Automobile Club of Michigan v. Commissioner of Internal Revenue

• Decision Date: 22 April 1957
• Docket Number: No. 89,89
• Citation: 77 S.Ct. 707,1 L.Ed.2d 746,353 U.S. 180
• Parties: AUTOMOBILE CLUB OF MICHIGAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

353 U.S. 180

77 S.Ct. 707

1 L.Ed.2d 746

AUTOMOBILE CLUB OF MICHIGAN, Petitioner,

v COMMISSIONER OF INTERNAL REVENUE.

No. 89.

Argued March 6 and 7, 1957.

Decided April 22, 1957.

Rehearing Denied June 3, 1957.

See 353 U.S. 989, 77 S.Ct. 1279.

Messrs Ellsworth C. Alvord, Washington, D.C., and Raymond H. Berry, Detroit, Mich., for the petitioner.

Mr. John N. Stull, Washington, D.C., for the respondent.

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,¹ and 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 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. Commis- sioner, 88 U.S.App.D.C. 286, 190 F.2d 283, 30 A.L.R.2d 443, to the extent that it holds to the contrary, is disapproved.

Petitioner's reliance on H.S.D. Co. v. Kavanagh, 6 Cir., 191 F.2d 831, and Woodworth v. Kales, 6 Cir., 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, 3 Cir., 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 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, 59 S.Ct. 423, 83 L.Ed. 536, argues that resort by the Commissioner to s 3791(b) was precluded in this case because the repeated re-enactments 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 re-enactment of § 101(9), '* * * Congress must be taken to have approved * * * and thereby to have given * * * the force of law.' Helvering v. R. J. Reynolds Tobacco Co., 306 U.S. at pages 114, 115, 59 S.Ct. at page 425.

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 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 without merit. Its returns for those years were not filed until October 22, 1945. Within three years, on August 25, 1948, the petitioner and the Commissioner signed consents extending the period to June 30, 1949. The period was later extended to June 20, 1950. Notice of deficiencies was mailed to petitioner on February 20, 1950. The assessments were therefore within time under §§ 275(a) and 276(b) ¹⁴ unless, as the peti- tioner asserts, the statute of limitations began to run from the dates when, if there was a duty to file, the statute required filing.¹⁵ The petitioner argues that because its omission to file on March 15, 1914, and March 15, 1945, was induced by the Commissioner's 1934 and 1938 rulings, it is only equitable to interpret the statute of limitations as running from those dates in the circumstances of this case. But the express condition prescribed by the 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. In Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249, 50 S.Ct. 297, 299, 74 L.Ed. 829, this Court held:

'Under the established general rule a statute of limitation runs against the United States only when they assent and upon the conditions prescribed. Here assent that the statute might begin to run was conditioned upon the presentation of a return duly sworn to. No officer had power to substitute something else for the thing specified. * * *'¹⁶

It is also argued that the Form 990 returns filed by the petitioner in compliance with § 54(f) of the 1939 Code, as amended,¹⁷ constituted the filing of returns for the pur- poses of § 275(a). But the Form 990 returns are merely information returns in furtherance of a congressional program to secure information useful in a determination whether legislation should be enacted to subject to taxation certain tax-exempt corporations competing with taxable corporations.¹⁸ Those returns lack the data necessary for the computation and assessment of deficiencies and are not therefore tax returns within the contemplation of § 275(a). Cf. Commissioner of Internal Revenue v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684.

The final issue argued concerns the treatment of membership dues and arises because such dues are paid in advance for one year. The dues upon collection are deposited in a general bank account and are not segregated from general funds but are available and are used for general corporate purposes. For bookkeeping purposes, however,...