54 T.C. 100">*100 Respondent determined deficiencies in the petitioner's income taxes for the years 1954 through 1964, inclusive, as follows:

The issues are (1) whether respondent abused his discretion in retroactively revoking petitioner's tax-exempt ruling granted on June 30, 1959; (2) whether respondent was barred by the statute of limitations 54 T.C. 100">*101 from asserting deficiencies for each of the 1970 U.S. Tax Ct. LEXIS 226">*227 taxable years 1954 through 1958; and (3) whether petitioner's failure to file tax returns for each of the years 1954 through 1958 was due to reasonable cause or to willful neglect.

FINDINGS OF FACT

Some of the facts were stipulated and they are so found.

Petitioner is a corporation organized under the laws of the State of California. Its principal office at the time the petition in this case was filed was at Oakland, Calif. It filed its information returns (Form 990), "Return of Organization Exempt From Income Tax," for the taxable years 1954 through 1964 with the district director of internal revenue, San Francisco, Calif.

Petitioner is a nonprofit California corporation organized in 1922 as a social club for Italian immigrants. A large settlement of these immigrants had settled in the area of Broadway and 49th Street in Oakland, Calif. This Italian community was comprised primarily of persons who had previously made their homes in the Piedmont area of Italy. As petitioner's membership grew, the building in which it was housed became outmoded and dilapidated, causing petitioner to have a new building constructed in 1952. The building, specially designed for petitioner and its activities, 1970 U.S. Tax Ct. LEXIS 226">*228 included a large dining room, a large ballroom, a bar, and various gamerooms. The building was financed through loans from members of petitioner in the sum of approximately $ 180,000. By December 31, 1964, this amount had been reduced to $ 11,578. At the time of trial the indebtedness of petitioner to its members had been extinguished.

In order to satisfy the outstanding loans from members, petitioner found it necessary to solicit outside business. It had been petitioner's practice that nonmembers (individuals and organizations) could make arrangements to use petitioner's facilities if sponsored by a member and would be considered as a guest of petitioner or the sponsoring members. The manager of petitioner also had the authority to sponsor any group which wished to rent petitioner's facilities.

In 1938 petitioner joined the Oakland Chamber of Commerce, and after 1952 its name began to appear in a circular issued by the Convention and Tourist Bureau of the Oakland Chamber of Commerce. A circular prepared in 1961 entitled "Halls and Auditoriums" provided the name of the organization, the facilities available and the rental charges therefor, and the capacity of the different facilities. 1970 U.S. Tax Ct. LEXIS 226">*229 Some of the organizations stated that their facilities were available to members only or to members and their guests. No such limitation was stated as to the use of petitioner's facilities.

54 T.C. 100">*102 Beginning in the year 1955 and continuing through 1964 petitioner purchased space in the yellow pages of the Oakland telephone directory. The listing in the advertisement was under the heading "Halls & Auditoriums" and indicated that petitioner's facilities were available for meetings, dances, lectures, banquets, receptions, and weddings. There was no statement in the advertisement as to restrictions on the use of petitioner's facilities. Petitioner also advertised during the years in issue over the Italian radio station KRE. The broadcasts were entirely in Italian, and they contained invitations to the listeners to participate in petitioner's functions and to utilize petitioner's facilities with no reference being made to membership requirements.

Petitioner's advertising expenses for the years in issue were as follows: ^{11970 U.S. Tax Ct. LEXIS 226">*230}

During the years in issue some organizations rented petitioner's facilities for special occasions, while other groups rented the facilities on a regular basis. Petitioner's income from rentals, dinners, and bar sales, together with its gross receipts for each of the years in issue, is set forth below: ^{21970 U.S. Tax Ct. LEXIS 226">*231}

Petitioner operated its facilities in much the same manner throughout the years 1954-64 and its accounting and other records were prepared and maintained in the same manner throughout the period. In 54 T.C. 100">*103 addition to normal accounting records, petitioner maintained a minute book generally setting forth the actions taken by petitioner's board of directors from time to time throughout the period. Petitioner's officers and employees made no effort to conceal or withhold any information from respondent at any time he sought it and petitioner's books and records were available for respondent's inspection at all times.

