Automobile Club of Michigan v. Commissioner of Internal Revenue

PETITIONER:Automobile Club of Michigan
RESPONDENT:Commissioner of Internal Revenue
LOCATION:Military Stockade

DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 353 US 180 (1957)
ARGUED: Mar 06, 1957 / Mar 07, 1957
DECIDED: Apr 22, 1957

Facts of the case


  • Oral Argument – March 07, 1957
  • Audio Transcription for Oral Argument – March 07, 1957 in Automobile Club of Michigan v. Commissioner of Internal Revenue

    Audio Transcription for Oral Argument – March 06, 1957 in Automobile Club of Michigan v. Commissioner of Internal Revenue

    Earl Warren:

    Number 89, Automobile Club of Michigan, Petitioner, versus Commissioner of Internal Revenue.

    Ellsworth C. Alvord:

    May it please the Court.

    Earl Warren:

    Mr. Alvord.

    Ellsworth C. Alvord:

    We are here on certiorari to the Sixth Circuit.

    The facts are stipulated and there are three issues in the case, almost three different cases.

    I will attempt to cover the first two issues in the order in which they appear in the Government brief and Mr. Berry will cover the third issue.

    The first issue does the Commissioner have power to revoke retroactively a ruling of some nine-year standing, eleven-year standing, granting tax exemption to the petitioner.

    The second issue is, did he act within the applicable statute of limitations.

    The third issue which Mr. Berry will cover is, did the Commissioner have power to compel the petitioner to change his long standing, consistent methods of accounting.

    These are the facts that were stipulated and relatively simple.

    The petitioner is an automobile service organization, organized under the nonprofit laws of Michigan having no stockholders, only members governed by the Board of Directors.

    Like in other, certificate of incorporations and by-laws, all of which are in the record.

    Its principal purpose is exactly what we all know an Automobile Association is to give its members emergency service.

    If your car doesn’t start in the morning, you get stuck on the road, you may call and service is sent.

    The Club pays the cost of the service under contracts of various service garages.

    That is its principal function.

    It also supplies road service to its members, and less, rising where the roads are good and where they’re bad.

    It also gives a magazine.

    Its membership is on annual basis.

    It has never paid a dividend and could not pay a dividend.

    Early in 1934, it was concerned about the application of Section 215 of the National Recovery Act which imposed a capital stock tax upon corporations.

    And as a result of its inquiry the Commissioner wrote a letter and said, “Please send me the facts” and imposed the question there which call for a very detailed facts.

    In June of 1934, the Commissioner by letter advised the petitioner, that was exempt from tax under what is now known as Section 101 (9), the same Section under which golf clubs, private golf clubs are exempted, the Metropolitan Club and the Press Club, and all recreations, social subject exempt a value of the petitioner that was exempt under 101(9).

    And that it need not file income tax returns, either for the past or for the future.

    Somewhat later in 1937 the Commissioner in accordance with his practice have attempted to check on tax exempt organizations or organizations which have been ruled tax exempt as for another questionnaire with a copy filled in and returned.

    A second letter came out a few months later saying, “We affirm our prior ruling that you are not — that you’re exempt and you were not called upon to prior corporate income tax returns”.

    And there the matter stood.

    Until my point of view, 1945 but there’s an intervening factor of no consequence although the Government pays a great deal of weight to it.

    A General Counsel Memorandum which has nothing but the opinion of the General Counsel of the Bureau of Internal Revenue given to the Commission of Internal Revenue for his guidance which he may follow or my not.

    He often does not.

    Ellsworth C. Alvord:

    It was published in the internal revenue bulletin.

    That memorandum was addressed to the 3 A’s, which is the Washington organization which is a federation of all the various local clubs such as the Michigan Club.

    Now so you won’t be confused.

    In the district, the 3 A’s also has a separate division which operates like the Michigan Club did, but that’s not the principal function of the 3 A’s.

    In fact GCM said, “You 3 A’s are not exempt despite our prior ruling.

    And in my point of view, that’s all that happened.

    In 1945, the Commissioner writes the petitioner a letter saying that in the light of this GCM, we are reconsidering whether automobile clubs and you specifically are to be exempt under 101 (9).

    Please send this information and the information was presented.

    It was considered by the Commissioner and on July 11th, 1945 I think it was.

    He wrote to petitioner.

    Wrote a long letter, it’s in the record saying “We have given thorough consideration.

    We have now changed our views about clubs under Section 101 (9).

    We think that there must be some friendship, some social — social purposes involved.

    And we rule that you have no social friendship purposes, no association together,” and he was right in that.

    “And therefore we rule that you were not exempt from taxes.

    From that moment on, we do not dispute, Mr. (Inaudible) that anytime he could say “Gentlemen as to the future, I’ve changed my mind.”

