued in the Court of Federal Claims that, because the language of §§ 275(c) and 6501(e)(1)(A) is the same, Colony controls the meaning of “omits from gross income an amount properly includible therein” in § 6501(e)(1)(A), even though Colony interpreted the pre-1954 Internal Revenue Code. Salman Ranch, 79 Fed.Cl. at 194. In making this argument, Appellants pointed to the Supreme Court’s statement that its conclusion in Colony was “in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code of 1954.” Id. (quoting Colony, 357 U.S. at 37, 78 S.Ct. 1033). Accordingly, Appellants urged that Colony’s interpretation of the relevant language in I.R.C. § 275(c) applies to I.R.C. § 6501(e)(1)(A) and forecloses a definition of “omits from gross income an amount properly includible therein” that includes an overstated basis.

The Court of Federal Claims denied Appellants’ motion for summary judgment and granted the government’s cross-motion for partial summary judgment. Id. at 205. In so doing, the court held that the IRS timely issued the FPAA. Id. at 204. The court concluded that the IRS was entitled to the six-year statute of limitations of I.R.C. § 6501(e)(1)(A), because the government carried its burden of proving that the Partnership made an omission from gross income. Id.

The court determined that the Partnership “omit[ted] from gross income an amount properly includible therein,” within the meaning of § 6501(e)(1)(A), when it overstated its basis in the ranch. Id. at 200. Colony did not govern the case, the court concluded, because the sale of the ranch was not in the context of a trade or business. Id. at 201. According to the court, “Colony held that section 275(c) ... only imposes liability on a taxpayer engaged in a trade or business selling goods or services where the taxpayer ‘omitted some income receipt or accrual in his computation of gross income.’ ” Id. at 200 (quoting Colony, 357 U.S. at 33, 78 S.Ct. 1033).

The court based its understanding of Colony’s holding on two statements made by the Supreme Court pertaining to the language in § 275(c) and § 6501(e)(1)(A). The court contrasted the Court’s state*1369ment in Colony that “the conclusion [it reached was] in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code of 1954,” Salman Ranch, 79 Fed.Cl. at 199 (quoting Colony, 357 U.S. at 37, 78 S.Ct. 1033 (emphasis added)), with its statement earlier in the opinion, noted above, that the language “omits from gross income an amount properly includible therein” in I.R.C. § 275(c) “cannot be said [to be] unambiguous,” id. (quoting Colony, 357 U.S. at 33, 78 S.Ct. 1033 (emphasis added)). Since the Supreme Court termed the language of I.R.C. § 6501(e)(1)(A) unambiguous, the court deduced that the Supreme Court viewed §§ 275(c) and 6501(e)(1)(A) as “in harmony” as a result of the addition of subparagraphs (i) and (ii) to § 6501(e)(1)(A). Id.

In the court’s view, the Supreme Court in Colony was addressing a situation under § 275(c) that is now addressed by subparagraph (i) of § 6501(e)(1)(A). Subparagraph (i) provides that “[i]n the case of a trade or business, the term ‘gross income’ means the total of the amounts received or accrued from the sale of goods or services ... prior to diminution by the cost of such sales or services.” The court explained that the taxpayer in Colony (Colony, Inc.) was engaged in the trade and business of developing and selling residential real estate lots. Id. (citing Colony, Inc. v. Comm’r, 26 T.C. 30, 31, 1956 WL 878 (1956), rev’d, Colony, 357 U.S. at 38, 78 S.Ct. 1033). It also noted that the gross income of a trade or business is usually calculated by subtracting the cost of goods sold from the gross receipts of the sale. Id. Subparagraph (i), the court explained, “provides an exception to this customary definition of gross income in the event of sales of goods or services by a trade or business” because it defines “gross income” as gross receipts, instead of gross receipts less the cost of goods sold. Id. From there, the court reasoned that, when the Colony Court stated that § 275(c) referred “to the situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes,” 357 U.S. at 33, 78 S.Ct. 1033, it was speaking only in the context of sales by a trade or business. Salman Ranch, 79 Fed.Cl. at 199. Since the court determined that the Partnership’s “sale of the ranch [did] not qualify for treatment under I.R.C. § 6501(e)(l)(A)(i) as the sale of goods or services by a trade or business,” id. at 201, it rejected Appellant’s reliance on Colony.

