Automobile Club of Mich. v. Commissioner of Int. Rev.

• Decision Date: 17 February 1956
• Docket Number: No. 12247.,12247.
• Citation: 230 F.2d 585
• Parties: AUTOMOBILE CLUB OF MICHIGAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

230 F.2d 585 (1956)

AUTOMOBILE CLUB OF MICHIGAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12247.

United States Court of Appeals Sixth Circuit.

February 17, 1956.

Lincoln Arnold, Washington, D. C., Raymond H. Berry, Detroit, Mich. (A. H. Moorman, John L. King, Detroit, Mich., on the brief), for petitioner.

I. Henry Kutz, Washington, D. C. (H. Brian Holland, Ellis N. Slack, Washington, D. C., on the brief), for respondent.

Before ALLEN, McALLISTER and STEWART, Circuit Judges.

ALLEN, Circuit Judge.

This case arises on petition to review a decision of the Tax Court of the United States sustaining a determination of deficiencies for the calendar years 1943 to 1947, inclusive, in the aggregate amount of $447,445.44, $161,184.43 being income taxes and $286,261.01 being excess profits taxes. Petitioner was organized as a nonprofit corporation without capital stock or shares and has never paid dividends. The facts are not in dispute and the questions presented are questions of law. The purposes of petitioner stated in its Articles of Association are the following:

To promote and foster the healthy growth of the automobile industry; to secure the adoption and enforcement of reasonable and useful traffic ordinances and motor vehicle laws; to promote the establishment and construction of permanent highways for traffic; to interest automobile owners and drivers in the principles of "Safety First," as applied to automobile traffic; to promote touring and to obtain and furnish touring information and the necessary sign boarding of public highways; and to cooperate in any work or movement which may tend to benefit the automobile driver, user, owner, or manufacturer, and the automobile industry in general.

As found by the Tax Court:

During 1943 through 1947 the petitioner devoted most of its resources and efforts to the bettering of conditions for motorists and the promotion of proper laws relating to the use of the motor car, the promotion of travel and the use of the automobile for other modes of transportation. It engaged in the promotion of safety, the solution of traffic problems and the promotion of the formation of school boy patrols. It organized the school boy patrols in Michigan. To teachers in the schools it furnished textbooks dealing with the conduct and operation of school boy patrols. As a reward it annually took some of the patrol boys to Washington, D. C. Annually it conducted seminars in the University of Michigan to promote the education of school teachers in the state in driver training courses. Petitioner\'s safety and traffic and engineer departments made surveys throughout the State of Michigan at the request of various cities and communities and many of its proposals as to safety measures were adopted. Petitioner supplied to its members in Michigan and those affiliated with the American Automobile Association emergency road service. The petitioner published and furnished to each of its active members a magazine containing news about travel and news about laws as they pertain to the use of automobiles. Maps and other touring information with reference to road conditions were also provided, as was assistance to the American Automobile Association in its designation or appointment of proper places for tourists to be housed and fed. The petitioner secured reservations for its members when traveling abroad and arranged for the shipping of their cars abroad. Petitioner also promoted and furnished gratis to various communities proper directional and stop signs. In its services the petitioner attempted to do for the motorist in a collective way that which he was unable to do as an individual.

The petitioner does not engage in or conduct any social activities.

Petitioner during 1934 had supplied the Commissioner with detailed information concerning its operations, its financial assets and liabilities, and its receipts and disbursements. On June 11, 1934, the Commissioner wrote petitioner that on the basis of evidence submitted petitioner was entitled to exemption under the provisions of Section 103(9) of the Revenue Act of 1932, 26 U.S.C.A.Int.Rev. Acts, page 507, and the corresponding sections of prior revenue acts; that, therefore, it was not required to file returns for 1933 and prior years, and that under the provisions of Section 101(9) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 688, it would not be required to file returns so long as there was no change in its organization, its purposes or methods of doing business.

