Dixon v. Unied States

Decision Date03 May 1965
Docket NumberNo. 486,486
PartiesW. Palmer DIXON et al., Petitioners, v. UNIED STATES
CourtU.S. Supreme Court

Bernard E. Brandes, New York City, for petitioners.

Frank I. Goodman, for respondent.

Mr. Justice BRENNAN delivered the opinion of the Court.

This case involves the issue decided today in United States v. Midland-Ross Corp., 381 U.S. 54, 85 S.Ct. 1308. Petitioners are members of a partnership which, during the tax year 1952, bought 33 short-term noninterest-bearing notes from issuers at discounts between 2 3/8% and 3 3/4% of face value. The notes had maturities ranging from 190 to 272 days. Their total face value was $43,050,000, and the total issue price was $42,222,357. The partnership sold 20 of the 33 notes before the end of the tax year but after having held them for more than six months, realizing a gain of $494,528. The remaining 13 notes were disposed of in the next tax year. In its 1952 return the partnership reported the $494,528 gain as a long-term capital gain, and, although on the accrual basis, did not accrue any income on account of the 13 unsold notes. Petitioners' individual income tax returns reflected the same treatment for their respective distributive shares of the partnership income derived from the sale of the notes.

The Commissioner of Internal Revenue determined that the gain realized was taxable as ordinary income, and also that a portion of the original issue discount on the 13 unsold notes was earned and reportable as ordinary income for 1952.1 Petitioners paid the resulting deficiencies, and in this suit for refund the United States prevailed in the District Court for the Southern District of New York, 224 F.Supp. 358, and in the Court of Appeals for the Second Circuit, 333 F.2d 1016. We brought the case here on certiorari, 379 U.S. 943, 85 S.Ct. 437, 13 L.Ed.2d 542, to resolve a conflict with United States v. Midland-Ross Corp., supra. We affirm.

Our holding today in Midland-Ross that original issue discount is not entitled to capital gains treatment under the 1939 Internal Revenue Code requires that we affirm the result below unless an affirmance is precluded by an argument made here and not in Midland-Ross. The petitioners contend that in purchasing the notes they relied upon the Commissioner's published acquiescence in the Tax Court's decision in Caulkins v. Commissioner of Internal Revenue, 1 T.C 656, aff'd 144 F.2d 482, not withdrawn until the transaction was closed,2 which acquiescence would require treating the gain realized as gain on the sale or exchange of a capital asset. Although petitioners concede that under § 7805(b) of the Internal Revenue Code of 1954 the Commissioner has discretion to apply the withdrawal of the acquiescence retroactively, cf. Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746, they contend that he abused his discretion in this case.

Section 7805(b) provides:

'Retroactivity of Regulations or Rulings.—The Secretary (of the Treasury) or his delegate may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect.'3

In Caulkins the Tax Court allowed capital gains treatment of the full amount received by the taxpayer upon the retirement of an 'Accumulative Installment Certificate,' a debt security under which the lender made 10 annual remittances to the borrower in the amount of $1,500 each in return for a payment of $20,000 in the tenth year. See United States v. Midland-Ross Corp., supra, 381 U.S., at 63, 85 S.Ct. at 1313. The result gave capital gains treatment to an amount corresponding to but not in the form of original issue discount. The basis for this result was an interpretation of § 117(f) of the Revenue Act of 1938, c. 289, 52 Stat. 447, which was reenacted as § 117(f) of the 1939 Code, and which provided that 'amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness * * * with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.' The Commissioner's 1955 withdrawal of his acquiescence in the Tax Court's decision in Caulkins was made retroactive as a general matter, but an exception was made for 'amounts received upon redemption of Accumulative Installment Certificates issued by Investors Syndicate which were purchased during the period beginning December 25, 1944, the date acquiescence in the Caulkins case was announced and March 14, 1955, the date this Revenue Ruling is published * * *.'4 The exception thus covered only the debt securities of the specific type involved in Caulkins, and issued by the particular issuer there involved.