The minutes of the meetings of petitioner's board of directors indicate that the officers and directors were aware of and concerned with the tax aspects of petitioner being qualified as a tax-exempt organization but did not always follow the advice of their accountant promptly. Those minutes indicate that in 1954 petitioner's accountant suggested that for the protection of the club petitioner should file tax returns and an 1970 U.S. Tax Ct. LEXIS 226">*232 application for a ruling that it was tax exempt. However, no returns and no application for such a ruling were filed except as hereinafter indicated.

In September 1956, it was suggested to a field agent of respondent, who thereafter advised the supervising auditor of the Exempt Organizations Branch of the San Francisco district-director's office, that petitioner may not have been limiting its activities to those allowed an exempt social club, in that the bulk of petitioner's income was derived from the rental of hall facilities and from bar and restaurant sales to nonmembers of petitioner. Subsequent thereto, in 1957 or 1958, a revenue officer, assigned to the Collection Division of the San Francisco district director's office, contacted petitioner to pick up petitioner's corporate income tax returns which had not been filed.

The revenue officer found that petitioner had not filed corporate tax returns for the years 1954, 1955, and 1956. Upon being notified by petitioner's officers that petitioner was an exempt organization but had not filed an application for exempt status, the revenue officer advised petitioner to file such an application.

On March 11, 1958, petitioner filed a U.S.1970 U.S. Tax Ct. LEXIS 226">*233 Treasury Department Form 1025 entitled "Exemption Application," together with a letter and a statement of receipts and expenses. On the exemption application (Form 1025) petitioner answered pertinent questions in the following manner:

10. State all sources from which income or receipts are derived.

A. Dues, social events, family functions, and rentals by the members or their families for family functions.

* * * *

12. State all the activities in which the organization has engaged during its last two years of active operation.

A. Social activities are initiated by the Club or its members, such as the Children's Christmas Party, monthly family and birthday dinners; special celebrations; and drives for charitable purposes.

* * * *

54 T.C. 100">*104 14a. Are nonmembers other than bona fide guests of members permitted to use the club facilities or participate in or attend any functions or activities conducted by the organization?

* * * *

16a. Is any part of the club's property rented or leased to others?

A. Parts of the club's property are rented to members and their guests. * * *

On the letter attached to the application, the following was stated:

4. The corporation has not filed income tax returns, as it is 1970 U.S. Tax Ct. LEXIS 226">*234 organized, and has been conducted, and is now operating solely and exclusively as a social club, dedicated entirely to social and charitable purposes. * * *

* * * *

8. The sources of income are:

a. Dues

b. Social events given by and for members which, together with their families, average at least 1,800 people

c. Wedding celebrations by members of the Club and their family, which draw a large attendance, also celebrations of Wedding Anniversaries by members, Christenings, and other family functions

d. Rentals by the members or their families for Weddings, Christenings, and by guests.

* * * *

12. Only the nonmembers which are bona fide guests of the members are permitted to use the Club facilities. * * *

* * * *

15. Parts of the Club's property are rented to members and their guests. * * *

16. No part of the net income inures to the benefit of any member officer, private shareholder or individual.

On the Statement of Receipts and Expenses the following sources of receipts were shown:

Sometime 1970 U.S. Tax Ct. LEXIS 226">*235 prior to or after the application for exemption was submitted, petitioner's books and records were furnished to an internal revenue agent for examination. These books and records included the rental income records.

By letter dated June 30, 1959, respondent granted petitioner an exempt ruling under section 501(c)(7) of the Internal Revenue Code of 1954. Respondent informed the petitioner in parts as follows:

It is the opinion of this office, based upon the evidence presented, that you are exempt from Federal income tax as an organization described in section 501(c)(7) of the Internal Revenue Code of 1954.

