Court Opinion

ID: 9450613
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:53:15.142281+00
Date Added: 2024-06-11T17:32:23.615661
License: Public Domain

COWEN, Chief Judge
(dissenting).
If we were empowered, in accordance with the dictates of natural justice, to order -that the taxes paid by plaintiff be refunded because plaintiff received unfair and unequal treatment, I would readily concur in the court’s decision. Despite the persuasiveness of the court’s opinion, however, I would dismiss plaintiff’s petition. In my view, the court’s decision is contrary to the intention of Congress as expressed in the enactment of the statute upon which the court’s action is predicated and departs from the rule announced in decisions which have construed that statute in actions by taxpayers who based their suits upon private rulings issued to other taxpayers. As a preliminary to the conclusion which I believe should have been reached in this case, let us review the salient facts.
First, it is undisputed and now conceded by plaintiff that the business machines, which are the subject of its suit for refund, -were at all times pertinent to this action subject to -the excise tax provided in Section 4191 of the Internal Revenue Code of 1954, or its predecessor.
Second, on July 13, 1955, plaintiff applied for a private ruling that its machines were not taxable on the ground that the Commissioner of Internal Revenue had, on April 15, 1955, issued a private ruling to Remington Rand that its computing machines, which were similar in all material respects to plaintiff’s machines, were not subject to the excise tax. The ruling in favor of Remington Rand was revoked December 3, 1957, but, as to if, the new ruling was made applicable only for the period beginning on and after February 1, 1958. On November 26, 1957, the Commissioner, in response to plaintiff’s request for a private ruling, notified plaintiff that its machines were taxable. There was no retroactive application of a private ruling issued to plaintiff or of a published ruling covering its machines.
Third, there is no evidence in the record that plaintiff closed any transactions in reliance on the private ruling given to Remington Rand, or that-it suffered any competitive disadvantage as a result of the Commissioner’s action.
The court recognizes that when the Internal Revenue Service revoked the pri*926vate ruling given to Rand, it could not apply the ruling of revocation to Remington Rand retroactively because of the provisions of Section 1108(b) of the Revenue Act of 1926 (quoted in footnote 10 of the court’s opinion). There is no corresponding statutory provision which would have authorized the Commissioner of Internal Revenue to forgive the tax on plaintiff’s sales during the period that the erroneous ruling to Remington Rand was outstanding. Nevertheless, the court holds that the Commissioner abused the discretion reposed in him by Section 7805 (b) of the Internal Revenue Code of 1954, when he failed to apply the ruling given to plaintiff (that its machines were taxable) without retroactive effect so that both competitors would be placed on the same plane.1
The predecessor of Section 7805(b) was first enacted in substantially its present form as Section 506 of the Revenue Act of 1934, which amended Section 1108 (a) of the Revenue Act of 1926. The purposes for which the new Section 506 was enacted are set forth in substantially the same -language in both H.Rep. No. 704, 73d Cong., 2d Sess., at page 38 and S.Rep.No.558, 73d Cong., 2d Sess., at page 48.
The House Report reads as follows:
“Section 506. Retroactivity of rulings: This section .amends section 1108(a) of the Revenue Act of 1926, as amended, so as to permit the Secretary, or the Commissioner with the approval of the Secretary, to prescribe the extent, if any, to which any -regulation, Treasury decision, or ruling relating to internal revenue taxes shall be applied without retroactive effect. The amendment extends the right granted by existing law to the Treasury Department-to give regulations and Treasury decisions amending prior regulations or Treasury decisions prospective effect only, by .allowing the Secretary, or the Commissioner with the approval of the Secretary, to prescribe the exact extent to which any regulation or Treasury decision, whether or not it amends a prior regulation or Treasury decision, will be applied without retroactive effect. The amendment furthermore permits internal revenue rulings as well as regulations or Treasury decisions to be applied without retroactive effect. Regulations, Treasury decisions, and rulings which are merely interpretive of the statute, will normally have a universal application, but in some cases the application of regulations, Treasury decisions, and rulings to past transactions which have been closed by taxpayers in reliance upon existing practice, will work such inequitable results that it is believed desirable to lodge in the Treasury Department the power to avoid these results by applying certain regulations, Treasury decisions, and rulings with prospective effect only.” [Cum.Bull. 1939-1 (Part 2) p. 583] ^Emphasis added]