    But the letter goes on to say, his letter is in 1945, says that you must now file returns for 1943 and 1944 for the two years preceding, two years and six in one case plus six months preceding with the specific revocation ruling.

    Returns were filed under protest and statements on the returns were made, prior returns of income and excess, profits, taxes had not been filed.

    Because of reliance upon the tax exempt rulings which have been enforced to some 10 to 11 years.

    Does the Commissioner under the statute have power to make retroactive rulings?

    Ellsworth C. Alvord:

    He does not, sir.

    I will come to that.

    There is nothing in the statute anywhere which gives the Commissioner that power.

    The regulations under which he was acted, Regulation 111 which we cite to you, in my opinion denied them both.

    The regulation says that when the Commissioner determines that an organization is exempt, not quite in those words it says when an organization establishes its right to exemption, which means when the Commissioner agrees with it.

    From that time on, no returns are required for income tax purposes.

    And there is nothing in the regulation which gives the Commissioner the power to change his mind retroactively.

    He doesn’t need the power as to the future.

    Hugo L. Black:

    Where — where is the power given the Commissioner?

    Ellsworth C. Alvord:

    As to the future?

    Hugo L. Black:

    To grant exemptions and keep them in exempt for five or six years on the basis of that an exemption under the Act.

    Ellsworth C. Alvord:

    That Your Honor is —

    Hugo L. Black:

    And then promulgate a new rule and make it effective in the future.

    Ellsworth C. Alvord:

    That —

    Hugo L. Black:

    You — you disturb me by your concession.

    Ellsworth C. Alvord:

    That Your Honor is a very appropriate question.

    The only power there is to make rulings of this kind outside of the regulations which are promulgated by the Commissioner with the Secretary of the Treasury under ample authority of the statute.

    The only power is the duty imposed upon the Commission who administer the law.

    Hugo L. Black:

    Well why do you say that then that he could grant exemptions?

    It doesn’t stay in effect for a number of years and then decides he doesn’t want to grant exemptions and cut them off for the future, that the law offers or delegate such a power to him?

    Ellsworth C. Alvord:

    Under our tax laws, Your Honor as you know, we go forth on an annual basis.

    Our status in 1945 would be exactly the same as our status in 1944 and 1943 but 1945 is a year under determination or perhaps 1957 is a year under determination.

    The Commissioner is charged with the duty of collecting taxes from corporations for the year 1945.

    He must decide which is a corporation, which is not, which corporation is taxable, which is not.

    That’s an annual duty imposed upon him.

    That duty sir is found in the statute itself.

    Hugo L. Black:

    He must decide that but does that prevent binding on the Court if it comes to the Court?

    In other words, does the statute fix the exemptions or does the Commissioner fix the exemption?

    Ellsworth C. Alvord:

    The statute —

    Hugo L. Black:

    I gather from you that the Commissioner determines the exemptions under the tax law.

    Ellsworth C. Alvord:

    The statute fixes the exemptions.

    From one year to another, the Commissioner has no power to change the statute.

    But when he rules, as he does and as a consistent practice over many, many, many years he gives rulings, rulings, rulings everyday with respect to taxability or non-taxability.

    I’m coming more directly to the point, Your Honor if I may, when he follows that long continuing practice, well-known to Congress authorized under the regulations, then he has the power to determine whether or not a corporation such as the Automobile Club here is taxable or whether or not it’s exempted.

    He exercised that function.

    Felix Frankfurter:

    Does that mean — are you merely saying, not that it isn’t important, are you saying that he must determine whether circumstances bringing in with the category which Congress has defined.

    Is that what you’re saying or something (Voice Overlap) —

    Ellsworth C. Alvord:

    You Honor, in reply to your question, I must be a little bit more specific.

    Felix Frankfurter:

    All right.

    Ellsworth C. Alvord:

    There is nothing in the tax law as which it requires me to apply for a ruling.

    Felix Frankfurter:

    No, I understand that.

    Ellsworth C. Alvord:

    I may, if I wish, that if I wish I will get a ruling.

    Now the regulations in this case are a little bit different from that because maybe that some courts have indicated he went beyond his power because the — Regulation 111 in this case, say that I must apply for a ruling or I cannot be exempt.

    (Inaudible) but that isn’t — we did comply with the regulations, we did get a ruling and that ruling was enforced for many, many years.

    William J. Brennan, Jr.:

    Well is your factual situation changed —

    Ellsworth C. Alvord:

    The factual situation is not changed in the slightest and that isn’t admitted to.

    The purpose of our organization and methods of our doing business remained exactly the same through all the years.

    William J. Brennan, Jr.:

    Well on the — on the facts before 1945, did you qualify for exemption under the statute?

    Ellsworth C. Alvord:

    In the absence of the decision of the Commissioner.