Having limited Colony’s holding to taxpayers engaged in a trade or business, the court took on the task of defining “omits from gross income” as used in I.R.C. § 6501(e)(1)(A). Id. at 200. The court defined “omits” with reference to the definition of “gross income” in the Internal Revenue Code. Id. An omission from gross income pursuant to I.R.C. § 6501(e)(1)(A), the court concluded, is an “omission from gain,” calculated by subtracting basis from gross receipts.7 Id. Under this definition, either an omission from gross receipts, as in Colony, or an overstatement of the basis figure, as alleged in this case, could result in an omission from gross income under *1370I.R.C. § 6501(e)(1)(A). Id. The court therefore construed “omits from gross income” in I.R.C. § 6501(e)(1)(A) to include the Partnership’s alleged reporting of an overstated basis. Id. As a result, the court held that the FPAA was covered by the six-year statute of limitations of § 6501(e)(1)(A). Id.

Based upon its holding, the court denied Appellants’ motion for summary judgment and granted the government’s cross-motion. Id. at 205. In its decision, the court indicated that, absent a request to certify an interlocutory appeal pursuant to 28 U.S.C. § 1292(d)(2), the parties were to submit a Joint Status Report proposing a schedule for pretrial proceedings and trial. Id. Thereafter, following Appellants’ application for interlocutory review, which the government did not oppose, the court certified its decision, and we granted Appellants permission to appeal.

DISCUSSION

I.

We have jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. § 1292(d)(2). We review the Court of Federal Claims’s grant of summary judgment de novo. Pennzoil-Quaker State Co. v. United States, 511 F.3d 1365, 1369 (Fed. Cir.2008). Summary judgment is appropriate where “there is no genuine issue as to any material fact and [the moving party] is entitled to judgment as a matter of law.” R. Ct. Fed. Cl. 56(c)(1). In this case, the pertinent facts are not in dispute, and we are presented solely with a question of statutory interpretation, an issue of law, which we review de novo. See AD Global Fund, 481 F.3d at 1353.

II.

Appellants contend that the Court of Federal Claims erred in holding that the IRS was entitled to the benefit of the six-year statute of limitations. Appellants’ Br. 15. The court, according to Appellants, mistakenly took the view that the term “omits” in I.R.C. § 6501(e)(1)(A) embraces not merely the omission from a return of an item of income received by or accruing to a taxpayer, but also an understatement of gross income resulting from a taxpayer’s overstatement of an item’s basis. Id. at 17. Appellants maintain that such a view is contrary to the ruling of the Supreme Court in Colony. Id.

The theory on which the Court of Federal Claims distinguished Colony rests on a faulty concept, Appellants contend. Appellants urge that nothing in the Colony opinion or in its rationale turns on the transaction at issue having been a sale of goods or services in the ordinary course of a trade or business. Id. The Supreme Court, according to Appellants, did not focus on the type of sale or the type of property for which the basis was overstated. Rather, they argue, the Court focused on the meaning of the term “omits” as used in the statute. Id. at 22-23.

Turning to the statutes, Appellants point out that the language of I.R.C. § 275(c) (“omits from gross income an amount properly includible therein”), which was construed and applied by the Supreme Court in Colony, is identical to the language of I.R.C. § 6501(e)(1)(A) (“omits from gross income an amount properly includible therein”), which is at issue in this case. Id. at 21. Therefore, they argue, the “in harmony” statement in Colony indicates that the Court believed the meaning of the language was unchanged. Id. at 20. Appellants contend that this means that the Supreme Court’s ruling in Colony with respect to § 275(c) of the 1939 Code — that an alleged overstatement of basis in property does not constitute an omission that extends the period for assessing income tax — is controlling with re*1371spect to § 6501(e)(1)(A) of the 1954 Code, which is at issue in this case. Id. at 21.

