## Facts

- William L. Becker, a veteran and Eastern Airlines DC-9 pilot, took a Learjet flight-training course to maintain and improve job-related skills.
- Becker paid $6,150 (1976) and $6,100 (1977) in tuition and fees.
- The Veterans’ Administration reimbursed Becker 90% of tuition, paying $5,535 (1976) and $5,490 (1977); Becker’s out-of-pocket costs were $615 and $610.
- Becker excluded the VA payments from income as tax-exempt veterans’ benefits and deducted the full tuition amounts as employee business expenses under I.R.C. § 162(a).
- At the time of filing, IRS guidance stated that veterans’ education expense deductions need not be reduced by nontaxable VA educational benefits.
- The IRS audited Becker’s 1976 and 1977 returns twice before 1980 and informed him the deductions were accepted and the matter closed.
- In 1980, the IRS issued Rev. Rul. 80-173, concluding that expenses reimbursed by VA benefits are not deductible because the taxpayer incurred no expense to the extent reimbursed.
- The IRS re-examined Becker’s 1976 and 1977 returns, applied Rev. Rul. 80-173 retroactively, and assessed deficiencies.

## Issues

1. Whether the Commissioner abused discretion under I.R.C. § 7805(b) by applying Rev. Rul. 80-173 retroactively to Becker’s open 1976 and 1977 tax years.
2. Whether the IRS was equitably estopped from disallowing the previously accepted deductions due to Becker’s reliance on IRS guidance and prior audits/closure notices.

## Decision

- The Third Circuit affirmed the Tax Court.
- The Commissioner did not abuse discretion under I.R.C. § 7805(b) in applying Rev. Rul. 80-173 retroactively to 1976 and 1977.
- The IRS was not equitably estopped from asserting deficiencies despite prior guidance, audits, and “case closed” notices.
- Becker’s deductions for flight-training expenses had to be reduced by the amount of tax-exempt VA reimbursement.

## Legal Principles

- Under I.R.C. § 162(a), a taxpayer may deduct ordinary and necessary business expenses only to the extent the taxpayer actually paid or incurred them; reimbursed amounts generally are not deductible where the taxpayer suffered no economic detriment.
- I.R.C. § 7805(b) permits retroactive application of IRS rulings unless the Commissioner’s decision is an abuse of discretion; review is highly deferential.
- Retroactive correction of an IRS interpretive position may be applied to tax years still open under limitations periods where the new position is legally supportable.
- Equitable estoppel against the government generally requires more than reliance; it typically demands misrepresentation or affirmative misconduct and reasonable reliance producing serious injustice.
- Prior audits, closure letters, and reliance on IRS publications or revenue rulings ordinarily do not bar the IRS from revising its position and assessing deficiencies for open years.

## Conclusion

The Third Circuit held that the IRS could retroactively apply a new revenue ruling disallowing deductions for reimbursed flight-training expenses, and that neither earlier IRS guidance nor prior audits and closure notices estopped the government from assessing deficiencies for open tax years.


Becker v. Comm’r of Internal Revenue, 751 F.2d 146 (3d Cir. 1984)