
    ALFRED B. BORNSTEIN AND ETHEL BORNSTEIN v. THE UNITED STATES ROBERT E. BORNSTEIN AND DORIS H. BORNSTEIN v. THE UNITED STATES WILLIAM BORNSTEIN AND KATE BORNSTEIN v. THE UNITED STATES ESTATE OF ADOLPH KLEIN, DECEASED, WILLIAM BORNSTEIN, EXECUTOR, AND JEAN KLEIN v. THE UNITED STATES
    No. 270-61
    No. 271-61
    No. 272-61
    No. 273-61
    [Decided May 14, 1965]
    
      
      Gerald H. Sherman for plaintiffs. Leonard L. Silverstem of counsel.
    
      Thomas A. Troyer with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. G. Moxley Featherston, Lyle M. Turner, and Philip B. Miller were on the brief.
    Before Cowen, Chief Judge, Laramore, Dureee, Davis and ColliNS, Judges.
    
   CowEN, 0Thief Judge,

delivered the opinion of the court:

This is a suit for refund of income taxes, plus interest, arising from the distribution of certain funds by a corporation of which plaintiffs are shareholders. The defendant treated the distribution as ordinary income to plaintiffs, pursuant to 26 U.S.C. (I.R.C. 1939) § 117 (m) (1952 Ed.) [Collapsible Corporations]. Plaintiffs concede that the distributions were properly taxable under that statute as ordinary income unless the Commissioner of Internal Eevenue is es-topped or otherwise prohibited from assessing the deficiency because of his issuance of a prior inconsistent private ruling to a similarly situated corporation, and because of oral representations made by an employee of the Bureau of Internal Eevenue. Plaintiffs have receded from the other contentions set forth in their petitions. The facts in these cases were stipulated by the parties and are incorporated in our findings of fact.

Plaintiffs are minority shareholders in Shirley-Duke Apartments, Section IV, Inc., and Shirley-Duke Apartments, Section V, Inc. They are not officers or directors of these corporations or of any of the Shirley-Duke group of corporations.

In June 1949, six corporations denominated “Shirley-Duke Apartments”, and then bearing the additional designation of “Section I, Inc.” through “Section VI, Inc.”, inclusive, were incorporated in the State of Virginia. Their purpose was to own a single, multi-unit, apartment project that was to be constructed in the metropolitan Washington area. It was necessary to create six corporations (as opposed to a lesser number) because the lending institution had set a ceiling on the mortgage obligation of any one corporate entity. Shortly after incorporation, a parcel of land was purchased in Fair-fax County, Virginia, and construction started.

Construction of apartment buildings for each of the six corporations was carried on as a single endeavor. Such construction proceeded with major regard to land topography, availability of materials, and other physical factors. Little attention was paid to the matter of which corporation’s building was being constructed. Some costs were incurred by, and paid by, each corporation individually. Most costs were allocated among the various corporations based upon the percentage that the units in the particular corporation bore to the total units of all six corporations. Some persons were employed only by certain of the individual corporations, and not by all of the six corporations.

The construction of the apartment dwellings and their subsequent management were performed by a partnership formed by the principal stockholders in all of the corporations. The plaintiffs in the present action have never been members of this partnership.

A motive force in the formation of the Shirley-Duke corporations, a shareholder in all corporations, and general counsel of all of the corporations, was Mr. Carl Budwesky, a practicing attorney. Mr. Budwesky’s offices are in a commercial building which is a part of the Shirley-Duke project.

By September 1950, all of the project was completed. It became apparent that the NBA insured mortgage funds received by each corporation would greatly exceed the corporation’s actual construction costs. In informal discussions, certain shareholders of the various Shirley-Duke corporations expressed a desire to distribute the excess, and discussed the method of distribution, as well as the tax consequences thereof. They wished to be sure that the gain realized would be taxable as capital gains, and Mr. Budwesky advised them that this would be the treatment accorded.

In order to secure an authoritative opinion, Mr. Budwesky, at the behest of the shareholders and as legal counsel to 'all of the Shirley-Duke corporations, was authorized to secure a ruling from the Internal Bevenue Bureau [now the Internal Bevenue Service].

Accordingly, Mr. Budwesky had two conferences at the Internal Bevenue Bureau with Mr. E. G. Parker and some of his associates regarding the possibility of obtaining a ruling from the Internal Bevenue Bureau and the actual content of such a ruling.