The government responds that the Court of Federal Claims correctly gave the IRS the benefit of the six-year statute of limitations of § 6501(e)(1)(A), because an understatement of income resulting from an overstatement of the basis of sold property can qualify as an omission from gross income. Government’s Br. 17. In the government’s view, the court properly construed Colony’s holding narrowly by defining “gross income” as gross receipts of a trade or business from sales of goods or services. Id. at 38. To the extent Colony construed “gross income” more broadly, the decision has been superseded, or at least substantially limited, the government says. Id. at 41-44. The government points to the Colony Court’s observation that “the question as to the proper scope” of the extended statute of limitations was “resolved for the future by § 6501(e)(1)(A) of the Internal Revenue Code of 1954.” Id. at 44 (quoting Colony, 357 U.S. at 32, 78 S.Ct. 1033). The government therefore urges that Colony does not prevent the extended statute of limitations from applying in this case. Id. at 44.

The government contends that its limiting construction of Colony finds support in changes made to the 1939 Code by the 1954 Code. Id. at 28, 41. In making this argument, the government focuses first on subparagraphs (i) and (ii) of I.R.C. § 6501(e)(1)(A), both of which were added to former § 275(c) by the 1954 Code. Sub-paragraph (i) states that, “[i]n the case of a trade or business, the term ‘gross income’ means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services.” I.R.C. § 6501(e)(l)(A)(i). The government urges that subparagraph (i) sets forth a gross receipts test similar to that adopted in Colony. However, the government states, the provision, by its terms, makes this test applicable only “[i]n the case of a trade or business.” Id. at 30. According to the government, to conclude, as Appellants do, that the Colony gross receipts test applies under § 6501(e)(1) to every sort of sale is to make redundant Congress’s reference to that same test as applying “[i]n the case of a trade or business.” Id. at 30-31. That result, the government contends, would violate the canon that “a legislature is presumed to have used no superfluous words.” Platt v. Union Pac. R.R. Co., 99 U.S. 48, 58, 25 L.Ed. 424 (1878). Accordingly, the government argues, since “gross income” in § 6501(e)(1)(A)© means gross receipts only in the limited context of trade or business income from the sale of goods or services, the general definition of gross income must be broader outside that context and must encompass omissions from income attributable to basis overstatement. Government’s Br. 31-32.

In addition, the government argues that the addition of subparagraph (ii) to the statute eliminated the Supreme Court’s primary justification for its ruling in Colony. Id. at 38. Subparagraph (ii) states that “[i]n determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.” I.R.C. § 6501(e)(l)(A)(ii). Subparagraph (ii) provides a taxpayer a kind of safe haven if it otherwise adequately disclosed in its return the amount omitted from gross income. The government posits that the Colony Court interpreted “omits from gross income” in light of adequate disclosure principles, by emphasizing that an omission must place the IRS “at a special disadvantage in detecting errors.” *1372Id. at 38-39 (quoting Colony, 357 U.S. at 36, 78 S.Ct. 1033). The government notes that the Court then stated that an omission of gross income caused by inflated basis would not put the IRS at a “special disadvantage.” Id. at 39. The government points out that I.R.C. § 6501(e)(1)(A)(ii) now provides a safe harbor for omissions from gross income that do not place the IRS at a “special disadvantage.” Thus, the government argues, the adequate disclosure provision renders moot the Court’s rationale for stating that an overstated basis does not constitute an omission of gross income. Id.

Moving beyond §§ 6501(e)(l)(A)(i) and (ii), the government notes that Congress added, as part of the 1954 Code, paragraph (2) of § 6501(e). Paragraph (2) covers estate and gift taxes and corresponds to the income tax rule.8 Id. at 33. The government notes that § 6501(e)(2), unlike § 6501(e)(1)(A), specifically refers to the omission of “items” includible in the gross estate or total gifts. Congress used the word “items,” according to the government, to make clear that the six-year period was not to apply because of differences as to the valuation of property. Id. In the government’s view, Congress’s use of the word “amount” rather than “item” in § 6501(e)(1) confirms that an “omi[ssion] from gross income” under § 6501(e)(1) occurs not only when a taxpayer completely leaves an item of income out of the return, but also when the taxpayer overstates the basis of an asset. Id. at 34.

III.

