353 U.S. 180 (1957), 89, Automobile Club of Michigan v. Commissioner of Internal Revenue

Docket Nº:No. 89
Citation:353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746
Party Name:Automobile Club of Michigan v. Commissioner of Internal Revenue
Case Date:April 22, 1957
Court:United States Supreme Court

Page 180

353 U.S. 180 (1957)

77 S.Ct. 707, 1 L.Ed.2d 746

Automobile Club of Michigan

v.

Commissioner of Internal Revenue

No. 89

United States Supreme Court

April 22, 1957

Argued March 6-7, 1957

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Syllabus

The Commissioner of Internal Revenue, by rulings in 1934 and 1938, exempted petitioner automobile club from income taxes as a "club" within the meaning of provisions corresponding to § 101(9) of the Internal Revenue Code of 1939. In 1945, the Commissioner revoked his 1934 and 1938 rulings, which were based upon a mistake of law, and directed petitioner to file returns for 1943 and subsequent years. The Commissioner also determined that prepaid membership dues received by petitioner should be treated as income in the year received. The Tax Court sustained the Commissioner's determinations, and the Court of Appeals affirmed.

Held: the judgment is affirmed. Pp. 181-190.

1. The Commissioner had power to apply the revocation retroactively to 1943 and 1944. Pp. 183-185.

(a) The doctrine of equitable estoppel does not bar correction by the Commissioner of a mistake of law. P. 183.

2. In the circumstances of this case, the Commissioner did not abuse the discretion vested in him by § 3791(b) of the 1939 Code. Pp. 184-186.

(a) It is clear from the language and legislative history of § 3791(b) that it confirmed the authority of the Commissioner to correct any ruling, regulation or Treasury decision retroactively, and empowered him, in his discretion, to limit retroactive application to the extent necessary to avoid inequitable results. P. 184.

(b) Helvering v. Reynolds Co., 306 U.S. 110, distinguished. Pp. 184-185.

(c) Having dealt with petitioner upon the same basis as other automobile clubs, the Commissioner did not abuse his discretion. Pp. 185-186.

(d) The 2-year delay in proceeding with petitioner's case did not, in the circumstances, vitiate the Commissioner's action. P. 186.

3. In the circumstances of this case, assessment of tax deficiencies against petitioner for 1943 and 1944 was not barred by limitations under §§ 275(a) and 276(b) of the 1939 Code. Pp. 186-187.

Page 181

(a) The express condition prescribed by Congress was that the statute was to run against the United States from the date of the actual filing of the return, and no action of the Commissioner can change or modify the conditions under which the United States consents to the running of the statute of limitations against it. P. 187.

(b) Form 990 returns are not tax returns within the contemplation of § 275(a) of the 1939 Code. Pp. 187-188.

4. The Commissioner's determination that the entire amount of prepaid dues received in each year by petitioner should be reported as income for that year (instead of being allocated over the following 12 months) did not exceed the permissible limits of the Commissioner's discretion under § 41 of the 1939 Code. Pp. 188-190.

230 F.2d 585, affirmed.

BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

In 1945, the Commissioner of Internal Revenue revoked his 1934 and 1938 rulings exempting the petitioner from federal income taxes, and retroactively applied the revocation to 1943 and 1944. The Commissioner also determined that prepaid membership dues received by the petitioner should be taken into income in the year received, rejecting the petitioner's method of reporting as income only that part of the dues as was recorded on petitioner's books as earned in the tax year. The Tax Court sustained the Commissioner's determinations, [77 S.Ct. 709]1 and

Page 182

the Court of Appeals for the Sixth Circuit affirmed.2 This Court granted certiorari.3

The Commissioner had determined in 1934 that the petitioner was a "club" entitled to exemption under provisions of the internal revenue laws corresponding to § 101(9) of the Internal Revenue Code of 1939,4 notifying the petitioner that

. . . future returns, under the provisions of section 101(9) . . . will not be required so long as there is no change in your organization, your purposes, or methods of doing business.

In 1938, the Commissioner confirmed this ruling in a letter stating:

. . . as it appears that there has been no change in your form of organization or activities which would affect your status the previous ruling of the Bureau holding you to be exempt from filing returns of income is affirmed. . . .

Accordingly the petitioner did not pay federal taxes from 1933 to 1945. The Commissioner revoked these rulings in 1945, however, and directed the petitioner to file returns for 1943 and subsequent years.5 Pursuant to this

Page 183

direction, the petitioner filed, under protest, corporate income and excess profits tax returns for 1943, 1944, and 1945.