    William J. Brennan, Jr.:


    Ellsworth C. Alvord:

    The best answer I can give you on that sir is four judges thought I was exempt, not in my case that an automobile club would be exempt.

    There is a few years of litigation on it.

    William J. Brennan, Jr.:

    But under the statute then, you did have a support of — of judicial decisions that you are entitled to statutory exemption.

    Ellsworth C. Alvord:

    Not at the time of the rulings.

    (Voice Overlap) — that — that must be very (Voice Overlap) not at the time of the rulings.

    William J. Brennan, Jr.:

    Well what I’m having difficulty is I don’t understand if you were entitled of the exemption under the statute before 1945, why you now tell us that you acknowledge that you’re not entitled to it after 1945?

    Ellsworth C. Alvord:

    That I can interpret this issue.

    The Commissioner, with respect to corporations which had received no ruling, with respect to automobile clubs including these 3 A’s, proceeded against them beginning in 1943.

    He had reached the decision based upon an unpublished decision have enforced.

    It has nothing to do with income taxes, but it had only to do with the dues tax, whether dues to revoke more health profit (Inaudible).

    Whether the member paying those should pay a tax on that, the Court said no.

    Based on that decision, they jumped over to the exemption 101 (9) and they say, “We think automobile clubs are no longer exempted”.

    And we go through litigation.

    The first case in litigation rule that the Automobile Club of California was exempted.

    William J. Brennan, Jr.:


    Ellsworth C. Alvord:

    Ruled that it was an appeal that opinion was reversed.

    At the time this case was tried before the tax court, there were at least three, I think, four Circuit Court of Appeals decisions against this.

    So that we stipulated on the tax court that from 1945 on, currently and for the future, we would not be exempted.

    William J. Brennan, Jr.:

    Well now to draw an inference on that maybe you’re wrong all along before 1945 (Voice Overlap) in your title of defense.

    Ellsworth C. Alvord:

    That is a very possible inference, yes sir.

    Ellsworth C. Alvord:

    And that of course is the condition that the Government takes but to me it makes no difference.

    If — let me put it this way.

    If we were exempted, then we wouldn’t be here.

    We’d be here unquestionably — if it all would be on the question of exemption.

    We are here on a question, first of administrative law.

    Having that ruling of exemption, can the Commissioner reverse it?

    Even though he’s right on law.

    Hugo L. Black:

    Suppose he was wrong under the statute in granting the exemption, why couldn’t he change it?

    Ellsworth C. Alvord:

    You Honor, that’s —

    Hugo L. Black:

    And I suppose the tax laws were fixed by the statute.

    I didn’t know that the exemption and so forth is determined by the tax commissioner.

    Ellsworth C. Alvord:

    Your Honor you — you will recall that every tax law imposes upon the Commissioner where the approved Secretary of the Treasury not only the power but the duty to prescribe regulations.

    Hugo L. Black:

    That’s right.

    Ellsworth C. Alvord:

    Beginning —

    Hugo L. Black:

    And if they’re — if they’re valid under the statute, that’s a good interpretation as we take it.

    It has great weight in saying whether that statute doesn’t mean to.

    Ellsworth C. Alvord:

    That’s right.

    If we’re invalid under the statute, we’ll still take it under certain circumstances.

    That’s been put in this course to getting with the Reynold’s case in 1939.

    Yes, the Commissioner’s interpretation of regulation is wrong but if it’s been adopted by the Congress, or if it’s been long standing, you accept, we say we don’t go back.

    This regulation has been enforced ever since 1918, permitting organizations to apply for exemption and more specifically in 1921 saying that if they’re exempt, they need not file corporate tax returns.

    Now, I’m very happy to see that you see the issue.

    The power to revoke retroactive —

    Hugo L. Black:

    But that’s not the issue I thought it was.[Laughter]

    Maybe it is.

    Ellsworth C. Alvord:

    The Commissioner exercised the power.

    There’s no doubt about that.

    The regulations gave them the power, those regulations were enforced through — more than 25 years.

    I think I would express some doubt as to the effectiveness of the regulations to compel me to apply for a ruling.

    But I have no doubt as to the propriety of the regulations and the consequences of complaint with them, if I do follow them apply to get a ruling.

    Felix Frankfurter:

    Let me ask you this, Mr. Alvord.

    As I understand it, this regulation granting exemption was made at the time that there was no — was made during a period, during which there was no court construction not challenged as we do not now challenge.

    There was no court construction saying that as one construed the tax laws, this is not within the permissive category of an exemption.

    But that the Commissioner construing as he must everyday and does, the law before the courts can get out of it, but before there’s a conflict which calls for a construction or a contest, the Commissioner, in giving his construction of the statute, thought this exemption was within the terms of the statute, is that it?

