Before BIGGS, Chief Judge, and GOODRICH and HASTIE, Circuit Judges.
This case raises the question of (1) the liability to taxation of a corporation organized for charitable, educational and philanthropic purposes,*fn1 which the Commissioner claims departed from its exempt purpose and was used in part as a means of furthering business enterprises in which the donor of the foundation of the charitable trust was interested and (2) the limits, if any, of the power of the Commissioner to make a revocation of an exemption retroactive.
The foundation on July 31, 1945, upon application was granted a certificate of exemption from taxation under the statute just referred to. Six years later, on December 19, 1951, the Commissioner revoked the certificate of exemption alleging the reason just mentioned and assessed a deficiency against the petitioner along with penalties. The revocation was made retroactive to 1946 during which year the foundation acquired Clover Spinning Mills, an enterprise which manufactured cotton yarn and cloth. This imposed a deficiency on the taxpayer for the years 1946 to 1948 and 1950. The taxpayer claims the resulting deficiency thus assessed will completely wipe out the assets of the foundation. This statement seems to be borne out by the last report we have for the year ending December 31, 1949, showing that the foundation had net assets of approximately $665,000. The total claim here is for $903,000 which includes a 25% failure to file penalty under § 291, 26 U.S.C.A. § 291 (now Int.Rev.Code of 1954, § 6651(a)) and a 5% negligence penalty under § 293(a), 26 U.S.C.A. § 293(a) (now Int.Rev.Code of 1954, § 6653(a)). This statement of fact does not constitute a reason by itself for refusing to back up the Commissioner's tax claim, if the taxpayer owes that much. But charitable enterprises continue to be met with legislative favor and the facts here show that there was nothing improper about the way the taxpayer distributed its money. Therefore, we look twice before we say that a Commissioner's retroactive ruling is to be permitted to wipe it out.
The Commissioner invites us to reconsider and overrule our decision in C.F. Mueller Co. v. Commissioner, 3 Cir., 1951, 190 F.2d 120. This we do not propose to do. The case was decided after careful consideration and followed the pattern already set in the Second Circuit. We abide by it.
Nor do we find it necessary to decide the interesting question posed in support of the Commissioner's ruling. That question involves the taxable status when the charitable enterprise is used in part to assist a profit-making enterprise of the foundation's donor although all the income accruing to the foundation is devoted to admittedly charitable purposes.*fn2 All of this, of course, is now ancient history as tax laws go, since such "feeder organizations" have been taxable since 1951.*fn3 The evidence shows that the mill owned by the foundation sold yarn to the donor's enterprises at regular market prices. The most claimed is that the foundation insured the donor's enterprises a source of supply when yarn was hard to come by. If it is to be held that such a use is sufficient to remove the taxpayer from the exemption, which we do not now decide, then the further question is presented: Is the evidence sufficient to sustain the conclusion that such a use was made?
The reason we do not need to go into the questions just stated is that we think the Commissioner went beyond his authority in revoking the certificate of exemption retroactively. We quite realize that the Commissioner may change his mind when he believes he has made a mistake in a matter of fact or law. Our own decision in Keystone Automobile Club v. Commissioner, 3 Cir., 1950, 181 F.2d 402 recognizes this point fully and that point is sustained by abundant authority. But it is quite a different matter to say that having once changed his mind the Commissioner may arbitrarily and without limit have the effect of that change go back over previous years during which the taxpayer operated under the previous ruling.