The Commissioner's earlier rulings were grounded upon an erroneous interpretation of the term "club" in § 101(9), and thus were based upon a mistake of law. It is conceded that, in 1943 and 1944, petitioner was not, in fact or in law, a "club" entitled to exemption within the meaning of § 101(9), and also that petitioner is subject to taxation for 1945 and subsequent years.6 It is nevertheless contended that the Commissioner had no power to apply the revocation retroactively to 1943 and 1944, and that, in any event, the assessment of taxes against petitioner for 1943 and 1944 was barred by the statute of limitations.

The petitioner argues that, in light of the 1934 and 1938 rulings, the Commissioner was equitably estopped from applying the revocation retroactively. This argument is without merit. The doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law.7 The decision in Stockstrom v. Commissioner,

Page 184

88 U.S.App.D.C. 286, 190 F.2d 283, to the extent that it holds to the [77 S.Ct. 710] contrary, is disapproved.

Petitioner's reliance on H.S.D. Co. v. Kavanagh, 191 F.2d 831, and Woodworth v. Kales, 26 F.2d 178, is misplaced, because those cases did not involve correction of an erroneous ruling of law. Reliance of Lesavoy Foundation v. Commissioner, 238 F.2d 589, is also misplaced, because there, the court recognized the power in the Commissioner to correct a mistake of law, but held that, in the circumstances of the case, the Commissioner had exceeded the bounds of the discretion vested in him under § 3791(b) of the 1939 Code.8

The Commissioner's action may not be disturbed unless, in the circumstances of this case, the Commissioner abused the discretion vested in him by § 3791(b) of the 1939 Code. That section provides:

RETROACTIVITY OF REGULATIONS OR RULINGS. -- The Secretary, or the Commissioner with the approval of the Secretary, may prescribe the extent, if any, to which any ruling, regulation, or Treasury Decision, relating to the internal revenue laws, shall be applied without retroactive effect.

The petitioner contends that this section forbids the Commissioner's taking retroactive action. On the contrary, it is clear from the language of the section and its legislative history9 that Congress thereby confirmed the authority of the Commissioner to correct any ruling, regulation, or Treasury decision retroactively, but empowered him, in his discretion, to limit retroactive application to the extent necessary to avoid inequitable results.

The petitioner, citing Helvering v. R. J. Reynolds Tobacco Co., 306 U.S. 110, argues that resort by the Commissioner to

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§ 3791(b) was precluded in this case because the repeated reenactments of § 101(9) gave the force of law to the provision of the Treasury regulations relating to that section. These regulations provided that, when an organization had established its right to exemption, it need not thereafter make a return of income or any further showing with respect to its status unless it changed the character of its operations or the purpose for which it was originally created.10 Helvering v. R. J. Reynolds Tobacco Co. is inapplicable to this case. As stated by the Tax Court:

The regulations involved there [Helvering v. R. J. Reynolds Tobacco Co.] . . . purported to determine what did or did not constitute gain or loss. The regulations here . . . in nowise purported to determine whether any organization was or was not exempt.11

These regulations did not provide the exemption or interpret § 101(9), but merely specified the necessary information required to be filed in order that the Commissioner might rule whether or not the taxpayer was entitled to exemption. This is thus not a case of " . . . administrative construction embodied in the regulation[s] . . . " which, by repeated reenactment of § 101(9), " . . . Congress must be taken to have approved [77 S.Ct. 711] . . . , and thereby to have given . . . the force of law." Helvering v. R. J. Reynolds Tobacco Co., 306 U.S. at 114-115.

We must, then, determine whether the retroactive action of the Commissioner was an abuse of discretion in the circumstances of this case. The action was the consequence of the reconsideration by the Commissioner, in 1943, of the correctness of the prior rulings exempting automobile clubs, initiated by a General Counsel Memorandum interpreting § 101(9) to be inapplicable to such organizations.12 The Commissioner adopted the General

Page 186

Counsel's interpretation and proceeded to apply it, effective from 1943, indiscriminately to automobile clubs.13 We thus find no basis for disagreeing with the conclusion, reached by both the Tax Court and the Court of Appeals, that the Commissioner, having dealt with petitioner upon the same basis as other automobile clubs, did not abuse his discretion. Nor did the two-year delay in proceeding with the petitioner's case, in these circumstances, vitiate the Commissioner's action.

The petitioner's contention that the statute of limitations barred the assessment of deficiencies for 1943 and 1944 is also...

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