Court Opinion

ID: 9427081
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:19:41.810171+00
Date Added: 2024-06-11T17:23:04.277857
License: Public Domain

Mr. Justice Brennan,
with whom The Chief Justice and Mr. Justice Powell join, concurring.
I join the Court's opinion, emphasizing that it does not decide “whether a new regulation that, for withholding purposes, would require the treatment of lunch reimbursements as wages under the existing statute would or would not be valid.” Ante, at 32 n. 12. I share the Court's conclusion that petitioner met its obligations under Treas. Reg. § 31.3401 (a)-l (b)(2) as that regulation was most reasonably interpreted in 1963. I write separately to state more fully my views on why petitioner cannot be subjected retroactively to withholding tax on the theory — whether correct or not— espoused here by the Government. See ante, at 28-29.
I
Those who administer the Internal Revenue Code unquestionably have broad authority to make tax rulings and regulations retroactive. See 26 U. S. C. § 7805 (b),1 construed in Dixon v. United States, 381 U. S. 68 (1965); Automobile Club of Michigan v. Commissioner, 353 U. S. 180 *34(1957).2 That authority is not unfettered, however, and conditions are.present here that would make retroactive application of the withholding tax to petitioner’s lunch payments an abuse of discretion.
The legislative history of the Internal Revenue Code does not reveal any evidence of congressional intent to make employers guarantors of the tax liabilities of their employees, which would in all likelihood be the result if withholding taxes can be assessed retroactively.3 Far from it. When Congress has changed the withholding provisions to enlarge the scope of *35the withholding base or to increase the tax rate, its uniform practice has been to give employers a grace period in which to bring their withholding practices in line with the new law.4 *36In the one instance where this has not been the case,5 Congress has made clear that its retroactive application of withholding tax changes was inadvertent and it has moved promptly to correct its error:
“The Tax Reform Act of 1976, enacted on October 4, 1976, made several changes which increased tax liabilities from the beginning of 1976.
“In prior legislation (such as the Tax Reform Act of 1969) which the Congress passed late in the year but *37which imposed tax increases from the beginning of the year, the Congress, as a matter of equity and custom, has relieved taxpayers of any liability for additions to tax, interest, and penalties with respect to increases in estimated tax resulting from increases in tax liability .... Relying on Congressional assurances that the failure to provide such relief in the 1976 Act was an oversight which would be remedied, the Commissioner [has delayed tax assessments for 1976]....
“The committee believes it is appropriate to grant to taxpayers affected by the 1976 legislation relief from additions to tax, interest, and penalties, similar to that which has traditionally been granted in connection with earlier legislation where provisions were enacted with retroactive application.
“[Therefore, t]he committee amendment . . . relieves employers of any liability for failure to withhold income tax during 1976, on any type of remuneration which was made taxable by the 1976 Act.” S. Rep. No. 95-66, pp. 85-86 (1977) (emphasis added).
See Tax Reduction and .Simplification Act of 1977, § 404, 91 Stat. 155-156.
The only conclusion that can be drawn from Congress’ consistent practice of avoiding retroactive imposition of withholding tax liability and its recent judgment that “equity and custom” require relief from inadvertent retroactive liability, I submit, is that additional withholding taxes should not, at least without good reason, be assessed against employers who did not know of and who had no reason to know of increased withholding obligations at the time wages had to be withheld.
Such notice, as the Court holds, ante, at 25-26, 29-30, was not given petitioner until at least 1967 and, for all that ap*38pears, possibly not until our decision in Commissioner v. Kowalski, 434 U. S. 77 (1977). Thus, the only question remaining is whether there is here some good reason to depart from customary practice. The United States does not suggest one, arguing instead that petitioner had ample notice of its obligations — a conclusion I join the Court in rejecting. Moreover, unlike the situation in Dixon and Automobile Club of Michigan, imposition of taxes retroactively here would not serve the important function of ensuring that all similarly situated taxpayers are assessed equally. Instead, the likely effect would be that the individual taxpayers who should have reported these meal reimbursements in income will be relieved of all taxes they should have paid, and petitioner will bear the tax directly rather than simply acting as a collection conduit for the United States, a result certainly not intended by Congress.

 "(b) Retroactivity of regulations or rulings. — The Secretary 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.”

 This case is very unlike either Dixon or Automobile Club of Michigan in each of which the Commissioner was held authorized to correct what we characterized as “mistakes of law.” See 381 U. S., at 72; 353 U. S.) at 183, 184. There is no simple sense in which the Commissioner is here merely undoing a mistake of law. Instead, as the Commissioner’s recent withdrawal of his fringe-benefit regulations witnesses, 41 Fed. Reg. 56334 (1976), the bifurcation of payments made to employees by employers into those that are fringe benefits — and hence income and hence taxable — and those that are merely reimbursements of moneys expended by the employee for the benefit of the employer’s business — and hence are a cost of doing business as an employee and hence excludable or deductible from income — is by no means easy. In the field of fringe-benefit taxation, therefore, the fact that something is taxed today that was not taxed yesterday is not so much evidence of mistake corrected as of an evolving understanding of what changed circumstances, equity, and legislative purpose require, And, although I feel no compulsion to insist that fringe-benefit law must always have been as it is newly announced on the theory that administrative interpretation must reflect a constant congressional intent, cf. Dixon v. United States, supra, at 73-75, I of course do not suggest that the Commissioner’s power to define income or wages is unfettered. It will be time enough to consider whether any particular fringe-benefit regulation is valid when and if such a regulation comes before this Court.