In Automobile Club of Michigan v. Commissioner of Internal Revenue, supra, 353 U.S. at 183—184, 77 S.Ct. at 709 we held that the Commissioner is empowered retroactively to correct mistakes of law in the application of the tax laws to particular transactions.5 He may do so even where a taxpayer may have relied to his detriment on the Commissioner's mistake. See Manhattan General Equipment Co. v. Commissioner of Internal Revenue, 297 U.S. 129, 56 S.Ct. 397, 80 L.Ed. 528. This principle is no more than a reflection of the fact that Congress, not the Commissioner, prescribes the tax laws, The Commissioner's rulings have only such force as Congress chooses to give them, and Congress has not given them the force of law. Consequently it would appear that the Commissioner's acquiescence in an erroneous decision, published as a ruling, cannot in and of itself bar the United States from collecting a tax otherwise lawfully due.

But petitioners point to prefatory statements in the Internal Revenue Bulletins for 1952 and other years stating that Tax Court decisions acquiesced in 'should be relied upon by officers and employees of the Bureau of Internal Revenue as precedents in the disposition of other cases.' See, e.g., 1952—1 Cum.Bull. IV. These are merely guidelines for Bureau personnel, however, and hardly help the petitioners here. The title pages of the same Revenue Bulletins give taxpayers explicit warning that rulings

'* * * are for the information of taxpayers and their counsel as showing the trend of official opinion in * * * the Bureau of Internal Revenue; the rulings other than Treasury Decisions have none of the force of effect of Treasury Decisions and do not commit the Department to any interpretation of the law which has not been formally approved and promulgated by the Secretary of the Treasury.'6 (Emphasis added.)

This admonition, together with the language of § 7805(b)'s predecessor, § 3791(b) of the 1939 Code, gave ample notice that the Commissioner's acquiescence in Caulkins was not immune from subsequent retroactive correction to eliminate a mistake of law.

Indeed, long before the tax year here in question this Court had made it clear that 'The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law * * * but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity.' Manhattan General Equipment Co. v. Commissioner of Internal Revenue, supra, 297 U.S. at 134,7 56 S.Ct. at 400. There we held that the Commissioner could make retroactive a new regulation increasing tax liability beyond that provided for by the prior regulation where the superseding regulation corrected an erroneous interpretation of the statute.

'The statute defines the rights of the taxpayer and fixes a standard by which such rights are to be measured. The regulation constitutes only a step in the administrative process. It does not, and could not alter the statute. It is no more retroactive in its operation than is a judicial determination construing and applying a statute to a case in hand.' Id., at 135, 56 S.Ct. at 400.

This reasoning applies with even greater force to the Commissioner's rulings and acquiescences.8 Therefore the acquiescence in Caulkins, even assuming for the moment that it embodied the Commissioner's acceptance of the treatment petitioners urge upon us here, does not preclude the Commissioner from collecting the tax lawfully due under the statute.

We cannot agree with petitioners that Automobile Club of Michigan v. Commissioner of Internal Revenue, supra, supports a finding that the Commissioner abused his discretion in giving retroactive effect to the withdrawal of the acquiescence. In that case the Commissioner had issued general pronouncements according exempt status to all automobile clubs similarly situated, following letter rulings to that effect in favor of the taxpayer. The Commissioner then corrected his erroneous view and, in 1945, specifically revoked the taxpayer's exemption for 1943 and subsequent years. We rejected the taxpayer's claim that the Commissioner had abused the discretion given him by § 7805(b)'s predecessor. The Commissioner's action had been forecast in a General Counsel Memorandum in 1943, and the corrected ruling had been applied to all automobile clubs for tax years back to 1943. 353 U.S., at 185—186, 77 S.Ct. at 710—711.

Petitioners make two arguments based on Automobile Club of Michigan. First, they contend that the Commissioner's decision to apply his change of position retroactively to them is an abuse of discretion because, unlike the taxpayer in Automobile Club, they had no notice in the relevant tax year that the Commissioner was about to correct his mistake of law, and thus had purchased the discounted notes in express reliance upon the Commissioner's published acquiescence in Caulkins. Second, they argue that the Commissioner abused his discretion because the retroactive withdrawal of his...

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