On July 5, 1938, after submission by petitioner of the information required concerning its claim for exemption under Section 101(9) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 849, the Commissioner wrote petitioner advising it that "since it appeared that there had been no change in its form of organization or activities which would affect its status, the previous ruling of the Bureau holding it to be exempt from filing returns of income was affirmed under the Revenue Act of 1936."

In May, 1935, the Commissioner wrote petitioner that the Bureau of Internal Revenue was reconsidering the question of the exemption of automobile associations from Federal income taxation in light of the opinion of the Chief Counsel of the Bureau of Internal Revenue as set forth in G. C. M. 23688, C.B.1943, 283. After petitioner had furnished certain further information, the Commissioner again wrote petitioner on July 16, 1945, calling attention to the fact that Section 101(9) of the Internal Revenue Code, 26 U.S.C.A., provides for the exemption of

"Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder".

The Commissioner's communication continued as follows:

"This office holds that the term `club\' as used in the above section of law contemplates commingling of members, one with the other in fellowship. Thus, an organization should be so composed and its activities be such that fellowship among the members plays a material part in the life of the organization in order for it to come within the meaning of the term `club.\'

"The evidence submitted shows that fellowship does not constitute a material part of the life of your organization and that your principal activity is the rendering of commercial services to your members.

"It is, accordingly, held that you are not a club `organized and operated exclusively for pleasure, recreation and other nonprofitable purposes,\' within the meaning of section 101(9) of the Internal Revenue Code or the corresponding sections of prior revenue acts, and, therefore, are not entitled to exemption under those sections. Furthermore, there is no other provision of law under which an organization of your character can be held to be exempt from Federal income tax.

"Bureau rulings of June 11, 1934 and July 5, 1938 are hereby revoked.

"In view of all the facts and circumstances in your case it is held, with the approval of the Secretary of the Treasury, that you will not be required to file income tax returns for years beginning prior to January 1, 1943. You are, however, required to file returns for the year 1943 and subsequent years."

In compliance with this communication petitioner filed income and excess profits tax returns for the calendar years 1943 and 1944 under protest, on the ground that it was exempt from taxes, and filed a petition to review the determination of the Commissioner. During the trial before the Tax Court petitioner admitted that it was taxable "for the period subsequent to July 16, 1945," but contended that the Commissioner acted arbitrarily and without authority in revoking previous rulings as to exemption, and in determining a deficiency in taxes for any period prior to July 16, 1945. In this court petitioner contends that the Commissioner in 1945 was estopped from retroactively revoking the prior determinations, made by a predecessor Commissioner, upon the ground that there had been no change in the law or in the character and operation of petitioner as a club.

The Commissioner ruled correctly in his determination of July 16, 1945, that petitioner was not exempt from tax under Section 101(9), Internal Revenue Code. The statute plainly applies, as decided in G. C. M. 23688, not to any and all organizations in which no dividends are declared, but to "clubs," namely, to organizations in which members commingle in fellowship. Also this section of the statute applies, not to every kind of club, but to clubs organized and operated exclusively for pleasure, recreation and other nonprofitable purposes. Since petitioner performs commercial services for its members it is not the kind of organization defined in the statute. The right to exemption which arises under Section 101(9), as it is created by statute, cannot be modified by the regulations. Since petitioner did not fall within the exemption provision it was at no time exempt from taxation, but was excused from taxation by a legal error of the Commissioner. The requirement that petitioner file returns for the years 1943 and 1944 was therefore valid and proper and, since petitioner was not required to file returns for a number of preceding years, it cannot be claimed that the ruling was arbitrary and oppressive.

As to the question of estoppel, petitioner does not assert that it has altered its position to its detriment in reliance on the former rulings of the Commissioner. In default of proof to that effect estoppel does not enter into the case.

Petitioner urges that H. S. D. Co. v. Kavanagh, 6 Cir., 191 F.2d 831, and Woodworth v. Kales, 6 Cir., 26 F.2d 178, require reversal of the Tax Court's decision. In the H. S. D. Co. case the District Court, which had upheld the Commissioner in changing a ruling as to the exemption from taxation of contributions to two employees' trusts, was reversed by this court. We held...