A partnership to which petitioners belong, in 1952, bought
short-term noninterest-bearing notes at discounts. The purchases
were assertedly made in reliance on the published acquiescence of
the Commissioner of Internal Revenue in Caulkins v.
1 T.C. 656, aff'd,
144 F.2d 482, where
the Tax Court had allowed capital gains treatment of the full
amount a taxpayer had received on an "Accumulative Installment
Certificate." After holding the notes six months, they disposed of
some at a gain before the end of the tax year, and the balance in
the next tax year. The partnership reported the gain as a long-term
capital gain, and, although on an accrual basis, did not accrue any
income for the notes unsold that year. Petitioners' individual
returns reflected the same treatment for their distributive shares
of the partnership income. The Commissioner subsequently withdrew
his acquiescence in Caulkins
except with respect to debt
securities that were (a) of the specific type involved in
and (b) issued by the particular issuer involved
in that case. The Commissioner determined that petitioners' gain
was taxable as ordinary income, and that a portion of the original
issue discount on the unsold notes was reportable as earned in the
tax year. Petitioners paid the deficiencies, and sued for a refund.
Respondent prevailed in the District Court and the Court of
1. Original issue discount is not entitled to capital gains
treatment under the 1939 Internal Revenue Code. United States
v. Midland-Ross Corp., ante,
p. 381 U. S. 54
followed. P. 381 U. S.
2. The Commissioner's acquiescence in an erroneous decision of
the Tax Court cannot, by itself, bar collection of a tax otherwise
lawfully due; the Commissioner has discretion under § 7805(b) of
the Internal Revenue Code of 1954 retroactively to withdraw an
acquiescence, and he may do so even where a taxpayer may have
detrimentally relied on the Commissioner's mistake. Pp.
381 U. S.
3. The Commissioner did not abuse his discretion in this case by
giving retroactive effect to the withdrawal of his acquiescence.
Pp. 381 U. S.
Page 381 U. S. 69
(a) No notice that he was about to correct his mistake of law
was required in the relevant tax year, since the petitioners were
not justified in relying on the acquiescence as precluding
correction. P. 381 U. S.
(b) Since the Commissioner's acquiescence in Caulkins
should not have been read as constituting acceptance of the general
proposition that earned original issue discount was entitled to
capital gains treatment, the revocation of his acquiescence was not
a repudiation of his earlier acceptance of a decision that
prescribed capital gains treatment for the original issue discount
here involved; consequently, his exception of specific certificates
of the type involved in Caulkins
from the retroactive
application of his nonacquiescence could not constitute an abuse of
discretion of which petitioners may complain.
(c) In any event, petitioners did not satisfy their burden of
showing that those securities could not rationally be distinguished
from other discounted securities. Pp. 381 U. S.
333 F.2d affirmed.
MR. JUSTICE BRENNAN delivered the opinion of the Court.
This case involves the issue decided today in United States
v. Midland-Ross Corp.,
No. 628, ante,
p. 381 U. S. 54
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
Page 381 U. S. 70
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. [Footnote 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.
, 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, to resolve a conflict with United States v. Midland-Ross
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
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,
Page 381 U. S. 71
144 F.2d 482, not withdrawn until the
transaction was closed, [Footnote
] 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.
, they contend that he abused his discretion in
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. [Footnote 3
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
Page 381 U. S. 72
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,
at 381 U. S. 63
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. . . .
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
at 353 U. S.
-184, we held that the Commissioner is empowered
retroactively to correct mistakes of law in the application of the
tax laws to particular transactions. [Footnote 5
Page 381 U. S. 73
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, 297 U.
. 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.,
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
Page 381 U. S. 74
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
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
Manhattan General Equipment Co. v. Commissioner, supra,
at 297 U. S. 134
]. 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,
Page 381 U. S. 75
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."
at 297 U. S. 135
This reasoning applies with even greater force to the
Commissioner's rulings and acquiescences. [Footnote 8
] Therefore, the acquiescence in
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, 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 353 U. S.
Petitioners make two arguments based on Automobile Club of
First, they contend that the Commissioner's decision
to apply his change of position retroactively to them is an abuse
of discretion, because, unlike
Page 381 U. S. 76
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
Second, they argue that the Commissioner abused
his discretion because the retroactive withdrawal of his
acquiescence in Caulkins
excepted certificates of the type
involved in Caulkins
if issued by the issuer there
involved and purchased while the acquiescence was in effect; this
is said to be an unreasonable and arbitrary classification, since,
petitioners assert, there is no significant difference between the
excepted certificates and the notes that they had purchased.
