Syllabus. 381 U.S. DIXON ET AL. v. UNITED STATES. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. No. 486. Argued March 30-31, 1965.-Decided May 3, 1965. 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. Commissioner, 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 Caulkins, 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 refund. Respondent prevailed in the District Court and the Court of Appeals. Held: 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. 54, followed. P. 70. 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. 70-75. 3. The Commissioner did not abuse his discretion in this case by giving retroactive effect to the withdrawal of his acquiescence. Pp. 75-80. 68 Opinion of the Court. (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. 76. (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. Pp. 76-79. (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. 79-80. 333 F. 2d 1016, affirmed. Bernard E. Brandes argued the cause for petitioners. With him on the briefs was Sanford Saideman. Frank I. Goodman argued the cause for the United States. With him on the brief were Solicitor General Cox, Assistant Attorney General Oberdorfer, Wayne G. Barnett and Joseph Kovner. 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. 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 23% and 334% 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 Opinion of the Court. 381 U.S. 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 1952.1 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. Supp. 358, 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 Corp., supra. We affirm. 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 in Midland-Ross. 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, 1 T. C. 1 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 Midland-Ross, we do not reach or intimate any view upon the question whether an accrualbasis taxpayer is required to report discount earned before the final disposition of an obligation. See United States v. Midland-Ross, ante, p. 54, at 58, note 4. 68 Opinion of the Court. 656, aff'd 144 F. 2d 482, not withdrawn until the transaction was closed, 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. S. 180, they contend that he abused his discretion in this case. 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." " In Caulkins 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 2 The Commissioner initially published a notification of nonacquiescence. See 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. 3 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. Opinion of the Court. 381 U.S. 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 63. This 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 re-enacted 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. 4 In Automobile Club of Michigan v. Commissioner, supra, at 183-184, we held that the Commissioner is empowered retroactively to correct mistakes of law in the application of the tax laws to particular transactions.5 + 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. 5 See also Helvering v. Reynolds, 313 U. S. 428; Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, 134–135. |