Mr. Parker was a Conferee Beviewer in the Coordinating and Advisory Section of the Practice and Procedure Division of the Internal Bevenue Bureau. His duties entailed the performing of research and analysis upon questions on which the Internal Bevenue Bureau had been requested to rule. He also prepared initial drafts of such rulings. He had no authority to sign or otherwise to issue rulings on behalf of the Internal Revenue Bureau; that authority was confined to the head of his division, the Deputy Commissioner and the latter’s assistant. Prior to their issuance by the Internal Revenue Bureau, all drafts of rulings which Mr. Parker prepared were required to be reviewed by at least two of his superiors. Mr. Parker never stated to Mr. Budwesky that he had authority to issue rulings on behalf of the Internal Revenue Bureau, and he never stated that he did not have such authority.

All of the work assigned to Mr. Parker during the period in question related to either the problems of capital gains or losses or to problems of business deductions. Mr. Parker had no specialized knowledge of any of the other areas of federal tax law, and his duties did not include any responsibility for work in such other areas.

In one of the conferences between Mr. Budwesky and Mr. Parker, Mr. Budwesky stated that he represented all six of the Shirley-Duke corporations and asked whether or not it would be necessary to apply for separate rulings for each of the six corporations. Mr. Parker advised him that, since the ruling would involve a legal determination, an application on behalf of one of the corporations would be sufficient and, since the same principle was involved, the ruling would be applicable to all of the six corporations.

Mr. Parker had no authority to make these statements, or to make any other statements or representations on behalf of the Internal Revenue Bureau about the applicability of its rulings. He had been given no authority to make, for the Internal Revenue Bureau or for the United States Government, any statements, either oral or written, about the law or its bearing upon particular situations. Mr. Parker’s lack of authority to do anything of this character had been made clear to him by his superiors many times, and he was well aware of it. Mr. Parker never stated to Mr. Budwesky that he had such authority, and never stated that he did not have such authority.

On October 18, 1950, Mr. Budwesky submitted a formal written request for a ruling on behalf of the Shirley-Duke Apartments, Section III, Inc. The request made no reference to any of the other apartments.

On November 30, 1950, the Internal Revenue Bureau by the Deputy Commissioner, in response to the October application issued a ruling addressed to “Shirley-Duke Apartments, Section III, Inc.”, hereinafter referred to as Section III. The ruling concluded that the distributions in question would be taxable as “long-term capital gains in accordance with the provisions of section 117 (b) of the Internal Revenue Code [1939].” This ruling was never published.

Thereafter, Mr. Budwesky reported the oral advice given him by Mr. Parker to certain of the shareholders of the Shirley-Duke corporations. The directors of each of the corporations caused their corporations to declare and pay cash dividends in December 1950, and early in 1951. The corporate resolutions authorizing the distributions made no reference to the November 30, 1950, ruling of the Internal Revenue Bureau or to the oral statements made to Mr. Bud-wesky by Mr. Parker. No attempt to obtain a ruling upon the tax status of the distributions in the hands of plaintiffs was ever made by them or the corporations in which they held shares. No such ruling was issued.

The Internal Revenue Service allowed capital gains treatment of the distribution to the shareholders of Section III, Inc., because of the issuance of the letter ruling to that corporation. The distributions to the shareholders in the other Shirley-Duke corporations have been treated as ordinary income by virtue of 26 U.S.C. (I.R.C. 1939) § 117 (m) (1952 Ed.).

In April 1959, deficiencies were assessed by the District Director against plaintiffs on the basis that the distributions reported as capital gains in their tax returns for 1950 and 1951 should be taxed as ordinary income. Plaintiffs paid the deficiencies, and after their timely claims for refund were denied, they brought these actions.

Plaintiffs advance three general propositions as a basis for their recoveries in these suits.

First, plaintiffs maintain that they refrained from requesting a written ruling in behalf of the corporations in which they held stock, in reliance on the oral representations of Mr. Parker, the Internal Revenue Bureau employee. Consequently, they argue that the defendant’s refusal to honor the Section III ruling with respect to the remaining corporations is inequitable and defendant should now be es-topped to assert the deficiency against these other corporations. Although plaintiffs say that the representations were made by an agent who acted within the scope of his authority, their brief refers to and relies upon the common law concept of apparent authority.