54 T.C. 100">*105 Accordingly, you are not required to file income tax returns unless you change the character of your organization, the purposes for which you were organized, or your method of operation. * * *

You are required, however, to file an information return, Form 990, annually, with the District Director of Internal Revenue for your district so long as this exemption remains in effect. * * *

For each of the taxable years 1959 through 1964, petitioner filed a timely information return on Form 990 with the district director, San Francisco, Calif. On September 29, 1966, petitioner filed information 1970 U.S. Tax Ct. LEXIS 226">*236 returns (Form 990) for the taxable years 1954 through 1958; prior to that time, petitioner had not filed any type of return for the years 1954 through 1958. Corporate income tax returns were filed for all years subsequent to 1964; however, no corporate returns have been filed for the years 1954 through 1964. Forms 872 were executed by petitioner extending the statute of limitations for the years 1959 through 1963.

By letter dated August 12, 1963, respondent advised petitioner that he proposed to revoke petitioner's exempt status and that petitioner could submit a brief and request a conference in support of its continued exemption prior to the issuance of a final ruling. The pertinent parts of the letter are as follows:

An examination of your records disclosed that a portion of your gross receipts was derived from the rental of club facilities to groups other than bona fide members and the availability of the club facilities was conducted through various modes of advertisements, and that the percentage of such rental receipts to total receipts for the years 1959, 1960 and 1961 amounted to 18%, 18% and 20%, respectively. It was also determined that the frequency of rental of club 1970 U.S. Tax Ct. LEXIS 226">*237 facilities to non-member groups as compared to regular club functions was substantial, and this type of activity has continued over a period of years. * * *

* * * *

Thus, the use of the club's facilities by non-member groups is not considered merely incidental or in furtherance of general club purposes. Furthermore, the members benefit by carrying on such rental activities through the use of enlarged club facilities and an enhancement of value of club assets, without a corresponding increase in dues or additional assessments.

By a letter dated December 20, 1965, respondent retroactively revoked its ruling of June 30, 1959, which had granted petitioner a tax-exempt status for Federal income tax purposes, and on December 13, 1967, issued the notice of deficiency in income tax and additions to tax for the years 1954-64 upon which this proceeding is based.

Petitioner has conceded that during all the years in issue it was not an exempt organization within the provisions of section 501(a) in that it received a material portion of its gross receipts from nonmembers and nonguests.

54 T.C. 100">*106 OPINION

The primary issue for our decision is whether respondent exceeded the bounds of his discretionary authority 1970 U.S. Tax Ct. LEXIS 226">*238 by retroactively revoking petitioner's exemption letter and determining that petitioner is liable for tax on its income for the years 1954-64.

In 1959 petitioner was granted exempt status as being a social club within the meaning of section 501(c)(7), I.R.C. 1954. ^{31970 U.S. Tax Ct. LEXIS 226">*239} However, in 1963 respondent advised petitioner that he proposed to revoke petitioner's exempt-status ruling and suggested that petitioner could file a brief opposing such action prior to the issuance of a final ruling. In 1965 respondent retroactively revoked his prior ruling, claiming that during 1954 and thereafter petitioner had made its facilities available to nonmembers and nonguests and was therefore not operated exclusively for pleasure, recreation, and other nonprofitable purposes. Sec. 1.501(c)(7)-1, Income Tax Regs. Petitioner has conceded that during the years in issue it was not an exempt organization.

It is clear that respondent has authority under section 7805(b)^{41970 U.S. Tax Ct. LEXIS 226">*240} to retroactively revoke a ruling. In this regard the Supreme Court in Automobile Club v. Comissioner, 353 U.S. 180">353 U.S. 180, 353 U.S. 180">184 (1957), stated:

* * * it is clear from the language of the section [7805(b)] and its legislative history n9 that Congress thereby confirmed the authority of the Commissioner to correct any ruling, regulation or Treasury decision retroactively, but empowered him, in his discretion, to limit retroactive application to the extent necessary to avoid inequitable results. [Footnote omitted.]