We conclude that Colony controls the disposition of this case. The Supreme Court stated that the language “omits from gross income an amount properly includible therein” in I.R.C. § 275(c) referred to the “specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes.” Colony, 357 U.S. at 33, 78 S.Ct. 1033. In Colony, the “errors in that computation arising from other causes” were “deficiencies ... based upon the Commissioner’s determination that the taxpayer had understated the gross profits on the sales of certain lots of land for residential purposes as a result of having overstated the ‘basis’ of such lots by erroneously including in their cost certain unallowable items of development expense.” Id. at 30 (emphasis added). The Court held that, under these circumstances, the taxpayer had not “omitted from gross income an amount properly includible therein” when it allegedly overstated in its return the basis of' property it had sold. That is precisely what is alleged in this case.

A.

We do not discern any basis for limiting Colony’s holding concerning the “omits from gross income” language of I.R.C. § 275(c) to sales of goods or services by a trade or business. Neither the language nor rationale of Colony indicates such an intent on the part of the Court. The Court interpreted the language of § 275(c) *1373based upon what it viewed as congressional intent and purpose, without ever mentioning the taxpayer’s trade or business.

At the same time, we respectfully disagree with the Court of Federal Claims’s conclusion that the Court in Colony intended its interpretation of “omits from gross income” in § 275(c) to be limited to the setting of a trade or business. The starting point for the court’s approach was the Colony Court’s statement, on the one hand, that it could not be said that the language of § 275 was “unambiguous,” combined with its statement, on the other hand, that the result it reached in the case was “in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code of 1954.” Salman Ranch, 79 Fed.Cl. at 199 (quoting Colony, 357 U.S. at 33, 37, 78 S.Ct. 1033). As seen, the Court of Federal Claims reasoned that the Supreme Court viewed the identical provisions of §§ 275(c) and 6501(e)(1)(A) as being in harmony, even though one provision was ambiguous and the other was not, as a result of the addition of subparagraphs (i) and (n) to the statute. Id. From there, the court concluded that Colony’s holding concerning the reach of § 275(c) was limited to sales of goods or services by a trade or business. Id. at 199-200.

In our view, however, the court’s approach incorrectly reads into Colony what is not stated. After analyzing the language of § 275(c) and the pertinent legislative history, the Court in Colony held that “omits from gross income an amount properly includible therein” does not include an overstatement of basis, as was alleged in the case of the taxpayer before it, and the Court did not say that its holding was limited to sales of goods or services by a trade or business. We are not prepared to conclude — based simply upon the Court’s reference to ambiguity in § 275(c) and the lack thereof in § 6501(e)(1)(A) — that the Court’s facially unqualified holding nevertheless carries with it a qualification.

B.

We recognize that the Supreme Court in Colony did not purport to interpret I.R.C. § 6501(e)(1)(A). In our view, however, several considerations weigh in favor of extending the Colony interpretation of I.R.C. § 275(e) to I.R.C. § 6501(e)(1)(A).

Most importantly, the “omits from gross income an amount properly includible therein” language is identical in the 1939 and 1954 Codes. We acknowledge that Congress did not have before it Colony, a 1958 decision, when it enacted § 6501(e)(1)(A) in 1954. Nevertheless, the fact remains that Colony represents an interpretation of the very same language that is now found in § 6501(e)(1)(A), and in the years since Colony, Congress has not indicated that the Court’s interpretation of the language of § 275(c) should not apply to § 6501(e)(1)(A). This is true despite the post-Colony debate over whether § 6501(e)(1)(A) is triggered only when an item of income is entirely omitted from a return.9 See Bob Jones Univ. v. United *1374States, 461 U.S. 574, 600-02, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983) (construing congressional inaction as acquiescence where the interpretation of statutory language generated controversy and Congress did not amend the statute). Given that Colony was decided over fifty years ago, we believe that, if Congress had so desired, it would have expressed its intention to change the meaning of the relevant language.

In addition, we think the Colony Court’s rationale for its holding applies with equal force to the 1954 Code. The Court determined that statements in the legislative history of the pre-1939 Code pertaining to § 275(c) (e.g., statements referring to when taxpayers “leave out of their return items,” “overlook! ] an item,” or “fail[ ] to report a dividend”) were “persuasive indications that Congress merely had in mind failures to report particular income receipts and accruals, and did not intend the five-year [now six-year] limitations period to apply whenever gross income was understated.” Colony, 357 U.S. at 35, 78 S.Ct. 1033. These references are as persuasive to us as they were to the Supreme Court in Colony.