It is a settled principle of law that the United States is not bound by the unauthorized acts of its agents, that it is not estopped to assert the lack of authority as a defense, and that persons dealing with an agent of the government must take notice of the limitations of his authority. Federal drop Insurance Corp. v. Merrill, 332 U.S. 380 (1947); Utah Power & Light Co. v. United States, 243 U.S. 389 (1917); Byrne Organization, Inc. v. United States, 152 Ct. Cl. 578 (1961). An agent cloaked only with apparent authority cannot bind the United States for, as the court stated in United States v. Willis, 164 F. 2d 453, 455 (4th Cir. 1947)—

* * * He who deals with an agent of the government must look to his authority, which will not be presumed but must be established. He cannot rely upon the scope of dealing or apparent authority as in the case of a private agent.

Interstate Fire Insurance Company v. United States, 215 F. Supp. 586 (E.D. Tenn. 1963) Aff'd without opinion, 15 AFTR., 2d 017 (6th Cir. 1964) and Smale & Robinson, Inc. v. United States, 123 F. Supp. 457 (S.D. Cal. 1954), which plaintiffs cite, do not support their position. In both decisions the courts found that the government agent involved was authorized to perform the acts which were relied upon to estop the United States. Thus, in Interstate Fire Insurance Company at page 597, the court stated:

It therefore becomes a question of fact whether there was a redelegation in this regard to Agent McCoy. Under the proof in this case, the Court finds that Agent McCoy was authorized to do all that he did do with regard to the reallocation of expenses for the 1955 tax return.

Similarly, in Smale & Robinson, Inc., the court (at page 467) found:

* * * the agent by whose conduct the Government is sought to be bound acted within the limits of authority lawfully conferred, * * *

In that case the court also recognized the rule that lack of authority is fatal to any claim of estoppel based on the conduct of an agent.

Since the parties have stipulated that Mr. Parker was wholly without authority to make the representations on which the plea of estoppel is based, we must conclude that the defendant is not estopped by the statements made by its agent.

Plaintiffs’ second contention is also grounded on the doctrine of equitable estoppel. They assert that the distributions to plaintiffs were made in reliance on the ruling issued to Section III and that the Commissioner is now estopped to take a different position with respect to the other Shirley-Duke corporations, which are identical in all respects that affect the taxability of the distributions.

The full text of the rules for the application of estoppel against the Commissioner of Internal Revenue is far from clear. See e.g., Note 40 Va. L. Rev. 313, 329 (1954). However, the nuances of the case law need not be extensively explored in these cases, because plaintiffs have failed to show that the distributions in question were made in reliance on the letter ruling. Even if it may be inferred that there was reliance, plaintiffs have not established that they changed their position to their detriment in reliance on the ruling. Detrimental reliance is an essential ingredient of estoppel. Schuster v. Commissioner, 312 F. 2d 311 (9th Cir. 1962); Knapp-Monarch Co. v. Commissioner, 139 F. 2d 863 (8th Cir. 1944); Fruehauf Trailer Co., 42 T.C. 83 (1964).

The shareholders of the Shirley-Duke corporations had large amounts of cash on hand after the corporations had achieved the purpose for which they were organized. Nowhere in the stipulation can we find a statement that the distributions were made in reliance on the letter ruling to Section III, although plaintiffs insist that such reliance is to be inferred from the fact that their attorney, Mr. Bud-wesky, was authorized to seek a ruling in behalf of all of the corporations. No reference was made to the ruling in the corporate records when the distributions were voted. It is apparent that the shareholders were intent on distributing the cash on hand, and there is no showing that, in the absence of the ruling, an alternative and more beneficial course of action would have been taken. From the record as a whole, it cannot be said that plaintiffs have discharged the burden of establishing the presence of the elements that are necessary to estop the Commissioner.

Even if it is assumed that plaintiffs had relied to their detriment on the favorable ruling to Section III, the doctrine of equitable estoppel does not prevent the Commissioner from changing his position to correct an error of law. The principal case in this area is Automobile Club of Michigan v. Commissioner, 353 U.S. 180, reh. denied, 353 U.S. 989 (1951). The Supreme Court there held that the Commissioner of Internal Revenue was not estopped from applying the revocation of a ruling retroactively, since the doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law.

In 1950, when the ruling was issued to Section III, the statute (Section 117(m) of the Internal Revenue Code of 1939) had 'been in effect for less than a month. More than 2 years elapsed before the Internal Revenue Bureau issued extensive regulations interpreting the new section. In addition, there were a number of court decisions which resolved legal problems that arose in applying the section with respect to FHA corporations. Thus by 1959, when the deficiencies against plaintiffs were assessed, the Commissioner knew a great deal more about the law than he did when the 1950 ruling was issued. Under these circumstances, we hold that the Commissioner’s change was a change in legal opinion which corrected an error of law.