From the above-quoted language in the House Report, it seems altogether clear that Congress vested the Commissioner with the discretion to limit the retroactive application of any ruling, regulation, or Treasury decision when necessary to avoid inequities to taxpayers who have acted to their detriment in relying upon prior decisions, regulations, or rulings. Therefore, in my opinion, a showing of detriment and reliance is generally necessary to establish an abuse of discretion under Section 7805(b). See Lynn and Gerson Quasi-Estoppel and Abuse of Discretion as Applied Against the United States in Federal Tax Controversies, 19 Tax L.Rev. 487, 508 (1964). As stated above, plaintiff did not show that it closed any transactions in reliance on the private ruling given to Remington Rand, or that it suffered any competitive disadvantage as a result of the ruling. At a *927pretrial conference held before our trial commissioner (para. 16 Commissioner’s Memorandum of Pretrial Conference) defendant put plaintiff on notice that if its right to recover was predicated upon an alleged competitive disadvantage inflicted upon it by the Commissioner of Internal Revenue, plaintiff could support its claim only by producing evidence of sales opportunities -lost because excise taxes were imposed on its machines but not upon those of Remington Rand. Plaintiff did not offer any proof on the point. Also, plaintiff did not absorb any of the excise taxes on the machines sold or leased to its customers.2
In a series of decisions by the First Circuit, the Third Circuit and the Tax Court, the courts were faced with actions by taxpayers, who had not received private rulings from the Internal Revenue Service. They argued that when the Commissioner revoked a previous letter ruling issued to another taxpayer, the retroactive application of that change in position as to them constituted a discriminatory abuse of the discretion granted by Section 7805(b) or its predecessor. Insofar as taxability was concerned, the situation of these taxpayers was the same or similar to that of the taxpayer who had received the ruling, and it was shown or assumed that the plaintiffs in each case had relied on the previous rulings. Weller v. Commissioner, 270 F.2d 294 (3d Cir. 1959), cert. denied, 364 U.S. 908, 81 S.Ct. 269, 5 L.Ed.2d 223; Estate of Bennett v. Commissioner of Internal Revenue, P.H. Memo. T.C. Para. 60253 (1960); Gerstell v. Commissioner of Internal Revenue, P.H. Memo. T.C. Para. 62181 (1962), Aff’d 319 F.2d 131 (3d Cir. 1963); Goodstein v. Commissioner of Internal Revenue, 267 F.2d 127 (1st Cir. 1959). In each case, -the court held that the issuance of a ruling to a particular taxpayer was a sufficient basis for the Commissioner, in the exercise of Tiis discretion, to apply the change in position retroactively as to taxpayers who had not received rulings. Thus, in Weller, the Third Circuit stated:
“Petitioners contend, however, that although the revenue ruling fails to indicate any limitation on its application, agents of the Treasury have stated to Congress that it does not intend to apply the revenue ruling retroactively to individuals who have previously been issued rulings. We need not determine whether such action if carried out would be an abuse of discretion, for petitioners are not in the same position as those parties who have been issued rulings. They are entitled to the same treatment as all other taxpayers similarly situated, i. e., without rulings, no more and no less. This the Commissioner has afforded them.” [Emphasis added]
The Third Circuit adhered to this rule in its affirmance of the Tax Court’s decision in Gerstell v. Commissioner, supra, and in Carpenter v. Commissioner of Internal Revenue, 322 F.2d 733 (1963).
The First Circuit reached the same conclusion in Goodstein v. Commissioner of Internal Revenue, supra, and pointed; out an additional basis therefor in the following language:
“But to hold that the Commissioner is bound by rulings specifically addressed to a taxpayer other than the one whose return is questioned would severely limit the usefulness of the long established practice of privates administrative rulings. * * * We are of the opinion that the Tax Court was correct in holding that insofar as * * * no individual ruling to> the contrary was ever issued to the taxpayer, he cannot now assert that the Commissioner committed error in his retroactive application of the published ruling.”
*928I see no distinction in principle between the facts in the case before us and those in the cases cited and I would, therefore, follow the rule which they have announced.
As the First Circuit has suggested, I believe that the court’s holding in this case might impair the usefulness of the long established and well-known policy of the Internal Revenue Service with respect to private rulings. The reasons for that policy inhere in the great number of such rulings which are issued yearly and the circumstances under which they are issued. The policy was first announced in 1954 in Rev.Rul. 54-172, 1954-1, Cum. Bull. 394, Section 11, and is now set forth in Treasury Regulation 601.201. Thus, it has long been the policy and it is now stated in the regulations that the Service will not, except in unusual cases, apply the revocation or modification of a ruling issued to a particular taxpayer in a retroactive way. The basis for this policy has been discussed fully and will not be repeated here. Wenchel, Taxpayers Rulings, 5 Tax L.Rev. 105 (1950) and Caplin, Taxpayer Rulings Policy of the Internal Revenue Service: A Statement of Principles, N.Y.U. 20th Inst, on Fed.Tax. 1, 26-29 (1962).