The Supreme Court went on to say that unless the circumstances of the case show that the Commissioner abused this discretion the Commissioner's action would not be disturbed.

It is petitioner's contention that respondent abused the discretion vested in him under section 7805(b) when he retroactively revoked petitioner's exempt status. In support of its contention petitioner argues that all of the matters complained of by respondent in its letter of revocation were known to respondent when he ruled that 54 T.C. 100">*107 petitioner was an exempt social club within the purview of section 501(c)(7).

Respondent, on the other hand, claims that at the time he determined petitioner was an exempt organization and for several years thereafter he was not aware of nor was he informed of the activities conducted by the petitioner which were not exemplary of an exempt social club. It is argued by respondent that petitioner misrepresented or omitted material facts in its application for exemption and thereafter in its information returns filed annually with respondent.

It is well settled that in circumstances where there has been a misrepresentation or omission of material facts upon which the issuance of a ruling is based the respondent's retroactive revocation of the ruling does not amount to an abuse 1970 U.S. Tax Ct. LEXIS 226">*241 of discretion. Birmingham Business College, Inc. v. Commissioner, 276 F.2d 476 (C.A. 5, 1960); Stevens Bros. Foundation, Inc. v. Commissioner, 324 F.2d 633 (C.A. 8, 1963), reversing and remanding on another issue 39 T.C. 93">39 T.C. 93. Compare, however, Lesavoy Foundation v. Commissioner, 238 F.2d 589 (C.A. 3, 1956), reversing 25 T.C. 924">25 T.C. 924, in which the Court of Appeals said:

Although there is ample authority that the Commissioner may change retroactively a ruling of general application, n4 there is a dearth of cases involving individualized taxpayers' 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">11 B.T.A. 1040, * * *

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. n7

[Footnotes omitted.]

In the Lesavoy case the Court of Appeals found that the taxpayer fully disclosed the information 1970 U.S. Tax Ct. LEXIS 226">*242 required by the informational return (a change in its activities), and we do not understand that case to stand for the proposition that the Commissioner cannot retroactively revoke an individualized ruling when the disqualifying facts were not fully disclosed to him when the ruling was made. See Stevens Bros. Foundation, Inc. v. Commissioner, supra, in which both this Court and the Court of Appeals distinguished the Lesavoy case on the same grounds.

We are not dealing here with a situation where there has been a change by the organization in its manner of operation subsequent to the issuance of an exemption ruling, but with a situation where respondent contends that at the time he issued the exempt ruling he was not fully and correctly informed of the petitioner's activities, which petitioner now concedes disqualify it for exempt status.

54 T.C. 100">*108 We are satisfied from the record that respondent was not fully and correctly informed at the time he issued his ruling that a substantial part of petitioner's income was being derived from the rental of its facilities to individuals and groups who were not members nor bona fide guests of members, and of the efforts being made by petitioner to obtain 1970 U.S. Tax Ct. LEXIS 226">*243 outside business through the medium of advertising. There was nothing in the exemption application nor in the information returns filed by petitioner which revealed these facts. The answers to questions on those forms would tend to negative such facts. The record does not reveal whether a complete audit of petitioner's books would have fully disclosed the situation.

Perhaps respondent should have been more inquisitive before issuing his ruling, in view of the fact that someone had suggested to his agent in 1956 that petitioner's activities might not be limited to those of an exempt organization. However, the evidence is not clear that respondent ever made an actual audit of petitioner's books as a result of this suggestion and furthermore we think respondent is entitled to rely on the information supplied by petitioner on its application and information forms in issuing a ruling. We said in Stevens Bros. Foundation, Inc., 39 T.C. 93">39 T.C. 93, 39 T.C. 93">106:

Whatever the nature of the limitations imposed on respondent when he issues a ruling or otherwise acts with regard to a particular taxpayer, it is clear that those limitations apply only to situations of which respondent has been made aware. Respondent 1970 U.S. Tax Ct. LEXIS 226">*244 is not barred from changing his rulings retroactively where he was not fully or correctly informed as to the material facts upon which the rulings were based or where there have been material changes in law or fact subsequent to the time respondent acted. [Citations omitted.]