Plaintiffs’ final contention is that when the Commissioner of Internal Revenue decided to honor the ruling issued to Section III in behalf of that corporation only, the retroactive application of the Commissioner’s change in position as to the shareholders in the other corporations was an unlawful discrimination between similarly situated taxpayers and an abuse of the Commissioner’s discretion.

We think this issue must he decided adversely to plaintiffs in view of the rule announced in a number of cases which have considered the question. Weller v. Commissioner, 270 F. 2d 294 (3d Cir. 1959), cert. denied, 364 U.S. 908; Estate of Bennett v. Commissioner, P. H. Memo. T.C. para. 60253 (1960); Gerstell v. Commissioner, P. H. Memo. T.C. para. 62181 (1962), Aff'd, 319 F. 2d 131 (3d Cir. 1963); Goodstein v. Commissioner, 267 F. 2d 127 (1st Cir. 1959).

In each of the cited cases, the situation of the plaintiff, insofar as taxability was concerned, was identical to that of another taxpayer who had received a favorable private ruling. At the time the ruling was issued, each of the plaintiffs could have secured a ruling in his favor had he applied for one. Despite a showing of reliance on the ruling issued to another taxpayer, it was held in each case that the issuance of a private ruling to a particular taxpayer provided a sufficient basis for the Commissioner to apply a change in position retroactively as to taxpayers who had not received rulings. In Weller, supra, at 298, the issue before the court was stated as follows:

In disallowing the interest in these cases, the department relied upon Revenue Ruling 54-94, 1954-1 Cum. Bull. 53, which, of course, was issued after the taxable years in question. The petitioners contend that the Commissioner may not retroactively reverse his prior rulings which allowed similar deductions. The prior rulings had not been issued to the petitioners, for they had never requested any but were individual rulings in other cases. These individual rulings had been shown to petitioners by insurance company salesmen prior to the time of the purchase of the annuity contracts. Recognizing that they may not rely on these rulings directly, petitioners maintain that all taxpayers have the right to be treated equally and fairly and since they undoubtedly would have received similar rulings had they applied for them, they are entitled to their benefits.

In disposing of the taxpayers’ contention, the court declared:

Petitioners contend, however, that although the revenue ruling fails to indicate any limitation on its application, agents of the Treasury have stated to Congress that it does not intend to apply the revenue ruling retroactively to individuals who have previously been issued rulings. We need not determine whether such action if carried out would be an abuse of discretion, for petitioners are not in the same position as those parties who have been issued rulings. They are entitled to the same treatment as all other taxpayers similarly situated, i.e., without rulings, no more and no less. This the Commissioner has afforded them.

The decisions of this court in Connecticut Railway & Lighting Co. v. United, States, 135 Ct. Cl. 650, 142 F. Supp. 907 (1956), and Exchange Parts Company, Inc. v. United States, 150 Ct. Cl. 538, 279 F. 2d 251 (1960), are inapposite. In Connecticut Railway & Lighting Co., the Internal Revenue Service reversed a consistent administrative practice which had extended over a period of many years. In Exchange Parts Company, Inc., plaintiff, after paying excise taxes on rebuilt equipment for several years, applied for and obtained a ruling that the articles were not taxable. Also, there were widely published rulings declaring that the articles were not subject to the excise tax. In reversing his long-standing administrative practice in Connecticut Railway & Lighting Co. and revoking the published and private ruling in Exchange Parts Company, Inc., the Commissioner announced that he would apply his change in position prospectively only, but that he would not refund any taxes that had previously been paid. In both cases, this court held that it was an abuse of discretion for the Commissioner to apply his ruling retroactively, solely on the basis that plaintiffs had paid the taxes in question.

It follows from what we have said above that plaintiffs are not entitled to recover and their petitions are dismissed.

FINDINGS OF FACT

The court, having considered the stipulation of the parties, and the briefs and arguments of counsel, makes findings of fact as follows:

1. Plaintiffs Alfred Bornstein and Ethel Bomstein, husband and wife, now reside, and have resided during the taxable years here involved, at 9501 Brunett Avenue, Silver Spring, Maryland.
2. Plaintiffs Robert E. and Doris H. Bornstein, husband and wife, now reside at 5800 Plainview Drive, Bethesda, Maryland. During the taxable years here involved they resided at 405 Deerview Avenue, Silver Spring, Maryland.
3. Plaintiffs William and Kate Bomstein, husband and wife, now reside at 1360 — 71st Street, Miami Beach, Florida. During the taxable years here involved they resided at 501 Cedar Street, N.W., Washington, D.C.
4. Plaintiffs Adolph and Jean Klein, husband and wife, resided during the taxable years here involved at 10003 Ray-nor Road, Silver Spring, Maryland. Jean Klein now resides at 7286 Gay Avenue, Park Island, Miami Beach, Florida. (For purposes of simplicity, whenever the term “plaintiffs” is used herein it shall, where appropriate, include Adolph Klein, although Mr. Klein is now deceased and has been succeeded in this action by William Bomstein, the executor of his estate.)
5. Plaintiffs duly filed their annual federal joint income tax returns for the years 1950 and 1951 with the District Director of Internal Revenue, Baltimore, Maryland, and made timely payments to said District Director of the amounts indicated by those returns to be due.
6. By letters dated April 22,1959, the said District Director, as one alternative position, proposed deficiencies and overassessments in income tax for the years 1950 in the following amounts: and 1951
Deficiency 1950 Over-assessment 1951
Alfred B. and Ethel Bornstein_$24, 707.90 $3, 314. 79
Robert E. and Doris H. Bornstein- 8,141. 94 2,301.16
William and Kate Bornstein- 19, 820. 76 592. 04
Adolph and Jean Klein_ 24, 767.10 3,292. 33

7. On or about October 27,1959, plaintiffs paid to the said District Director, in liquidation of their federal income tax deficiencies for the year 1950, the amounts indicated in the following table. Said payments included applications of overassessments for the years 1951 and 1953 in the amounts indicated.

8. On or about December 16, 1959, plaintiffs filed claims for refund of income tax with the said District Director for the years 1950 and 1951 in the amounts indicated below. The claims were based upon plaintiffs’ assertion that distributions which they had received from certain corporations were properly taxable as long-term capital gains, rather than ordinary income.

9. By letters dated July 25,1961, the said District Director disallowed these claims for refund.

10. Jointly with Calvin Black and Don Loftus, Carl Budwesky conceived the idea of the possible use of certain property in northern Virginia as land upon which to build multi-unit apartment dwellings. Mr. Budwesky was and is a practicing attorney in the State of Virginia. He was formerly City Attorney and City Manager of the City of Alexandria, Virginia. The land was chosen because it was anticipated that it would satisfy FHA financing requirements.

11. It was impossible to undertake construction of the proposed project within a single corporation. It was anticipated that permanent mortgage financing in the total amount of approximately $12,000,000 would be required. The lender, Investors Diversified 'Services, would not issue mortgages in excess of $2,500,000 per borrower on a single project. In order to insure that no problem would be encountered as a result of this limitation, on June 7, 1949, the following six corporations were incorporated in the Commonwealth of Virginia:

a. Shirley-Duke Apartments, Section I, Inc. (hereinafter called Section I).
b. Shirley-Duke Apartments, Section II, Inc. (hereinafter called Section II).
c. Shirley-Duke Apartments, Section III, Inc. (hereinafter called Section III).
d. Shirley-Duke Apartments, Section IV, Inc. (hereinafter called Section IV).
e. Shirley-Duke Apartments, Section V, Inc. (hereinafter called Section V).
f. Shirley-Duke Apartments, Section VT, Inc. (hereinafter called Section VI).

12. Each of the above-named corporations had 200 shares of common stock issued and outstanding during the years here in issue. The stock of Sections I and VI was, for the most part, issued to the same persons. The stock of Sections II and III was, for the most part, issued to the same persons. The ownership of the issued and outstanding common stock of Sections IV and V during the years here in issue was as set forth in the following table. None of the plaintiffs ever owned any stock in any of the Shirley-Duke corporations other than Sections IV and V.

Section Section IV V Shareholder
162 162 Herman W. and Regina Hutman
William Bernstein_ CO O
Robert E. Bornstein_ © 60
Alfred B. Bornstein_ 00 00
Adolph Klein_ OO CO
Russell T. Morris_ H H
Olarence R. Botkin_ j-t H
Carl Budwesky_ CO CO
Total_ 200 200

13. At the time of the distributions here in question, each of the plaintiffs had held his stock for more than 6 months.

14. As one of the sponsors of the project, Mr. Budwesky subscribed for six shares of stock in each of the six corporations. He continues to hold such shares at the present time. He was general comisel to all of the corporations during construction and the early years of operation.