Congress has considered this problem and has demonstrated its reluctance to change or restrict the established Service policy regarding private rulings by rejecting a proposed amendment to Section 7805 of the Internal Revenue Code of 1954. The amendment provided that a taxpayer who files a tax return in reliance on an unpublished ruling issued to another taxpayer, should be treated in the same manner as if the unpublished ruling had been issued to him, provided the ruling had not been revoked by the time the return was filed. 102 Cong.Rec. 14,-682 (1956). The Senate adopted the proposed amendment but it was never acted on by the House.
As I understand, the court’s decision is principally based on the decisions of this court in Exchange Parts Company, Inc. v. United States, 279 F.2d 251, 150 Ct.Cl. 538 (I960) and Connecticut Railway & Lighting Co. v. United States, 142 F.Supp. 907, 135 Ct.Cl. 650 (1956).3 I think that the facts in those cases are dissimilar and that the decisions do not control this case. In Connecticut Railway, the Internal Revenue Service published regulations which reversed a consistent administrative practice extending over a period of 30 years, as well as the government’s published representations to the Supreme Court. In Exchange Parts Company, Inc., plaintiff was one of many businesses engaged in rebuilding automobile parts. After paying the excise tax on rebuilt equipment for several years, plaintiff applied for and obtained a ruling that the articles were not taxable. In addition, there were published rulings to the same effect. Thereafter, the Commissioner reversed his position but stated that in view of his earlier published pronouncements, he would apply the new ruling prospectively, except that he would not refund any excise taxes that had been previously paid. Plaintiff’s claim for refund, which covered the period for which it had paid the taxes, was rejected.
The distinguishing feature of both cases is that by virtue of private and published rulings or long standing administrative practice, each of the affected taxpayers would have been entitled-to a refund of the taxes paid under the law as it had been administered by the Internal Revenue Service. The court held that in such circumstances it was an abuse of discretion for the Commissioner to discriminate against the plaintiffs in those *929cases solely on the basis that they had paid the taxes in suit.
The plaintiff’s situation here is quite different. It applied for but did not obtain a ruling that its machines were nontaxable. The erroneous ruling issued to Remington Rand was a private ruling which covered only its machines, designated by name and number. There was no published ruling of general applicability nor was there a long standing and publicly announced administrative practice that the type of machines manufactured by plaintiff were not subject to the excise tax. The fact that plaintiff’s machines were similar in all respects to those made by Remington Rand does not place plaintiff in any better position than the plaintiffs in the Weller-Goodstein line of cases cited above.
Upon the facts presented to us, the long delay which elapsed between plaintiff’s application for a favorable ruling and the revocation of the ruling given to Remington Rand appears to have been inexcusable. The explanation offered by defendant is neither appealing nor convincing. But this is a problem of administrative management in the Internal Revenue Service and its correction should come through reforms initiated in that agency. If relief is to be granted for the kind of damage claimed by plaintiff, such relief should be provided by legislation4 rather than by a remission of taxes lawfully due.
Equal treatment of all taxpayers who are similarly situated is a much sought-after goal. This case is an example — a deplorable example — of the fact that in many cases the goal is not attained. However, in the absence of some statutory provision which affords plaintiff relief because of the unequal treatment it received, I think the court is powerless to supply the remedy it has applied in thiscase.

. Tlie majority places the “competitors" on the same plane retrospectively, but.it does so without regard to whether any competitive disadvantage was suffered by plaintiff.

. Of the total amount plaintiff seeks to recover, $251,797.45 represents taxes imposed on plaintiff’s own use of its machines and $11,123,292.55 represents excise taxes passed on to its customers who purchased or rented plaintiff’s machines.

. In Connecticut Railway and Exchange Parts Company, the briefs of the parties did not contain any reference to or discussion of Section 1108(b) of the Revenue Act of 1926 and there is no indication in the court’s opinions that this statute was noticed or considered.

. Congress has denied consent to sue the sovereign in tort actions for damages predicated on an abuse of discretion. 28 U.S.C. 2680(a); see Jayson, Application of the Discretionary Function Exception, 24 Fed.Bar J. 153 (1964).