On its exemption application form, in answer to the question, "Are nonmembers other than bona fide guests of members permitted to use the club facilities or participate in or attend any functions or activities conducted by the organization," petitioner answered "No." Petitioner attempts to explain this answer by showing that it was petitioner's understanding during the period in question that any person or group sponsored by a member of petitioner was considered to be a guest. Petitioner cites the following definition of "guest" as given in Webster's New Collegiate Dictionary (1961 ed.) as supporting its misunderstanding of the term "guest": "A person entertained in one's house or at one's table; a visitor entertained without pay; hence, a person to whom the hospitality of a home, club, etc., is extended. Any person who lodges, boards, or receives refreshment, for pay, at a hotel, or the like; patron." (Emphasis 1970 U.S. Tax Ct. LEXIS 226">*245 added.)

To the contrary, we think this definition refutes, rather than supports, petitioner's statement on the application form that its facilities 54 T.C. 100">*109 were not available to nonmembers other than bona fide guests of members, within the context used. The nonmembers who used the facilities were charged for the privilege, whether sponsored by members or not; and the term "guest," when used on this particular form, could not be construed to refer to guests at a hotel or other commercial establishment.

Finally, we can find no abuse of discretion on the part of respondent in retroactively revoking his ruling under the particular circumstances of this case. Petitioner now concedes that it was not entitled to exempt status for any of the years here involved; and it is stipulated that petitioner conducted its operations in the same manner throughout the period. Petitioner did not even file information returns for the years 1954-58 until 1966 and did not file an exemption application until 1958, despite the advice of its accountant in 1954 that it should do so. When it did file an exemption application in 1958 and thereafter when it filed information returns the information reported about the 1970 U.S. Tax Ct. LEXIS 226">*246 use of its facilities was certainly not clear and candid. There is no evidence that respondent would have issued the exemption ruling had he been fully informed; his revocation does not appear to be a change of heart, but rather a reappraisal of the situation upon getting the complete facts. To limit respondent's revocation to the date it was issued would be to permit petitioner to profit from its own misconstruction of the law or misrepresentation of the facts. We can find no abuse of discretion on the part of respondent under the circumstances, and we hold for respondent on this issue.

In view of our decision above, we must now determine whether respondent was barred by the statute of limitations from asserting deficiencies for each of the taxable years 1954 through 1958. Petitioner contends that the filing of the application for exemption, the submission of financial data, and the audit of that information by respondent constituted the filing of a return sufficient to start the statute of limitations running for the years 1954 through 1958. Section 6501(a) states the general rule as follows: "Except as otherwise provided in this section, the amount of any tax imposed by this 1970 U.S. Tax Ct. LEXIS 226">*247 title shall be assessed within 3 years after the return was filed * * *." It is not disputed that petitioner did not file corporate tax returns for the years 1954 through 1958. It was not until 1966 that petitioner, at the request of respondent, filed information returns (Form 990) for those years.

In regard to what type of return is necessary to start the running of the statute of limitations, section 6501(g)(2) states:

If a taxpayer determines in good faith that it is an exempt organization and files a return as such under section 6033, and if such taxpayer is thereafter held 54 T.C. 100">*110 to be a taxable organization for the taxable year for which the return is filed, such return shall be deemed the return of the organization for purposes of this section.

This Court has held in California Thoroughbred Breeders Association, 47 T.C. 335">47 T.C. 335 (1966), that the filing of an information return (Form 990) started the running of the statute of limitations under section 6501(g)(2). ⁵

In view of the fact that no corporate income tax returns for the years 1954-58 were ever filed and 1970 U.S. Tax Ct. LEXIS 226">*248 the fact that the statutory notice of deficiency was mailed to petitioner within 3 years of the filing of information returns for the years 1954 through 1958, the statute of limitations does not bar the deficiencies for those years.