15. On July 5, 1951, the officers of each of the six Shirley-Duke corporations were as follows:

Section I
President — Bryan Gordon, Jr.
Vice-president — Calvin O. Black
Treasurer — Harold J. Fredericks
Secretary — M. T. Craig
Section II
President — Earl J. Preston
Vice-president — E. G. Wallensik
Treasurer — E. M. Bros
Secretary — E. M. Bros
Section III
President — Earl J. Preston
Vice-president — E. G. Wallensik
Treasurer — E. M. Bros
Secretary — E. M. Bros
Section IV
President — Herman W. Hutman
Vice-president — Herman W. Hutman
Treasurer — Regina Hutman
Secretary — Carl Budwesky
Section V
President — Herman W. Hutman
Vice-president — Herman W. Hutman
Treasurer — Regina Hutman
Secretary — Carl Budwesky
Section VI
President — Bryan Gordon, Jr.
Vice-president — Calvin O. Black
Treasurer — Harold J. Fredericks
Secretary — M. T. Craig

None of the plaintiffs was ever an officer or a director of any of the Shirley-Duke corporations.

16. Soon after incorporation each of the sis corporations acquired title to a parcel of undeveloped land in Fairfax County, Virginia. The land owned by all of the corporations, when aggregated, constituted a single, contiguous parcel.

17. Construction of the apartment buildings for each of the six corporations was carried on as a single endeavor. Such construction proceeded with major regard to laud topography, availability of materials, and other physical factors. Little attention was paid to the matter of which corporation’s building was being constructed. Some costs were incurred by, and paid by, each corporation individually, Most costs were allocated among the various corporations based upon the percentage that the units in the particular corporation bore to the total units of all six corporations. Some persons were employed only by certain of the individual corporations, and not by all of the six corporations.

18. The construction of the apartment dwellings and their subsequent management was performed by a partnership formed by the principal stockholders in all of the corporations. The plaintiffs in the present action have never been members of this partnership. The offices of the partnership are located in a commercial building which is a part of the Shirley-Duke project. Mr. Budwesky’s offices are located in the same building.

19. The six corporations never entered into a partnership, joint venture, or similar arrangement among themselves with respect to the construction, development, or operation of the apartment project. No partnership federal income tax return was ever filed on 'behalf of the corporations as a group.

20. In July 1950, the construction of three of the projects was completed. In September 1950, the projects of the remaining three corporations were completed. Funds from the permanent financing for all corporations were made available to the corporations in September 1950. Such permanent financing was insured by the Federal Housing Administration.

21. The FHA insured funds received by each corporation from the permanent financing were substantially in excess of the corporation’s actual costs of construction.

22. Each of the stockholders was desirous of obtaining his pro rata share of the excess mortgage proceeds held by the corporations in which he had stock. At various informal discussions and meetings, the methods by which such cash could be paid to the stockholders were discussed.

23. Throughout the informal discussions, certain of the stockholders expressed concern over the exact tax consequences that they would experience as a result of any such cash distributions. These stockholders wished to be sure that any gain on the distributions would be taxable at capital gain rates and not as ordinary income. It was Mr. Bud-wesky’s professional view 'at the time that the cash distributions in the hands of the stockholders would be taxable at capital gains rates. However, it was felt by certain of the stockholders that some confirmation of this opinion should be obtained from the Internal Revenue Bureau. Consequently, Mr. Budwesky was authorized and instructed, in his capacity as legal counsel to all of the corporations, to do whatever was necessary to obtain a ruling or rulings from the Internal Revenue Bureau, which would state that all such distributions would be subject to tax at capital gain rates.

24. Pursuant to this authorization, Mr. Budwesky had two conferences at the Internal Revenue Bureau with Mr. E. G. Parker and some of his associates regarding the possibility of obtaining a ruling from the Internal Revenue Bureau and the actual content of such a ruling. Mr. Parker was a Conferee Reviewer in the Coordinating and Advisory Section of the Practice and Procedure Division of the Internal Revenue Bureau. His duties in that position entailed the performing of research and analysis upon questions on which the Internal Revenue had been requested to rule. He also prepared initial drafts of such rulings. He had no authority to sign or otherwise to issue rulings on behalf of the Internal Revenue Bureau; that authority was confined to the head of his division, the Deputy Commissioner, and the latter’s assistant. Prior to their approval for issuance by the Internal Revenue Bureau, all drafts of rulings which Mr. Parker prepared were required to be reviewed by at least two of his superiors. Mr. Parker never stated to Mr. Bud-wesky that he had authority to issue rulings on behalf of the Internal Revenue Bureau, and he never stated that he did not have such authority.

25. All of the work assigned to Mr. Parker during the period in question related either to problems of capital gains or losses or to problems of business deductions. Mr. Parker had no specialized knowledge of any of the other areas of federal tax law, and his duties did not include any responsibility for work in such other areas.