    Ellsworth C. Alvord:

    That’s is right (Voice Overlap).

    That is right.

    Felix Frankfurter:

    Now, if that had continued for years and years, and the first time it came up here, unless it were one of those egregious regulation, it so obviously exceeded the speed limit, you say this Court would have served such since these tax measures not as clear as crystal, not the multiplication table.

    Great deference, almost conclusive deference is shown to a long standing administrative interpretation.

    And indeed, the Government constantly comes in and argues for that.

    And therefore you say that you can’t look to the subsequent declaration of illegality that during the period that it was construed by the Commissioner, it was lawfully construed.

    Is that what this is about?

    Ellsworth C. Alvord:

    That is correct and the Third Circuit and the Sixth Circuit agree with you.

    The Third Circuit and the Sixth Circuit will say that the Commissioner has no power to revoke this specific tax luring, granting exemption to a specific organization has no power to revoke retroactively.

    And that’s what we want this Court to do.

    We say as to the statute of limitations, my time is almost up.

    We say as to the statute of limitations, if you follow the Balkan Insurance Company case decided by the Court of Appeals for the District of Columbia, and if you follow the Sandston case, decided by the Third Circuit, you will find that that regulation relieved of — relieved us of a duty to file tax returns and the statute of limitations which says that tax must be assessed within three years from the time the return is filed.

    Relieved us of the duty to file a return on the statute of limitations ran from the due date.

    If it did, the statute of limitations bars the Commissioner’s action.

    Second, we say as to the satute of limitations, we filed the only form required by law and the regulation form under Section 54 (f) and the regulations adopted in 1942 applicable to 1941, Form 990, which gives all the facts necessary to determine an income tax.

    But I concede not excess from this tax.

    We comply with everything required of this and we see that Form 990 is the return within the meaning of Section 2 — 275 (a) and is the return within 276 (a) and the statute of limitations had ran.

    Earl Warren:

    Mr. Berry.

    Raymond H. Berry:

    May it please the Court.

    Mr. Alvord has brought briefly on some of the functions of the petitioner in this case.

    I would like to elaborate on them because from the standpoint of the accounting, the facts involved in this case would appear to be quite important.

    Bear in mind please the Automobile Club of Michigan has carried on an accounting system dating back to 1934, a consistent system of accounting on the accrued basis in — as a matter of fact our system of accounting has been carried on uninterruptedly from June 30th, 1924 from Mr. Sasser the Chief Accounting Officer of the club so testified.

    Now our dues as to the corporation, existing under our laws as a membership corporation.

    Our dues during this period of time were $10 a year.

    Except in October of 1946, that was increased to $12.

    However, I shall use $10 (Inaudible).

    Raymond H. Berry:

    The club — those dues are paid daily.

    That is a man may join on the 6th day of March 1957 for his $10.

    His membership continues for 12 months until March 5th, 1958 and he has built a (Inaudible).

    Now those dues are to carry on the functions of the club which we agree to furnish him for 12 months time.

    Among those are road service, which includes towing of automobiles, factory service, fixing cars, and so forth.

    Now we have absolutely no way of estimating based on the years of experience what that cost runs one year from another.

    Now we take this man’s $10.

    We put that into a separate fund known as Unearned Membership Dues.

    Once a month, we take out of that fund one-twelfth.

    Now, I hope I’m not misunderstood.

    This fund is not a separate bank account.

    It is a separate account in our books and ledgers.

    We do not regard that money as earned.

    Up to that point, the time this man pays his $10, we have not earned one penny.

    Our — what we agreed to give him or serve him is all in the future.

    Let’s take a case where a man may join the club, we’ll say the first of October.

    We take into income, three clubs of that $10, the balance for the — the three remaining fund — months of the balance of that year.

    By theway, we are on in a full basis and our fiscal year is December 31st.

    We take that money into income of the three clubs, one club each month.

    So there’s nine months remaining of those twelve for which we have agreed to furnish him certain of the services, the services which briefly enumerate.

    Now we then take out of that Unearned —

    William O. Douglas:

    It was in this brief.

    Raymond H. Berry:

    — Membership account, three clubs of that $10.

    We put that in our income and we pay a tax on that three clubs.

    William O. Douglas:

    That was in the —

    Raymond H. Berry:

    The Government’s position here is that we should pay a tax on the full $10 in the year in which proceeding.

    And right there is the issue on this account.

    Now we have conducted this business since 1916.

    We believe we know something about the business itself, the up right — we had all this in Detroit with 26 branches throughout the State of Michigan.

    During the period here under review our membership increased from something like 215 or 20,000 members to 269 to 70,000.

    Raymond H. Berry:

    Today, there’s a great (Inaudible).

    95% of our income of our receipts are from these dues.

    The balance of our income is from investments and miscellaneous sources not too important here.

