Becker v. Comm'r of Internal Revenue

• Decision Date: 15 August 1985
• Docket Number: Docket No. 8498-80.
• Citation: 85 T.C. No. 16,85 T.C. 291
• Parties: WILLIAM L. BECKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

85 T.C. 291

85 T.C. No. 16

WILLIAM L. BECKER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8498-80.

United States Tax Court

Filed August 15, 1985.

On remand from the Court of Appeals for the Third Circuit (751 F.2d 146 (1984)), HELD, the distinction created by the Commissioner in Rev. Rul. 80-173, 1980-2 C.B. 60, between educational expenses for flight training and certain other educational expenses of veterans is not devoid of a rational basis. Manocchio v. Commissioner, 78 T.C. 989 (1982), affd. 710 F.2d 1400 (9th Cir. 1983), followed. William L. Becker, pro se. ¹

THOMAS G. NORMAN, for the respondent.

SUPPLEMENTAL OPINION

DAWSON, JUDGE:

This case is now before us on remand from the Court of Appeals for the Third Circuit. In our earlier opinion, T.C. Memo. 1983-94, we held that petitioner is not entitled to an educational expense deduction under section 162² for the cost of a flight-training course for which he received nontaxable reimbursement from the Veterans' Administration (VA). In rejecting petitioner's arguments that the expenses were deductible, we applied the case of Manocchio v. Commissioner, 78 T.C. 989 (1982), affd. 710 F.2d 1400 (9th Cir. 1983), wherein we held that (1) the deduction claimed by the taxpayer-veteran for reimbursed flight-training expenses was disallowed by section 265(1), and (2) the Commissioner was not estopped from disallowing the deduction.

Like the taxpayer in Manocchio, petitioner's reimbursement for flight-training expenses was authorized by 38 U.S.C. sec. 1677 (1976) (repealed in 1981), which permits eligible veterans to receive an educational assistance allowance equal to 90 percent of the expenses incurred for approved flight-training courses. Petitioner excluded the payments from income on his 1976 and 1977 Federal income tax returns under 38 U.S.C. sec. 3101(a) (1976), which provides an exemption from taxation for payments of benefits made under any law administered by the VA.

On the appeal of this case the Third Circuit Court of Appeals concluded that section 265(1) prohibits the deduction in question and that respondent is not estopped from disallowing the deduction. The Court of Appeals, however, did not affirm but vacated our decision and remanded this case

solely to afford the taxpayer an opportunity to present to the Tax Court his contention that the Tax Court erred in not finding that the Commissioner abused his discretion in applying Revenue Ruling 80-173 retroactively as to him in violation of the taxpayer's right to equal treatment in the application of the tax laws. (Becker v. Commissioner, 751 F.2d 146, 152 (1984).)

In our consideration of the equal treatment issue, we were also directed to specifically consider the effect of Rev. Rul. 83-3, 1983-1 C.B. 72, on this issue. The Court of Appeals stated as follows:

(A)t the time that Manocchio was decided by the Tax Court, the Commissioner had not issued Revenue Ruling 83-3 which disallowed the deduction of educational expenses that were allocable to a portion of the veterans' educational benefits other than flight training. This ruling, however, was prospective only. After the Tax Court had rendered its decision in this case, the Courts of Appeals for the Ninth and Eleventh Circuits reached different conclusions as to whether the application of Revenue Rulings 80-173 and 83-3 have resulted in the disparate treatment of similarly situated taxpayers. Manocchio v. Commissioner, 7l0 F.2d l400, 1404 & n.2 (9th Cir. 1983) (holding that there is a rational basis for the distinction); Baker v. United States, 748 F.2d 1465 (llth Cir. 1984) (holding that there is no rational reason for the retroactive application of 80-173 and the prospective application of 83-3). Thus, there may be some question as to the soundness of the Tax Court's reliance on Manocchio due to the Commissioner's subsequent revenue ruling. (751 F.2d at 151-152.)

We begin our analysis of the equal treatment issue by discussing respondent's rulings. At the time petitioner filed his 1976 and 1977 returns, Rev. Rul. 62-213, 1962-2 C.B. 59, revoked by Rev. Rul. 83-3, supra, was still in effect. Rev. Rul. 62-213 announced respondent's published position regarding the deductibility of any educational expenses incurred by veterans as follows:

(E)xpenses for education, paid or incurred by veterans, which are properly deductible for Federal income tax purposes, are not required to be reduced by the nontaxable payments received during the taxable year from the Veterans' Administration. (1962-2 C.B. at 59.)