Although there is ample authority that the Commissioner may change retroactively a ruling of general application,*fn4 there is a dearth of cases involving individualized taxpayer's rulings. This is so because the Commissioner has almost invariably followed a policy of honoring his rulings and making changes prospective only, since the much criticized case of James Couzens, 1928, 11 B.T.A. 1040, (Contra, Woodworth v. Kales, 6 Cir., 1928, 26 F.2d 178.*fn5 Indeed, this policy has been codified by one of the Commissioner's own rulings.*fn6
The few authorities that there are concerning individualized rulings are not unanimous. The point has had the most attention in the Sixth Circuit. The latest decision of that Court in Automobile Club of Michigan v. Commissioner, 6 Cir., 1956, 230 F.2d 585, certiorari granted, 352 U.S. 817, 77 S. Ct. 32, discusses previous rulings and comes out with elaborate opinions both supporting and against the Commissioner's action. The result of that case, another one concerning an automobile club, was to permit a two-year retroactive effect to a revocation of the certificate under which the club was exempt as a social club. Note, however, that the majority found, 230 F.2d at pages 588 and 590, that the ruling was not arbitrary or oppressive since the retroactive effect was limited to two years though it could have been extended back eleven, and there was no element of estoppel since the taxpayer did not assert that it acted in reliance on the certificate. On the other hand, there is respectable authority that the Commissioner may not retroactively change an individualized taxpayer's ruling, unless the taxpayer is himself estopped from relying on the ruling in good faith because he has concealed the facts, or because of some other fraud or misrepresentation.*fn7
We, therefore, turn our attention to the question of whether this taxpayer has done anything to estop itself from relying on the certificate. In arguing that it has, the government urges that the taxpayer was not frank in the manner in which it filled out its 1946 information return. The income tax form asks: "Have you any sources of income or engaged in any activities which have not previously been reported to the Bureau? If so, attach detailed statement." Taxpayer answered, "Yes" in the blank provided after the question. In the margin directly under the question was typed, "Purchased Clover Spinning Mills Co., Clover, So. Carolina, March 18, 1946." A balance sheet attached to the 1946 return listed such assets as mill buildings, machinery and equipment, accounts receivable and under inventory listed cotton, work in progress, finished yarn and manufacturing supplies. Under liabilities were items for accounts payable and payroll. Another question on the form asked for gross receipts from business activities and the taxpayer reported substantial sales of yarn and cloth. Taken as a whole, we think that the return fully and fairly disclosed that taxpayer was engaged in an active textile spinning enterprise. We see nothing more that the form called for. The taxpayer did not misstate anything it told the Commissioner, nor did it omit to disclose anything it should have told him. In fact, a schedule attached to the 1946 return indicated a close connection between the foundation and other textile enterprises by listing as contributors Fabrics Corporation of America, Rayon Corporation of America and two other businesses which contained "Mills" as part of their names.
The taxpayer fully disclosed the information required by the informational return. The original exemption certificate imposed upon the foundation a duty to inform the Commissioner of any relevant changes in the facts and, as already stated, taxpayer gave the information. The taxpayer did not bring to the Commissioner's attention the fact that Clover sold yarn to the donor's mills. We do not find this fact any evidence of lack of frankness for the information would have been irrelevant at the time the return was made. The Commissioner's theory is a debatable one at best even today and some of the cases he relies on most heavily were not decided until the end of the taxable years involved. E.g ., C.F. Mueller Co. v. Commissioner, 3 Cir., 1951, 190 F.2d 120; United States v. Community Services, Inc., 4 Cir., 1951, 189 F.2d 421, certiorari denied 1952, 342 U.S. 932, 72 S. Ct. 375, 96 L. Ed. 694; Universal Oil Products Co. v. Campbell, 7 Cir., 181 F.2d 451, certiorari denied 1950, 340 U.S. 850, 71 S. Ct. 78, 95 L. Ed. 623; but cf. Better Business Bureau of Washington, D.C., Inc. v. United States, 1945, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67.
The statutory section on retroactivity is found in section 3791(b) of the 1939 Code, 26 U.S.C.A. § 3791(b) (now Int.Rev.Code of 1954, § 7805(b)). The section reads as follows:
"Retroactivity of regulations or rulings. The Secretary, or the Commissioner with the approval of the Secretary, 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."*fn8
As the Sixth Circuit points out, the provision gives the Commissioner discretionary power to determine the extent of retroactivity in a given case. The usual rule in such case is that an official vested with discretionary power is not to be interfered with unless it can be found that his action in a given case goes beyond ...