Petitioner's contention that the filing of the application for exemption and supporting financial data constitutes the filing of a return is without merit since the Supreme Court in 353 U.S. 180">Automobile Club v. Commissioner, supra, held that the statute of limitations would not begin to run until the actual filing of the return.

The last issue before us is whether petitioner's failure to file tax returns for each of the years 1954 through 1958 was due to reasonable cause or willful neglect. The respondent has asserted additions to tax under section 6651(a) for the years 1954 through 1958 against petitioner. Section 6651(a) provides as follows:

In case of failure to file any return required * * * on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent 1970 U.S. Tax Ct. LEXIS 226">*249 of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.

The maximum 25-percent addition to tax has been asserted for each of the years 1954 through 1958.

Petitioner argues that respondent acted in an inconsistent and capricious manner by asserting these additions to tax since in its determination letter dated June 30, 1959, respondent informed petitioner that income tax returns were not required to be filed unless there was a change in the character of petitioner's organization, its purposes, or methods of operation. Put simply, petitioner's argument is that the failure to file was a result of respondent's written advice and was therefore due to reasonable cause.

The petitioner relies on the case of K. O. Lee Co., Inc.v.United States, an unreported case (N.D. S. Dak. 1957; 52 A.F.T.R. (RIA) 1543, 57-1 54 T.C. 100">*111 U.S.T.C. par. 9491), as holding that the addition to tax is improper when the failure to file is based upon the advice of the Internal Revenue Service. In that case the plaintiff filed corporate tax returns instead of personal 1970 U.S. Tax Ct. LEXIS 226">*250 holding company returns for the years 1943 through 1945. An audit of plaintiff's books was conducted in 1947. The agent conducting the audit did not determine that the plaintiff was a personal holding company. In 1951 the Commissioner asserted the personal holding company tax and the maximum 25-percent addition to tax for failure to file personal holding company returns for the years 1943 through 1945. In holding that the plaintiff exercised ordinary business care and prudence the court stated:

Under these circumstances, and in further view of the fact that the Internal Revenue Service's own agent failed to determine that plaintiff was a personal holding company, I cannot hold that because plaintiff failed to seek the advice of a lawyer or public accountant, that such failure constitutes an absence of reasonable cause.

Thus, the finding of reasonable cause was not based on the Internal Revenue Service's action in that case, but was based upon all of the circumstances of the case.

Even though petitioner considered itself an exempt organization during the years 1954 through 1958, it was not actually granted exempt status until June 30, 1959. The rule regarding the filing of returns 1970 U.S. Tax Ct. LEXIS 226">*251 in this type of situation is stated in section 1.6033-1(c), Income Tax Regs., as follows:

An information return on Form 990, 990-A, 990 (SF), or 990-A (SF) is not required to be filed by an organization claiming an exempt status under section 501(a) prior to the establishment by the organization of such exempt status under section 501 and § 1.501(a)-1. If the date for filing an income tax return and paying the tax occurs before the tax-exempt status of the organization has been established, the organization is required to file the income tax return and pay the tax. * * * Upon establishment of its exempt status, the organization may file a claim for a refund of income taxes paid for the period for which its exempt status is established.

The evidence shows that petitioner's accountant advised petitioner in 1954 to file income tax returns and an application for exemption. The application was filed in 1958, but petitioner never did file any corporate income tax returns for the years 1954 through 1958.

Based upon the requirement to file income tax returns, the advice of petitioner's accountant to file returns, and the lack of any evidence to rebut the respondent's finding of willful neglect, 1970 U.S. Tax Ct. LEXIS 226">*252 the assertion of additions to tax for the years 1954 through 1958 must be sustained.

Decision will be entered for the respondent.