    Now the road service, our emergency service and the things that we agreed to give that member when he joins, in fact he joins in order to obtain those services.

    95% or — the largest amount of that income goes to and towards the payment of the services for which we agreed to furnish that line.

    Whether that be within the 12 months or whether that be within the next — I mean within the county here or within the next — the months of showing in the following act.

    Now I mentioned we cannot determine what our costs are.

    We cannot for the reason, I mean our — setup a reserve for the reason that if we have a very tough winter, snow, rain, hail, (Inaudible) and so forth, various road conditions.

    Then our cost go up appreciatively.

    By the same token, if we have a very hot summer, which we sometimes have in Michigan, then our cost by the same token, materially increase because they call for more services.

    In summer, they will call for road information and maps and the tour laws.

    In the winter, we furnish those also for which of course we’ll make no charge.

    We have not been able to adopt any system of accounting that will meet our needs any better.

    We believe it’s a sensible sound system, at least it has been so tried and we believe there’s no improvement of it.

    Now our system is one of accounting is one that we rely upon for all our purposes.

    We rely upon it for our state tax purposes, our accounting purposes to the State of Michigan, in any at all other purposes and upon the basis upon which we have filed our tax returns with the Government.

    To change that system which the Government has done, they have put us on a case basis.

    By the way, the Government does not dispute the fact that we are on a poor basis and that we had consistently followed our method of accounting throughout all these years.

    I don’t believe there’s any dispute as to our — that — how we’ve handled it.

    Now to put us on a case basis and I submit, Your Honors, that if 95% of our revenue is from the dues and the Government says, “We want to tax those dues and perceived, they then have shifted our basis to a case basis from an accrue basis.

    To me, 95% is almost 100%.

    We accrue the balance anyhow.

    Earl Warren:

    But Mr. Alvord said that you raise no question as to the future beyond 1945.

    Raymond H. Berry:

    No, sir.

    Well — well yes, wait a minute.

    We — we raised a question as to our method of accounting.

    We claimed that our method of accounting —

    Earl Warren:

    Was that involved here?

    Raymond H. Berry:

    Yes, sir.

    We — we claim that our method of accounting, Mr. Justice Warren is that should be use — the method we follow should be used for income tax purposes for 1945 and all the years following.

    Raymond H. Berry:

    Today we make out our returns what the — accept through on that basis.

    Harold Burton:

    Well this issue is completely separable from the other one that Mr. Alvord argued then?

    They have no relation to each other.

    Raymond H. Berry:

    That is correct, Your Honor.

    That’s correct, Mr. Justice Burton.

    Now we must — well, now, let’s see what the statute requires us to do.

    Section 41, the Internal Revenue Code provides, it sets —

    Earl Warren:

    I don’t quite —

    Raymond H. Berry:

    — forth — I beg your pardon.

    Earl Warren:

    I don’t quite get the distinction now.

    Would you — would you tell me the difference between what — what you are now saying now or explain to me how — what you’re saying to me now is consistent with what Mr. Alvord said to us when he said, “We have no complaint against anything that it is not retroactive so far as this order is concerned.

    Raymond H. Berry:

    Well —

    Earl Warren:

    Now — now —

    Raymond H. Berry:

    Well I think I could explain that, Mr. Justice Warren.

    Mr. Alvord was talking about two other points.

    Now our — which do not run through and carry this side of 1945, the statute of limitations and the retroactive revocation of our exemption.

    Earl Warren:


    Raymond H. Berry:

    However, our accounting carries through every year.

    If we’re taxable from 1945, 1943 on, then by the same token, our accounting method determines the basis of our tax.

    So our accounting method differs from the two points Mr. Alvord.

    Because our accounting must be consistent every year and we are taxable, we know that from 1945 forward.

    So we must have a system that will determine the basis or furnish the basis to determine our tax.

    Though our accounting therefore is very important.

    Now Section 41 of the —

    (Voice Overlap) putting it in other way you —

    Raymond H. Berry:

    I beg your pardon.

    Putting another way, you could loose on your point what Mr. Alvord did one on his.

    Raymond H. Berry:

    Yes, sir.

    And vice versa?

    And vice versa.

    Raymond H. Berry:

    And vice versa or I hope we went on all of them — on both of them.

    William J. Brennan, Jr.:

    And you might be more worried about losing on the first.

    Raymond H. Berry:

    Well, no.

    If I had —

    William J. Brennan, Jr.:

    No, don’t bother answering that — [Laughter]

    Raymond H. Berry:

    All right, sir.

    Now, on Section 41 of the Code, the Internal Revenue Code provides to submit income shall be — and I’m going to indulge of just reading a portion of it, shall be computed upon the basis of tax presented in the accounting period in accordance with the method of accounting regular employees in keeping the books of such taxpayers.