 It is possible that the employer could sue each of his employees to recover the amount of withholding taxes retroactively assessed by the Government. The chance that such a method of recovery would be either practical or cost effective is remote, however.

 One of the first instances of this policy can be found in the Revenue Act of 1942 itself. There, Congress raised the witholding tax rate on payments made to nonresident aliens and foreign corporations, see Internal Revenue Code of 1939, §§ 143-144, 53 Stat. 60-62, but nonetheless delayed the. effective date of the increase
“until the tenth day after the enactment of the act in order to afford a reasonable period within which withholding agents will be informed of the higher rate applicable to payments made to nonresident aliens or nonresident foreign corporations.” S. Rep. No. 1631, 77th Cong., 2d Sess., 69 (1942); see Revenue Act of 1942, § 108 (c), 56 Stat. 808.
Similarly withholding for the Victory Tax did not commence until tax years beginning after December 31, 1942, see id,., § 172 (a), 56 Stat. 884, although the Tax was passed in October 1942. Section 2 (c) of the Current Tax Payment Act of 1943, 57 Stat. 139, also delayed imposition of modified withholding obligations for about three weeks.
A review of amendments to the withholding provisions of the 1954 Code reveals a uniform practice of prospective application of modifications to the withholding tax that would require an employer to withhold increased amounts from employees’ pay.
The first such amendment to § 3401 is found in § 213 of Title II of the Revenue Act of 1964, which clarified and in some cases expanded the tax liability of employees for moving expenses and modified withholding correspondingly. See Tit. II, §§213 (a), 213 (c), 78 Stat. 50-52, adding respectively, 26 U. S. C. §§217 and 3401 (a) (15). Congress, apparently recognizing that additional withholding might be required, stated in § 213 (d): “The amendment made by subsection (c) shall apply with respect to remuneration paid after the seventh day following the date of enactment of this Act.” 78 Stat. 52. By contrast, § 204 of the Act, 78 Stat. 36 — which added § 79 of the Internal Revenue Code, 26 U. S. C. § 79, giving deductions to employees for group term life insurance contributions made by employers, and which created a corresponding deduction in the withholding tax (§3401 (a) (14)) — actually contracted the wage base and this change in withholding obligation was made retroactive. See § 204 (d) of the Act, 78 Stat. 37.
In 1965, Congress modified the treatment of tip income under both the Social Security Act and the withholding provisions of the Code. Although the amending legislation was passed in July 1965, the modifications to *36withholding did not take effect until January 1, 1966. See Social Security Amendments of 1965, Tit. Ill, § 313 (f), 79 Stat. 385.
In 1966, Congress amended §§3401 (a)(6) and 3401 (a)(7), specifying that withholding on wages paid to aliens would thereafter be governed by Treasury Regulations. See Foreign Investors Tax Act of 1966, Tit. I, § 103 (k), 80 Stat. 1554. This change could have required increased withholding and Congress, apparently recognizing this, delayed the effective date of the change to 1967. See § 103 (n)(4), 80 Slat. 1555. Similarly, in 1972, Congress modified § 3401 (a) (1) of the Code. Again, Congress provided: "The amendments made [to § 3401 (a) (1)] shall apply to wages paid on or after the first day of the first calendar month which begins more than 30 days after the date of enactment of this Act.” Pub. L. No. 92-279, § 3 (b), 86 Stat. 125. See also Employee Retirement Income Security Act of 1974, Tit. II, §§ 2002 (g) (7), 2002 (i) (2), 88 Stat. 970-971.
In the Tax Adjustment Act of 1966, Congress made a wholesale modification of the withholding tax tables found in § 3402 of the Code, 26 II. S. C. § 3402. Again, Congress created a grace period — this time of over a month — before the new withholding provisions took .effect. See Tax Adjustment Act of 1966, § 101 (g), 80 Stat. 62. Further complex changes in withholding tables that increased withholding for many taxpayers were made in 1969, 1971, and 1976. In each instance but the last, changes were expressly made prospective. See Tax Reform Act of 1969, Tit. VIII, §805 (h), 83 Stat. 709; Revenue Act of 1971, Tit. II, §208 (i), 85 Stat. 517. As explained in the text, infra, Congress’ failure to make the 1976 withholding changes prospective was an oversight and has been corrected.
Thus, although the withholding provisions of the Code have been frequently amended, there is only one instance of intentionally retroactive application of an amendment and in that case the amendment scaled down an employer’s withholding obligations.

 See n. 4, supra.