Although we mentioned certain facts in support of our conclusion
in Automobile Club
that there had not been an abuse of
discretion in that case, it does not follow that the absence of one
or more of these facts in another case wherein a ruling or
regulation is applied retroactively establishes an abuse of
discretion. Automobile Club
merely examined all the
circumstances of the particular case to determine whether the
Commissioner had there abused his discretion. 353 U.S. at
353 U. S. 185
In the present case, it cannot be said that the Commissioner abused
his discretion in either of the respects urged by petitioners. The
absence of notice does not prove an abuse, since, for the reasons
we have stated, the petitioners were not justified in relying on
the acquiescence as precluding correction of the underlying mistake
of law and the retroactive application of the correct law to their
case. Since no reliance was warranted, no notice was required.
Nor is there merit in the argument that the Commissioner abused
his discretion in distinguishing Investors Syndicate Accumulative
Installment Certificates from other debt securities, for we do not
think the Commissioner's acquiescence in Caulkins
be interpreted as his acceptance of the proposition that earned
Page 381 U. S. 77
issue discount was entitled to capital gains treatment.
interpretation might be properly put upon his acquiescence only if,
first, the Tax Court in Caulkins
squarely decided that any
discount element in the amount realized by the taxpayer on the
retirement of the certificate was not to be taxed as ordinary
income, but as capital gain, and, second, the decision of the Tax
Court should be read as holding that the tax treatment of gain
attributable to discount is the same on sales and retirements. But
embodies neither of these holdings. Therefore,
when the Commissioner revoked his acquiescence in 1955, he was not
repudiating his earlier acceptance of a decision that prescribed
capital gains treatment for the earned original issue discount here
involved. Consequently, his decision to accept Accumulative
Installment Certificates from the retroactive application of his
nonacquiescence in Caulkins
could not constitute an abuse
of discretion of which the petitioners may complain.
As to item first:
that he Tax Court in
did not squarely decide that the discount element
in the amount realized by the taxpayer on the retirement of a debt
security is to be taxed as a capital gain is apparent from its
opinion. The Tax Court seemed to regard the only significant issue
before it as whether the taxpayer's certificate of indebtedness was
a "registered" certificate within
Page 381 U. S. 78
the meaning of § 117(f). There was no explicit consideration of
whether any discount element in the amount realized by the taxpayer
on the certificate was to be taxed as ordinary income or as capital
gain. It is, at best, highly questionable, therefore, that, by
acquiescing in this decision, the Commissioner conceded that §
117(f) extended capital gains treatment to the discount element in
the certificate of indebtedness. [Footnote 10
As to item second:
the petitioners were not warranted
in reading Caulkins
as holding that the gain realized on a
sale that is attributable to original issue discount is to be given
the same tax treatment as gain so attributable realized on a
retirement. The opinion deals only with, and rests squarely upon, §
117(f), which is concerned with retirements. It is true that, in
the case of securities in registered form or with coupons attached,
that section was added by the Revenue Act of 1934, 48 Stat. 680,
714-715, to eliminate a difference in treatment between sales and
retirements. See, e.g., Fairbanks v. United States,
306 U. S. 436
Watson v. Commissioner,
27 B.T.A. 463. But the opinion in
appears erroneously to carry forward a
distinction, and to give more favorable treatment to retirements.
See United States v. Midland-Ross Corp., supra
381 U. S. 63
Thus, petitioners should not have read Caulkins
did. Indeed, the Tax Court has since distinguished
on the ground that it rested on the § 117(f)
Page 381 U. S. 79
retirement, and consequently was inapplicable to a sale. See
Paine v. Commissioner,
23 T.C. 391, 401, rev'd on other
236 F.2d 398 (C.A.8th Cir.); United States v.
Midland-Ross Corp., supra, 381 U. S.
Furthermore, even on the assumption that Caulkins
be read as petitioners contend, petitioners had the burden of
demonstrating that Accumulative Installment Certificates could not
rationally be distinguished from other discounted securities.
Cf. American State Bank v. United States,
279 F.2d 585,
589-590 (C.A.7th Cir.); Schwartz v. Commissioner,
191, 193. But the record is devoid of any evidence of effort by
petitioners to discharge this burden by showing the absence of any
significant difference between the holders of Accumulative
Installment Certificates and themselves. Indeed, the Commissioner
might well have believed that, however mistaken the view that his
acquiescence in Caulkins
was tantamount to an acceptance
of capital gains treatment for original issue discount, the
assumption that such treatment would be given the discount element
of their debt securities was more understandable in the case of
holders of Accumulative Installment Certificates -- the same
obligations as were involved in Caulkins
-- than in the
case of other taxpayers. So thinking, the Commissioner might
further have concluded that equitable considerations pointed to
making an exception to the retroactive application of the
nonacquiescence for the holders of these Certificates. It is not
for us to pass upon the wisdom of any such distinction. It suffices
that, on this record, we cannot say that the distinction was so
devoid of rational basis that we must now overturn the
Insofar as petitioners' arguments question the policy of
empowering the Commissioner to correct mistakes of law
retroactively when a taxpayer acts to his detriment in reliance
upon the Commissioner's acquiescence in an
Page 381 U. S. 80
erroneous Tax Court decision, [Footnote 11
] their arguments are more appropriately
addressed to Congress. Congress has seen fit to allow the
Commissioner to correct mistakes of law, and, in § 7805(b), has
given him a large measure of discretion in determining when to
apply his corrections retroactively. In the circumstances of this
case, we cannot say that this discretion was abused.
