Addison International, Inc. v. Commissioner ( 1988 )

GERBER, J.,

dissenting: The majority has overruled our recent and well-reasoned opinion in CWT Farms, Inc. v. Commissioner, 79 T.C. 1054 (1982), which was embraced and affirmed by the Court of Appeals for the 11th Circuit at 755 F.2d 790 (11th Cir. 1985). I respectfully dissent because the majority has not provided adequate rationale in support of its decision to overrule our established and affirmed precedent. Also, the majority has ignored long-established principles concerning the retroactive application of regulations.

All courts which have considered the final regulations in question have found them to be valid and “consistent with the statutes’ origin and purpose.” CWT Farms, Inc. v. Commissioner, 755 F.2d 790, 797-802 (11th Cir. 1985), affg. 79 T.C. 1054, 1061-1067 (1982); Gehl Co. v. Commissioner, 795 F.2d 1324, 1327 (7th Cir. 1986); LeCroy Research Systems Corp. v. Commissioner, 751 F.2d 123 (2d Cir. 1984); Thomas International Ltd. v. United States, 773 F.2d 300 (Fed. Cir. 1985). The Courts of Appeals for both the Second and Seventh Circuits have decided that the regulations should not be retroactively applied, whereas this Court and Court of Appeals for the 11th Circuit have held otherwise.

Judge Simpson, in his thorough analysis of the retroactivity of regulations, set forth the following three principles (each of which was, at the very least, supported by a Supreme Court citation), as follows: (1) “Internal Revenue regulations are retroactive in effect unless the Commissioner provides otherwise.” (2) “The Commissioner’s failure to make regulations nonretroactive may not be disturbed unless it amounts to an abuse of discretion.” (3) “An abuse of discretion may be found if the retroactive regulations alter settled prior law or policy upon which the taxpayer justifiably relied and if the change causes the taxpayer to suffer inordinate harm.” CWT Farms, Inc. v. Commissioner, 79 T.C. at 1068.

Our Court and the Court of Appeals for the 11th Circuit considered two bases in deciding whether the situation involved herein presented an exception to the general rule that regulations are to be retroactively applied. First considered was the principle that statements contained in publications, such as the handbook in question, do not bind the Commissioner in subsequent litigation. See cases cited at 79 T.C. 1069. Although that general principle is appropriate in most circumstances, one might reasonably argue that the handbook in question had a more significant stature or that it was in other ways extraordinary.¹

The second basis presents a more persuasive rationale for finding that the general rule of regulation retroactivity should apply. The handbook containing the guidelines or, lack of same, was published and issued by the Treasury Department during January 1972. “The handbook provided that its rules would be followed until modified ‘in regulations or other Treasury publications.’ ” CWT Farms, Inc. v. Commissioner, 79 T.C. at 1069. The Treasury Department published and issued proposed regulations containing the disputed requirements during October 1972. The petitioner in this case did not rely upon the handbook or proposed regulations or apparently consider DISC status until “September 1973, as a result of information learned at a seminar.” The final regulations were adopted in final form on September 29, 1976, and October 14, 1977. The dates of the final regulations were both before the commission payment in question occurred and at least one of the final regulations was adopted before petitioner’s income tax return for the period in question was due to be filed.

In our finding that petitioner in CWT Farms, Inc., v. Commissioner, failed to demonstrate that respondent abused his discretion in applying the subject regulations retroactively, the following reasoning and principles, amply supported by precedent, were provided: (1) Respondent’s regulatory interpretation did not alter settled prior law and taxpayers had no “ ‘vested interest in a hypothetical decision in * * * [their] favor prior to the advent of the regulations.’ CWT Farms, Inc. v. Commissioner, 79 T.C. at 1070; Helvering v. Reynolds, 313 U.S. at 433; Chock Full O’Nuts Corp. v. United States, 453 F.2d at 303.” (2) The respondent made his position publicly known in proposed regulations during 1972, and that constituted adequate notice. See Wendland v. Commissioner, 79 T.C. 355, 382 n. 15 (1982). (3) A published proposed regulation, at very least, complied with the terms for modification or variance from the terms (or lack thereof) of the handbook. CWT Farms, Inc. v. Commissioner, 79 T.C. at 1069-1070.

Our reasoning in support of retroactive application in CWT Farms, Inc. v. Commissioner, is equally appropriate here, where petitioner did not consider use of a DISC until after issuance of both the handbook and proposed regulations. In light of the respondent’s published intent, petitioner was taking a risk in blindly following the handbook. Moreover, it appears that the handbook was not dispositive or in any way concise about the circumstances covered in the proposed or final regulations. Most importantly, the majority does not set forth any changed conditions or law to justify overruling our established and affirmed precedent in CWT Farms, Inc. v. Commissioner.

The opinions of the Courts of Appeals for the Second and Seventh Circuits which overruled memorandum opinions of this Court and supported a position contrary to the Court of Appeals for the 11th Circuit and this Court, essentially, offered the following reasoning: (1) That the handbook in question was something more than a statement of current law, because it contained promises to be relied upon in the future; and (2) that proposed regulations are merely “suggestions made for comment” and are not intended to modify anything. Gehl Co. v. Commissioner, 795 F.2d 1324 (7th Cir. 1986); LeCroy Research Systems Corp. v. Commissioner, 751 F.2d 123 (2d Cir. 1984).

Although I agree that proposed regulations do not have the authority or standing of temporary or final regulations, they are regularly used to present the Treasury Department’s position on a particular subject. The purpose for issuing proposed regulations is to put taxpayers on notice and to elicit commentary that may be considered in finalizing the regulation. See sec. 601.601(a) and (b), Procedural Regs. As jurists, we have adhered to the principle that respondent’s revenue rulings and procedures are nothing more than the position of a party and they are afforded little or no weight as authority. Estate of Lang v. Commissioner, 613 F.2d 770, 776 (9th Cir. 1980), affg. on this point 64 T.C. 404 (1975); Stubbs, Overbeck & Assoc. v. United States, 445 F.2d 1142 (5th Cir. 1971); Sims v. United States, 252 F.2d 434 (4th Cir. 1958), affd. 359 U.S. 108 (1959); Minnis v. Commissioner, 71 T.C. 1049, 1057 (1979). The opinions of the Courts of Appeals for the Second and Seventh Circuits have placed proposed regulations below the level afforded revenue rulings and procedures and placed the handbook in the same status as temporary or final regulations. This approach is both divisive and disruptive to a long-established order of significance upon which both taxpayers and Government have long relied.

To reiterate, in effect, the Government made no promises to this petitioner or any taxpayer with a taxable year after 1972. The handbook and proposed regulations were published within 9 months of each other during 1972. I find the majority’s position that a proposed regulation is insufficient to put the public on notice to be simply incorrect.

For the foregoing reasons, I respectfully dissent from the majority’s opinion.

1 Although one might make that argument, it is a matter of judgment and would appear to be a close call. In this regard, we have already taken a position on this aspect in CWT Farms, Inc. v. Commissioner, 79 T.C. 1054 (1982), and numerous Memorandum Opinions. In close situations, such as this one, we have a duty of consistency and should not change our opinion or judgment unless it is clearly wrong.