After reconsidering the deductibility of veterans' educational expenses, respondent issued Rev. Rul. 80-173, 1980-2 C.B. 60, which announced that flight training expenses for which veterans receive reimbursement under 38 U.S.C. sec. 1677, like petitioner herein, are not deductible under section 162. Rev. Rul. 80-173 focused upon reimbursement payments under 38 U.S.C. sec. 1677, as follows:

This holding applies only to reimbursement payments made under 38 U.S.C. section 1677. For treatment of subsistence and educational allowance payments made under 38 U.S.C. section 1681 (1976), which are not reimbursement payments determined by reference to amounts actually expended for tuition and fees, but rather are in the nature of a living stipend determined without regard to amounts expended, see Rev. Rul. 62-213, 1962-2 C.B. 59. (l980-2 C.B. at 61.)

Rev. Rul. 80-173 applied retroactively and, thus, formed the basis for the notice of deficiency sent to petitioner in this case.

Respondent's issuance of Rev. Rul. 83-3, 1983-1 C.B. 72, completes the rulings scenario. ³ Rev. Rul. 83-3 revoked Rev. Rul. 62-213, supra, and announced, in part, that a deduction otherwise allowable under section 162 for educational expenses must be reduced ‘to the extent the expense is allocable to the amounts received for such expenses from the Veterans Administration * * *.‘ 1983-1 C.B. at 73. As authority for his position, respondent relied upon section 265(1), which provides, in part, that no deduction shall be allowed for any amount otherwise allowable as a deduction that is allocable to one or more classes of income other than interest wholly exempt from taxes imposed by subtitle A. Rev. Rul. 83-3, however, was applied prospectively only to the VA allowance attributable in part to educational costs and in part to a veteran's subsistence expenses. With respect to reimbursement SOLELY attributable to educational expenses (such as the situation covered by Rev. Rul. 80-173), Rev. Rul. 83-3 was applied retroactively.

The Commissioner has discretion to determine the extent to which a revenue ruling will be applied retroactively. His action in applying a ruling retroactively is reviewable for an abuse of discretion. Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 184 (1957). The Commissioner may be held to have abused his discretion where the circumstances reveal an unfair disparity in his treatment of similarly situated taxpayers. Dixon v. United States, 381 U.S. 68, 76-77 (1965); Farmers' and Merchants' Bank v. United States, 476 F.2d 406, 409 (4th Cir. 1973); International Business Machines Corp. v. United States, 343 F.2d 914, 920 (Ct. Cl. 1965). ‘The Commissioner cannot tax one and not tax another without some rational basis for the difference.‘ United States v. Kaiser, 363 U.S. 299, 308 (1960) (Frankfurter, J., concurring).

In Dixon v. United States, supra, the taxpayers purchased notes in reliance upon the Commissioner's acquiescence in a Tax Court decision that allowed capital gain treatment upon the retirement of certain notes to an amount corresponding to original issue discount. The Commissioner then withdrew his acquiescence. The withdrawal was retroactive in general but prospective as to the notes in issue in the Tax Court case. The taxpayers in Dixon argued that the Commissioner abused his discretion in applying the withdrawal of the acquiescence retroactively, in part, on the ground that the Commissioner set up an unreasonable and arbitrary classification because, they contended, there was no significant difference between the notes they purchased, to which the nonacquiescence applied retroactively, and the notes in issue in the Tax Court decision, to which the nonacquiescence applied prospectively. The Supreme Court examined the Commissioner's justification for the distinction. Rather than deciding the merits of the Commissioner's distinction, the Supreme Court gave it substantial deference. ‘(W)e cannot say that the distinction was so devoid of rational basis that we must now overturn the Commissioner's judgment.‘ 381 U.S. at 79.

In the instant case, after publishing Rev. Rul. 80-173, which modified Rev. Rul. 62-213, the Commissioner provided for two types of treatment for VA educational assistance: (1) payments under 38 U.S.C. sec. 1677 (and like payments) which reduce the business educational expense deduction; and (2) payments under 38 U.S.C. sec. 1681, in the nature of a ‘living stipend‘ determined without regard to education costs, which do not reduce the business educational expense deduction. In Manocchio, this Court found no merit in the taxpayer's argument that the Commissioner unfairly discriminated against taxpayers receiving payments under 38 U.S.C. sec. 1677 by establishing these two categories. We stated as follows:

Given the fundamental differences in the way these benefits are computed, we cannot say that respondent's decision to treat them differently for tax purposes is ‘so devoid of rational basis‘ as to constitUte an abuse of discretion. See Dixon v. United States, supra at 79. (78 T.C. at 1002-1003.)

The Court of Appeals for the Ninth Circuit affirmed our opinion in Manocchio on the issue of whether the Commissioner's retroactive application of Rev. Rul. 80-173 made an impermissible distinction. Manocchio v. Commissioner, 710 F.2d at 1404. Upon further consideration of this issue we adhere to our...