The petitioners concede the correctness of this treatment of the
earned discount on the 13 unsold notes if original issue discount
is reportable as ordinary income. Again, as in
we do not reach or intimate any view upon
the question whether an accrual basis taxpayer is required to
report discount earned before the final disposition of an
obligation. See United States v. Midland-Ross, ante,
381 U. S. 54
381 U. S. 58
The Commissioner initially published a notification of
Rev.Rul. 11581, 1943 Cum.Bull. 1, 28.
He published his acquiescence after the Court of Appeals affirmed
the Tax Court. See
Rev.Rul. 11907, 1944 Cum.Bull. 1, 5.
The withdrawal of his acquiescence and the reinstatement of his
initial nonacquiescence came in 1955, in 1955-1 Cum.Bull. 7, and
Rev.Rul. 55-136, 1955-1 Cum.Bull. 213.
Section 3791(b) of the 1939 Code, 53 Stat. 467, was similarly
worded, except that the 1954 Act substituted "The Secretary or his
delegate" for "The Secretary, or the Commissioner with the approval
of the Secretary. . . ."
Whether the discount element of the gain from the notes here
involved is a capital or an income item is governed by the relevant
provisions of the 1939 Code, but the statute governing the
retroactive application of the withdrawal of the acquiescence in
1955 is § 7805(b) of the 1954 Code, and not § 3791(b) of the 1939
Code. This makes no practical difference, since the two provisions
are identical apart from the variance mentioned above.
The withdrawal was published March 14, 1955. However, the
exception was later limited to certificates acquired before
December 31, 1954, Rev.Rul. 56-299, 1956-1 Cum.Bull. 603,
apparently because § 1232 of the 1954 Code applies to obligations
issued after that date.
See also Helvering v. Reynolds, 313 U.
; Manhattan General Equipment Co. v.
Commissioner, 297 U. S. 129
297 U. S.
the current Internal Revenue Bulletins,
wherein, with specific regard to acquiescences, it is stated:
"Actions of acquiescences in adverse decisions shall be relied
on by Revenue officers and others concerned as conclusions of the
Service only to the application of the law to the facts in the
particular case. Caution should be exercised in extending the
application of the decision to a similar case unless the facts and
circumstances are substantially the same. . . ."
1964-1 Cum.Bull. 3. And the introduction to
Revenue Rulings now expressly warns that, "Except where otherwise
indicated, published rulings and procedures apply retroactively."
at 1. See also
Rev.Proc. 62-28, 1962-2
Cum.Bull. 496, which states at 504:
"A ruling . . . may be revoked or modified at any time in the
wise administration of the taxing statutes. . . . If a ruling is
revoked or modified, the revocation or modification applies to all
open years under the statutes, unless the Commissioner exercises
the discretionary powers given to him under section 7805(b) of the
Code to limit the retroactive effect of the ruling."
See also Miller v. United States, 294 U.
, 294 U. S.
-440; Lynch v. Tilden Produce Co.,
265 U. S. 315
265 U. S.
The Commissioner's acquiescence in Caulkins
withdrawal and reinstatement of nonacquiescence were stated in
Revenue Rulings. Present practice appears to be to publish
acquiescences and nonacquiescences without incorporating them in
rulings. See, e.g.,
1964-1 Cum.Bull. 3.
Petitioners invoke the principle that
"The Commissioner cannot tax one and not tax another without
some rational basis for the difference. And so, assuming the
correctness of the principle of 'equality,' it can be an
independent ground of decision that the Commissioner has been
inconsistent, without much concern for whether we should hold as an
original matter that the position the Commissioner now seeks to
sustain is wrong."
United States v. Kaiser, 363 U.
, 363 U. S. 308
(concurring opinion). See also Schuster v. Commissioner,
312 F.2d 311 (C.A.9th Cir.); Exchange Parts Co. of Fort Worth
v. United States,
279 F.2d 251, 150 Ct.Cl. 538; City Loan
& Savings Co. v. United States, 177 F.
287 F.2d 612 (C.A.6th Cir.);
Brecklein v. Bookwalter, 231 F.
; Connecticut Railway & Lighting Co. v. United
142 F. Supp. 907.
The opinion of the Court of Appeals stated that § 117(f)
required that all gain realized upon retirement of an obligation to
which the section applied be given capital gains treatment; that
court's primary concern, however, was also with the question
whether the section applied to the Caulkins
Technically, the Commissioner's acquiescence in Caulkins
was in the Tax Court decision, and not in the decision of the Court
of Appeals. As a general matter, the Commissioner still follows the
practice of noting his acquiescence or nonacquiescence only in Tax
Griswold, A Summary of the Regulations Problem, 54
Harv.L.Rev. 398, 411-419 (1941).