26. At one of the conferences between Mr. Budwesky and Mr. Parker, Mr. Budwesky stated that he represented all six of the Shirley-Duke corporations and asked whether or not it would be necessary to apply for separate rulings for each of the six corporations. Mr. Parker advised Mm that, since the ruling would involve a legal determination, an application for tbe adjudication on behalf of one of the corporations would be sufficient, and, since the same principle was involved, the ruling would be applicable to all of the six corporations.

27. Mr. Parker had no authority to make these statements, or to make any other statements or representations on behalf of the Internal Revenue Bureau about the applicability of its rulings. He had been given no authority to make, for the Internal Revenue Bureau or for the United States Government, any statements, either oral or written, about the law or its bearing upon particular situations. Mr. Parker’s lack of authority to do anytMng of this character had been made clear to him by his superiors many times, and he was well aware of it at the time. Mr. Parker never stated to Mr. Budwesky that he had such authority, and he never stated that he did not have such authority.

28. On the basis of the oral advice he had received from Mr. Parker, under date of October 18, 1950, Mr. Budwesky submitted a formal written application for ruling for only one of the corporations. Section III was chosen as the corporation. The terms of the application were as follows:

Commissioner of Internal Revenue
Washington, D.C.
Dear Sir:
In June, 1949, Shirley-Duke Apartments, Section III, Incorporated, commenced the construction of an apartment project consisting of 276 apartment units upon a tract of land in Mount Vernon Magisterial District, Fairfax County, Virginia, said project being' financed by a mortgage loan in the principal amount of $1,840,000.00.
The corporation is chartered under the laws of Virginia, and there are issued and outstanding 100 shares of First Preferred Stock having a par value of One Dollar ($1.00) per share, and 200 shares of common stock of no par value which were issued on a basis of Five Dollars ($5.00) per share.
The project was built by the owning corporation (no general contractor) and is entirely completed and in operation. After all costs were paid, the corporation had and has in excess of $100,000.00 remaining unex-pended out of the proceeds of the mortgage loan, which the Board of Directors transferred to capital.
The Board of Directors has in mind a distribution to the stockholders of a substantial part of the amount remaining from the proceeds of the permanent mortgage loan which it believes it is entitled to do as a partial liquidation, for which each stockholder could surrender a percentage of his stock, but this is not believed to be necessary, and as the stock has been held for more than six months by each stockholder involved, it is believed the proposed distribution to each stockholder would constitute a long term capital gain, and taxable as such.
Certain stockholders were employed by and performed services for the corporation in the construction of this project for which they were paid as follows:
Engineer in charge of the Project_$20, 000. 00 per annum
Superintendent of Construction_ 9,100.00 per annum
Accountant - 7, 800.00 per annum
Attorney, for organizing the corporation and closing the mortgage loan_ 2, 500.00 fee
(Title, etc., by Title Company)
The other five stockholders performed no services for the corporation.
We would appreciate a ruling from the Bureau on the status, for income tax purposes, of the proposed distribution in the hands of the respective stockholders.
Very truly yours,
SHIRLEY-DUKE APARTMENTS, SECTION III, INCORPORATED BY: /S/ Carl Bttdwesky,
Secretary.

29. On November 30, 1950, the Internal Revenue Bureau issued the following ruling letter:

Shirley-Duke Apartments, Section III, Inc.
Post Office Box 970
Alexandria, Virginia
Attention: Mr. Carl Budwesky, Secretary Gentlemen:
Reference is made to your letter dated October 18, 1950, requesting a ruling as to the status, for Federal income tax purposes, of a proposed distribution to your stockholders.
It is stated that the corporation was organized under the laws of the State of Virginia for the construction and operation of an apartment development. It began construction in June, 1949, which, was financed by a mortgage loan of $1,840,000. There are issued and outstanding 100 shares of First preferred stock of a par value of $1.00 per share and 200 shares of common stock of no par value issued on a basis of $5.00 per share.
The project was constructed by the corporation through its employees, who supervised the operations and let contracts for the various types of work to numerous contractors. Four of the stockholders were employed in this connection, and the compensation paid to them is set forth in your letter.
The construction has been completed, all costs have been paid, and there is remaining $100,000.00 of the proceeds of the mortgage loan which the Board of Directors has transferred to capital account. It is proposed to distribute this sum to the shareholders in proportion to their holdings of stock. All such shareholders have held their respective shares for more than six months.
Based upon the representations in your letter it is held that upon distribution the amount distributed shall be applied against and reduce the basis of the stock held by the receiving shareholder and shall be taxable to the recipient if, and to the extent that, the amount distributed exceeds such basis. The gain, if any, will constitute long-term capital gain in accordance with the provisions of section 117 (b) of the Internal Revenue Code.
Very truly yours,
/S/ E. I. McLarkey,
Deputy Commissioner.