    But if those such methods of accounting has been so employed, or if the method employed does not fairly reflect the income, a computation shall be made in accordance with such method as the Commissioner may determine.

    Now that is just where we are.

    Now, my time is up and I — it’s a very important facts of material and this is very important because the lower court and the tax court have put us on a so-called claim of right doctrine which we claim by reason or by our systems and the necessity for our bookkeeping deprives us of force and such, in fact to continue our system because we cannot develop and device any other system.

    Earl Warren:

    What case —

    Raymond H. Berry:

    And there are —

    Earl Warren:

    — what case do you rely on?

    Raymond H. Berry:

    I beg your pardon?

    Earl Warren:

    What case do you rely on for this particular line?

    Raymond H. Berry:

    We were relying upon Beacon Publishing Company that is cited in our brief but I can look it up.

    Earl Warren:


    Raymond H. Berry:

    We believe that in — there is precedent for our case.

    In the Beacon case, it’s on the newspaper where they take subscription over a period of years, from one to five years.

    They are permitted to defer their income just the same as we are asking for a privilege to differ here.

    Incidentally, the Beacon has congressional pool in the repeal of Sections 425 and — 452 and 462, in the committee reports, both the Senate of Finance Committee and the House Ways and Means Committee and then a letter from Secretary Humphrey.

    Now we are relying on the Beacon case, the Schuessler case.

    We believe that they support our position and our accounting position and in our method of treating the revenue available to us.

    William J. Brennan, Jr.:

    Is the tax very different in allowing —

    Raymond H. Berry:

    I beg your pardon.

    Is the tax difference very great depending on which method you —

    Raymond H. Berry:

    Yes, sir.

    — use?

    Raymond H. Berry:

    Yes, sir.

    I might say this quickly.

    Raymond H. Berry:

    If our membership dues — if our membership and our dues, state status, there will be no difference in tax if our membership were to decrease or our income were to decrease from dues, our method would produce a greater amount of revenue and vice versa.

    Earl Warren:

    Mr. Stull.

    John N. Stull:

    May it please the Court.

    Of the two questions before the Court here, I’d like to start off with the ruling question and then later come back to the accounting question.

    As regard to this ruling, there seems to be some intimation here, the certain lack of integrity on the part of the tax collectors in a so-called retroactive revocation of a ruling.

    And taxpayers are asking this Court to come to their rescue.

    I think it is pertinent in this case to remember, as Mr. Alvord pointed out, that they have conceded on this oral argument before the tax court that this outset is not exempt after 1945.

    This to us means that it never was exempt under the statute.

    Therefore, we have an organization which since 1916 until 1943 did not bear its fair share of the tax burden which Congress meant to place upon organizations of this type.

    And now, this Court is being asked to help it to escape its fair share taxes for two additional years, 1916 to 1943 apparently wasn’t enough.

    Now in pointing up our approach to this case, I would like to briefly summarize the facts of this case, discuss the statute under which the Commissioner is operating and finally try to analyze just what it is that the taxpayer is complaining about in this case.

    Taxpayer was organized in 1916.

    No ruling was requested as far as we know no tax returns were ever filed until 1945, and no tax was ever paid.

    It is possible that it thought it was exempt on the basis of an office decision of the Internal Revenue Service issued in 1920 with regard to an automobile club.

    As Mr. Alvord has pointed out in 1934, the Commissioner or Internal Revenue issued a ruling which we say is erroneous and has been shown by the courts to be erroneous to this club stating that it was exempt from income tax.

    And said you don’t have to file returns all the way back.

    You won’t have to file any returns in the future unless you change your method of operation, organization, or purposes.

    In 1938, a letter of erroneous ruling was issued to the same taxpayer reaffirming the 1934 ruling.

    Now, during all this time, the Commissioner was far from title in this field.

    He had been busy in 1928, issuing two other erroneous rulings which were published as General Counsel Memorandum.

    One of them related to an association of automobile clubs.

    The other related to a local automobile club, and held in both cases that they were exempt under this Section 101 (9) which exempts social clubs.

    In —

    When you say erroneous ruling, what do you mean by that?

    Does it simply mean that one Commissioner took a different view than the other?

    John N. Stull:

    Well, sir it was — it is finally been determined by the courts that all those rulings were erroneous because these clubs, as far as we’ve been able to determine, have not changed their purposes or their activities or their organization.

    Therefore the — there are three Circuits in the tax court now tell us that these never — cannot come within the statute.

    The statute has been fundamentally the same all these years.

    So this is a case of a committee of errors on the part of the Commissioner.

    Harold Burton:

    You don’t criticize that according to (Inaudible), the following those rules (Inaudible).

    John N. Stull:

    No, sir.

    Those rulings, I suppose, are those Court of Appeals’ opinions all came down after the new ruling, is that right?

