Opinion ID: 504669
Heading Depth: 1
Heading Rank: 3

Heading: Retroactivity of the Revocation

Text: 31 The Association next contends that, if the IRS was properly able to revoke its tax-exempt status, the IRS was still not able to make that revocation retroactive. The IRS issued its report revoking the Association's tax-exempt status in 1984, but made the revocation retroactive to 1981, the year in which the regulation became effective. The Association was required to file tax returns and pay taxes for years 1981 through 1984. 32 Section 7805(b) of the Internal Revenue Code provides that the decision on whether or not to make a tax ruling or regulation retroactive is left to the sound discretion of the Secretary of the Treasury. 26 U.S.C. Sec. 7805(b) (1954). The Secretary's decision will not be reversed unless it amounts to an abuse of discretion. Automobile Club of Michigan v. Comm'r, 353 U.S. 180, 184, 77 S.Ct. 707, 710, 1 L.Ed.2d 746 (1957); Old Dominion Box Co. v. United States, 477 F.2d 340 (4th Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973). 33 In Dickman v. C.I.R., 465 U.S. 330, 104 S.Ct. 1086, 79 L.Ed.2d 343 (1984), the Supreme Court was presented the issue of whether the IRS Commissioner could change an existing interpretation of a tax law and give that changed interpretation retroactive effect. The plaintiffs argued that the Commissioner's retroactive application of the changed interpretation of the tax law should be held an abuse of discretion since they detrimentally relied on the original, long-standing interpretation of the law in planning their financial affairs. The Court disagreed, holding that: 34 [I]t is well established that the Commissioner may change an earlier interpretation of the law, even if such a change is made retroactive in effect. E.g., Dixon v. United States, 381 US 68, 72-75, 14 L Ed 2d 223, 85 S Ct. 1301 [1304-1306] (1965); Automobile Club of Michigan v. Commissioner, 353 US 180, 183-184, 1 L Ed 2d 746, 77 S Ct 707 [709-710] (1957). This rule applies even though a taxpayer may have relied to his detriment upon the Commissioner's prior position. Dixon v. United Sates, supra, at 73, 14 L Ed 2d 223, 85 S Ct 1301 [1304]. The Commissioner is under no duty to assert a particular position as soon as the statute authorizes such an interpretation. See also Bob Jones University v. United States, 461 US 574, 76 L Ed2d 157, 103 S Ct 2017 (1983). Accordingly, petitioners' taxpayer reliance argument is unavailing. 35 Id. at 343, 104 S.Ct. at 1094 (footnotes omitted). Clearly, if the Commissioner can retroactively apply a changed interpretation of a tax law, the Secretary can, in the instant case, retroactively revoke the Association's tax exemption to the date of the Association's initial violation of an existing regulation. In the present case, the Association cannot even make the good-faith, detrimental reliance argument raised by the plaintiffs in Dickman since the revocation was retroactively applied only to the effective date of the regulation which controlled the Association's continued entitlement to its tax exemption. 36 The Association cites this court to Pittsburgh Press Club v. United States, 615 F.2d 600 (3d Cir.1980), in which the Third Circuit held that the Commissioner's decision to revoke the tax-exempt status of a voluntary employee organization was an abuse of discretion. In Pittsburgh Press, the Commissioner, after an IRS audit of the organization's accounts, notified the organization that its tax-exempt status might be revoked for engaging in certain for-profit activities not mentioned in the organization's original exemption application. The Commissioner subsequently revoked the organization's tax exemption, making the revocation retroactive to the tax year in which the organization first engaged in the impermissible activities. 37 The Third Circuit held that the Commissioner abused his discretion in making the revocation retroactive to the year in which the organization first engaged in the impermissible activities. The court, however, did not disclose its reasoning beyond citing Lesavoy Foundation v. Comm'r, 238 F.2d 589 (3d Cir.1956). 38 In Lesavoy, the Third Circuit held that, if an organization detrimentally and in good-faith relies on a tax-exemption and does not misrepresent the nature of its activities to the IRS, it is an abuse of discretion for the Commissioner to retroactively revoke the organization's tax exemption based on those activities. Id. at 590-93. Obviously, the Supreme Court's decision in Dickman v. Comm'r, 465 U.S. 330, 104 S.Ct. 1086, 79 L.Ed.2d 343 (1984), casts serious doubt on the continuing validity of at least that portion of Lesavoy which holds that good-faith, detrimental reliance on a tax exemption is a basis for denying retroactive application of a subsequent revocation. 39 We need not determine, however, whether the Third Circuit's holding in Lesavoy has any continuing validity after Dickman, since the instant case is clearly distinguishable from Lesavoy and Pittsburgh Press. In both of those cases, there was no intervening change in the tax regulations to signal the organizations that their tax-exempt status was in jeopardy. In the instant case, on the other hand, the Association had at least constructive notice, after Treasury Regulation 1.501(c)(9) became effective in January of 1981, that the IRS had a regulatory basis to revoke its tax-exempt status. It is not unfair, therefore, for the Secretary to have decided to make the revocation retroactive to the effective date of the new regulation. It simply cannot be said that such decision amounted to an abuse of discretion.