30. This ruling was never published in the Internal Rev-nue Bulletins.

31. Mr. Budwesky reported the oral advice given him by Mr. Parker to certain of the stockholders of the Shirley-Duke corporations. The directors of each of the corporations caused their corporations to declare and pay cash dividends in December of 1950, and early in 1951. The corporate resolutions authorizing the distributions ¡made no reference to the November 30,1950, ruling of the Internal Revenue Bureau or the oral statements made to Mr. Budwesky by Mr. Parker.

32. The dates and amounts of the distributions to which reference was made in the preceding paragraph were as follows:

Corporation Date of Payment Total Distributed
1- 12-13-50 $370,665.00
12-18-50 123,555.00
Total $494,220.00
2 - 12-11-50 $316, 560.84
3- 12-11-50 $281,433. 71
4- 12-13-50 $394, 862.80
2-28-51 17,547.68
Total $412,410.48
5- 12-13-50 $315,503. 85
2-28-51 22,270. 86
Total $337,774.71
12-12-50 $161,616.00
2-28-51 67,340.00
5-26-51 13,468.00
Total $242,424.00

33. Because of tbe issuance of the letter ruling to Shirley-Duke Apartments, Section III, Inc., the Internal Bevenue Service has permitted the shareholders of that corporation to treat the distributions of excess FHA loan proceeds as capital gains to the extent that those distributions exceeded the shareholders’ ratable shares of the earnings and profits of the corporation and their bases in their stock. The Internal Bevenue Service has asserted that such distributions to the shareholders of any of the other Shirley-Duke corporations are taxable to the recipient shareholders, to the extent of the gain realized, as ordinary income, in accordance with the provisions of section 117(m) of the Internal Bevenue Code of 1939.

34. Shirley-Duke Apartments, Section IV, Inc., and Shirley-Duke Apartments, Section V, Inc., were collapsible corporations within the meaning of section 117 (m) (2) of the 1939 Internal Bevenue Code at all times in issue in the present cases. None of the exceptions prescribed by section 117 (m) (3) of such Code applied to any of the distributions here in dispute. Accordingly, had Mr. Parker not made the oral statements described in paragraph 27 above, and had the Internal Eevenue Bureau not issued to Section III the ruling letter set forth in paragraph 30 above, the parties would be in agreement that all gain realized by the plaintiffs from such distributions was properly taxable as ordinary income pursuant to the provisions of section 117(m) (1) of such Code.

35. Each of the six Shirley-Duke corporations maintains its books and records and files its tax returns on the accrual method of accounting, using the fiscal year ending May 31.

36. Alfred Bornstein and Eobert E. Bornstein are the sons of William Bornstein. All three Bornsteins and Adolph Klein, during the years here in issue, conducted a plumbing contracting and real estate investment business as partners. They also performed plumbing contracting work in the construction of the Shirley-Duke project.

CONCLUSION' 0E LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are not entitled to recover, and their petitions are therefore dismissed. 
      
      
        Burge v. Commissioner, 233 F. 2d 765 (4th Cir. 1958); Glickman v. Commissioner, 256 F. 2d. 108 (2d Cir. 1958); Weil v. Commissioner, 252 F. 2d 805 (2d Cir. 1958); Abbott v. Commissioner, 28 T.C. 795, Aff’d, 258 F. 2d 537 (3d Cir. 1958); Mintz v. Commissioner, 32 T.C. 723, Aff’d, 284 F. 2d 554 (2d Cir. 1960); Hartman v. Commissioner, 34 T.C. 1085, Aff’d, 296 F. 2d 726 (2d Cir. 1961)
     
      
       There are also controlling factual differences between these cases and International Business Machines Corp. v. United, States, ante p. 357, 343 F. 2d 914. In that case the court applied Section 7805(b) of the Internal Revenue Code of 1954 in behalf of a taxpayer who had made prompt application to obtain a private ruling to the same effect as a ruling issued to another taxpayer, which manufactured and sold business machines that were similar in all material respects to the machines manufactured by plaintiff. In these cases, none of the taxpayers nor the corporations in which they are shareholders ashed for rulings.
     