Referring to § 275(c), the Colony Court stated that while it could not be said that the statutory language was “unambiguous,” it was “inclined to think that the statute on its face len[t] itself more plausibly to the taxpayer’s interpretation.” Id. at 33. In Colony, the taxpayer advanced a plain meaning of the “omits from gross income” language in § 275(c). Id. at 32-33. By this logic, we think it prudent to take note of the ordinary meaning of “omits” today. See Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994) (recognizing that, in the absence of a statutory definition, statutory terms are construed in accordance with their ordinary or natural meaning). The meaning of “omits” in today’s parlance appears to be no different than its meaning at the time of the Colony decision. See, e.g., The American Heritage Dictionary of the English Language 1227 (4th ed.2000) (“to fail to include or mention; leave out”). We thus give to “omits” in § 6501(e)(1)(A) the same meaning the Supreme Court gave to the word in § 275(c). In other words, “omits” in § 6501(e)(1)(A) means to affirmatively “leave out.”

C.

A cardinal rule of statutory construction is that courts should construe statutes “so as to avoid rendering superfluous” any statutory language. See Astoria Fed. Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 112, 111 S.Ct. 2166, 115 L.Ed.2d 96 (1991). Thus, if following Colony in this case would have the effect of rendering either the gross receipts or adequate disclosure provisions of § 6501(e)(1)(A) superfluous, we would be faced with a situation in which we would need to reconsider the applicability of Colony’s holding to § 6501(e)(1)(A).

*1375We conclude, however, that neither the gross receipts provision nor the adequate disclosure provision requires that we depart from Colony and define “omits” to mean anything except “left out.” First, paragraph (A) sets forth the “General rule” of the section. The rule is that “[i]f the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.” I.R.C. § 6501(e)(1)(A). The rule involves two determinations: a first determination, which involves identifying when a taxpayer “omits from gross income an amount properly includible therein”; and a second determination, which involves calculating whether the omission from gross income was “in excess of 25 percent.” The first determination, upon which Colony turned, contemplates the “specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income,” Colony, 357 U.S. at 33, 78 S.Ct. 1033. The second determination involves a straightforward mathematical calculation.

We do not view subparagraph (i) of § 6501(e)(1)(A), the gross receipts provision, as superfluous under our reading of the statute. By its terms, paragraph (A) of § 6501(e)(1)(A) is not limited to any particular type of “taxpayer.” In other words, the “taxpayer” referenced in the paragraph can be an individual or an entity acting as a trade or business. That brings us to subparagraph (i). It states: “In the case of a trade or business, the term ‘gross income’ means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services.” I.R.C. § 6501(e)(1)(A)®. It seems to us that what subparagraph (i) does is tell the reader how, for purposes of paragraph (A), “gross income” is calculated when the activities of the “taxpayer” at issue are of a trade or business nature. Unlike subparagraph (i), Colony did not speak to the calculation of “gross income.” Rather, it identified the situations in which a taxpayer “omits from gross income an amount properly includible therein.” Our reading of § 6501(e)(1)(A), which is based on Colony, is that the language “omits from gross income” does not extend to an alleged overstatement of basis in property. We do not see how this reading of the statutory language renders subparagraph (i) superfluous, and neither does the Ninth Circuit. See Bakersfield Energy Partners, LP v. Comm’r, 568 F.3d 767, 776 (9th Cir.2009) (“[W]e are not convinced that applying Colony to the 1954 Code would render § 6501(e)(1)(A)® superfluous,” because “Colony’s holding ... affects only [the “gross income” omitted], by defining what constitutes an omission from gross income.”). Put most simply, we do not see how subparagraph (i), which explains how “gross income” is calculated when a trade or business is involved, is made superfluous, by saying that an overstatement of basis is not an omission from gross income.