    John N. Stull:

    In 1949 and 1950, Your Honor.

    Any ruling on this Court on the subject?

    John N. Stull:

    No, sir.

    This is a relatively new thing and apparently (Voice Overlap) —

    It was a characterization that you would — you can’t quite say that it’s a clear cut mistake of law.

    It’s a view which up to now is been regarded by a new man and the three Courts of Appeals as being the right ruling or as the other one was erroneous as far as you can go.

    John N. Stull:

    That is correct.

    I think it is — it was a mistake of law in this case though, because it’s certain —

    I don’t express (Inaudible) of that.

    John N. Stull:

    Well finally, in this — in 1943, the Commissioner woke up and issued another General Counsel’s Memorandum.

    Now, Mr. Alvord has been somewhat disparaging of a General Counsel’s Memorandum and although it doesn’t appear on the record, I can tell the Court that a General Counsel’s Memorandum being an opinion of the General Counsel, when it is published in the Internal Revenue Board the way this way for general circulation to the public.

    It is approved by the Commissioner’s office, therefore, it is a ruling of the revenue service and not merely just an opinion of the General Counsel of the Treasury.

    This ruling was published in the Internal Revenue Board in 1943.

    It stated that it was reconsidering the status and all these automobile clubs or rather the status of an association of automobile clubs.

    And it was obviously directed and it’s been admitted that it was directed at the American Automobile Association not at a local club.

    This ruling also revoked both of those two 1928 published GCMs, one of which had to do with an Association of Automobile Club, the other of which had to do with a local automobile club.

    As a result of the publication of this General Counsel’s Memorandum in 1943, the Commissioner started looking into all the status of all of these clubs.

    He did not want to revoke without giving anybody a chance.

    So he started going through his records and looking for those who had never filed for an exemption anyway.

    He got around to a great many of them in 1943, but Government being what it is, he didn’t get around to this particular club until 1945.

    And at that time, he wrote a letter and said in the light of the 1943 published GCM were reconsidering the problem of your exemption, will you please submit information so that we can find out whether you are distinguishable from it.

    As a result of the information that was submitted, a ruling was issued to the taxpayer, which stated that it was no longer exempt.

    It said, “You are not required to file income tax returns for periods commencing before January 1, 1943.”

    That was because the GCM was published for everybody to see in 1943.

    But you will be required and are required to file income and excess products tax returns for years beginning after, I think it was December 31, 1943.

    At any rate, these taxpayers are on a calendar year basis and he was required to file and did file in 1945 income and excess profit tax returns covering the years 1943 and 1944.

    The assessment or rather the notice of deficiency finally after a great many negotiations between revenue and the taxpayer was issued in 1950.

    Now, if the statute of limitations and that is a question on this case began to run as we think it did when those returns were filed in 1945 at the request of the Commissioner and not at some time back in 1943 or 1944, then there’s no question in this case that the notice of deficiency was timely.

    John N. Stull:

    Now the taxpayer here seems to be saying, first, that this revocation of its ruling in 1945, and direction to file in 1943 was a retroactive revocation and furthermore, it was unfair.

    Now I think that if it is analyzed that this 1943 ruling was issued to the American Automobile Club, it was published in the Internal Revenue Board for everyone to see.

    The taxpayer here is associated with the American Automobile Club.

    It pays a substantial amount of dues to it every year and it’s represented on the Board of Directors.

    So far, counsel has not admitted knowing the existence of this ruling.

    But he certainly hasn’t denied it.

    And it seems to us, pretty incredible, that they didn’t know about that ruling.

    Hugo L. Black:

    Would it make any difference so far as the law is concerned (Inaudible) whether you didn’t know?

    John N. Stull:

    We’re — this — this part of the argument, Your Honor, is that there was never a retroactive revocation anyway.

    As far as the law is concerned, in our view, they were either exempt under the law or they weren’t and there was nothing the Commissioner could do to make an exempt.

    William J. Brennan, Jr.:


    John N. Stull:

    That is correct, Your Honor.

    William J. Brennan, Jr.:


    John N. Stull:

    Yes, Your Honor.

    That is correct.

    I don’t know honestly what more the taxpayer wants in this case.

    Here was a published ruling.

    It referred to a former ruling dealing with an — a local club.

    So therefore, it seems to me that they certainly were unnoticed of it.

    Perhaps they —

    William O. Douglas:

    Could you have gone back to 1942?

    John N. Stull:

    Could we have, Your Honor I think we could have gone back to 1942 but we didn’t in this case because the revenue felt not to because it was really their own mistake that contributed to this delinquency here.

    Now, the complaint seems to be that we did not get around to this ruling and revoke it or revenue didn’t when it should.

    Therefore they say that until our individual ruling is revoked, we are still — we still continue to be exempt.