The legislative history of § 6501(e)(1)(A)® is consistent with our observation that subparagraph (i) is not rendered superfluous by our reading of § 6501(e)(1)(A). Congress added subparagraph (i) to resolve a conflict between the IRS and taxpayers about how to calculate gross income in the case of a trade or business. See, e.g., Hearings Before the Senate Comm, on Finance on H.R. 8300 (part 2), 83rd Cong. 984 (1954) (letter of Harry N. Wyatt) (noting “disagreement evidenced by the case law between the [IRS] and some of the courts as to whether ... [i]n the case of a business, the term ‘gross income’ should be construed as *1376gross receipts and gross sales, or as net receipts and net sales”). Under § 275(c), it was unclear whether, in calculating “gross income” in the case of a trade or business, the IRS should deduct certain business expenditures, such as the cost of sales or services. In response, Congress enacted subparagraph (i), which made it clear that “gross income” in the case of a trade or business was calculated prior to diminution by the cost of such sales or services. See H.R.Rep. No. 83-1337, at A414 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4561 (“The term gross income as used in this paragraph has been redefined to mean the total receipts from the sale of goods or services prior to diminution by the cost of such sales or services.”). In light of this conflict, we believe that Congress enacted subparagraph (i), not to define “omits from gross income an amount properly includible therein,” but to assist the IRS in its calculation of whether any omitted gross income exceeded 25% of the gross income stated in the return. Thus, the legislative history of § 6501(e)(1)(A)(i) does not detract from our view that the gross receipts provision is not rendered superfluous by our reading of § 6501(e)(1)(A).

Neither do we think that the adequate disclosure provision, subparagraph (ii), somehow renders moot the Supreme Court’s construction of the phrase “omits from gross income an amount properly includible therein,” as argued by the government. We agree with the government that the adequate disclosure provision is related to the policy concern expressed by the Colony Court when it stated, “We think that in enacting § 275(c) Congress manifested no broader purpose than to give the Commissioner an additional two years [now three years] to investigate tax returns where, because of a taxpayer’s omission to report some taxable item, the Commissioner is at a special disadvantage in detecting errors.” 357 U.S. at 36, 78 S.Ct. 1033. As noted, subparagraph (ii) provides a safe harbor in terms of the § 6501(e)(1)(A) calculation for an amount which, although omitted from gross income stated in the return, is nevertheless adequately disclosed. Under these circumstances, the IRS presumably is not at a “special disadvantage.” Assuming the policy concern expressed by the Supreme Court in Colony and the adequate disclosure provision are related, we think that is not an adequate reason to conclude that Colony has been rendered moot.

Finally, we do not think that use of the word “amount” in § 6501(e)(1)(A), in contrast to use of the word “item” in § 6501(e)(2), requires us to alter our conclusion that the language “omits from gross income an amount properly includible therein” in § 6501(e)(1)(A) does not include an overstatement of basis. In Colony, the Supreme Court considered whether there was any significance in the “use of the word ‘amount’ (instead of, for example, ‘item’).” Id. at 32. The Court looked to the legislative history and found several references to instances where taxpayers left out “items” from their tax returns. Id. at 34-35. As seen, based on these references, the Court stated that “Congress manifested no broader purpose than to give the Commissioner an additional two years to investigate tax returns in cases where, because of a taxpayer’s omission to report some taxable item, the Commission is at a special disadvantage in detecting errors.” Id. at 36. The Court then held that “omits from gross income an amount properly includible therein” did not include an overstatement of basis in property. Under these circumstances, the use of the word “item” in § 6501(e)(2), the provision relating to estate and gift taxes, does not persuade us to deviate from the Colony Court’s interpretation of statutory language identical to what is before us.

*1377D.

In sum, we conclude that the Supreme Court’s interpretation of the language “omits from gross income an amount properly includible therein” in I.R.C. § 275(c) controls the interpretation of the identical language in I.R.C. § 6501(e)(1)(A). For this reason, we hold that the alleged overstatement of the basis of Salman Ranch by the Partnership did not constitute an omission from gross income under § 6501(e)(1)(A). Accordingly, the IRS is not entitled to the benefit of the six-year statute of limitations set forth in § 6501(e)(1)(A). The three-year limitations period of § 6501(e)(1)(A) controls, which means that the FPAA was untimely and therefore invalid. Our holding today is consistent with the June 17, 2007 decision of the Ninth Circuit in Bakersfield Energy Partners, 568 F.3d at 778.

CONCLUSION

Based upon the foregoing, we reverse the Court of Federal Claims’s grant of partial summary judgment in favor of the government. The case is remanded to the court with the instruction that it enter judgment in favor of Appellants.

REVERSED and REMANDED

COSTS

Each party shall bear its own costs.