    And the revenue service in the course of the year issues hundreds of rulings.

    Over the course of the years, they’ve issued thousands of them.

    And we think that it would be a very serious detriment to the orderly and collection and administration of the revenue if every individual ruling had to be reconsidered everytime there’s a reconsideration of policy in the light of a change of policy or a court decision or something by the revenue service.

    And we think that a publication in the Internal Revenue Board which is just for this purpose is sufficient notice to taxpayers to come in and ask to have their or at least know that their individual ruling may no longer be considered finding by the Commissioner.

    Now this taxpayer apparently gets that fact and said, “Well I’ll sit around and wait until they come and get me.

    They’re trying to enjoy this way a position which was not enjoyed by mostly other taxpayers because as Mr. Alvord pointed out in all the cases which were litigated, revenue did get around to it in 1943.

    John N. Stull:

    Now they also say that there is an unfairness here.

    The unfairness is a little hard for me to see it.

    In the first place, this organization can’t show any hardship.

    Perhaps if we had revoked back in 1916 or 1938 and take away all their assets or something like that, put them out of business, it certainly would have been hardship.

    And an unfair —

    Hugo L. Black:

    Only the little ones, is that it?

    John N. Stull:

    Pardon me, sir?

    Hugo L. Black:

    Only a little one.[Laughter]

    John N. Stull:

    Well, we’re taking a free good slide of tax in this because an excess profit tax year but actually it’s only 245,000 but they have plenty at surplus.

    We can’t see if they can show any detriment.

    We —

    William J. Brennan, Jr.:

    With that one year, or two —

    John N. Stull:

    Two years, Your Honor.

    They can’t show any detriment, we didn’t deserve any penalties.

    In fact, the only detriment that they’ve been able to show on the brief is that had they known that there they were not exempt, they would have setup a reserve to pay the income taxes.

    Well it seems to us that any prudent accounting knowing that the General Counsel of the Treasury had just published a memorandum that these clubs are not exempt, would have setup a reserve in case they were finally determined that they weren’t.

    We also think that the Commissioner was not only being fair in applying this ruling to all taxpayers similarly situated as of this year.

    And there’s one point here, and of course we can’t break-up taxable years, so there’s one taxpayer here who got away with an extra six months because he was on a fiscal year and the ruling was made retroactive only to fiscal years beginning on and after January 31, 1942.

    So beyond on August to June 30 of fiscal year, you get away with a little bit there.

    But that was something that we couldn’t help.

    It seems to us that this 1943 ruling applied to the taxpayer and that he knew it.

    And furthermore, that there was nothing unfair or indiscrete or on the action of the Commissioner.

    Now if we assume that this was a retroactive revocation of a ruling and we certainly don’t admit it, then we have to look at the statute to see just what the Commissioner’s power to revoke rulings retroactively is.

    Under Section 3791 (b) of the 1939 Code, it is stated in effect and that’s quoted on page 30 of our brief, “That the Commissioner may prescribe the extent, if any, to which any ruling, regulation, or Treasury decision, relating to the internal revenue laws, shall be applied without retroactive effect.”

    In other words the discretion of the Commissioner is to issue in certain cases, rulings prospectively.

    And it is certainly recognized in there and clear on its face that the Commissioner has the power to revoke rulings, regulations, Treasury decisions retroactively.

    If there’s any question about that, going back to the 1921 Act when this — the predecessor of this section first came in, it was put in the law by the Committee to take care of the situation where the Attorney General, in 1919 had revoked an excised tax ruling.

    And it was recognized and stated in the committee report that it was understood that no administrative officer had the power to forgive or to weigh collection of a tax.

    Therefore, the Commissioner was under a duty to apply this ruling of the Attorney General revoking another ruling retroactively to the years 1917 and 1918.

    And it was stated that this would help the administration of the revenue to — and prevent the opening of literally thousands of cases everytime there was a change in the views of the — those administering the revenue.

    John N. Stull:

    Far from restricting this power, it has been extended from year to year since then.

    There have been a couple of extensions that first started of by saying that it could be this, the discretion in the Commissioner could be applied only where a court decision did not require that the ruling be revoked retroactively.

    Later on, that was taken out of the law and although the first one just said, “A Treasury decision or a regulation”.

    It was finally extended to the retroactive revocation of a ruling.

    Now in this particular section of the law has been under consideration once before by this Court in the R.J. Reynolds Tobacco Company case.

    In that case, under the broad provision of 22 (a) which it used to define income in the vague words of gains, profits, and income, the Commissioner had come out with a regulation and had — which had stated that the purchase and sale of stock by a corporation is a capital transaction that doesn’t give rise to gain or loss.

    Earl Warren:

    We’ll recess — we’ll recess now, Mr. —