(1) The IBM Case.
Can the taxpayer complain about more favorable tax treatment given to a competitor? Allowing the taxpayer seeking the private letter ruling to obtain a benefit ultimately contrary to the law while denying that benefit to others, particularly competitors where the erroneous benefit gives a competitive advantage, has at least the appearance of unfairness. The Court of Claims – the predecessor to the current Court of Appeals for the Federal Circuit – addressed this issue in 1966 in International Business Machines Corp. v. United States. n255 One of IBMs competitors in the highly competitive computer business had sought and obtained a ruling that ultimately proved to be based on an incorrect interpretation of law. Shortly thereafter, IBM learned of the ruling and sought one for itself. After over two years consideration / reconsideration of the issue, the IRS simply denied IBM’s requested ruling and revoked the ruling to the competitor but revoked prospectively only. During the interim before prospective revocation (about 2 ½ years), the competitor had a substantial advantage over IBM, which had not sought a ruling and was taxed on the basis of the correct interpretation of law. In a fairness / equity based decision, the court required the IRS to refund the taxes during the period to IBM. The technical basis for the ruling was that (i)§ 7805(b) authorizes IRS interpretations to be applied prospectively (thus implicitly permitting the IRS to apply wrong interpretations prior to a prospective application date), and (ii) that the IRS’s refusal to make prospective the ruling it gave IBM was an abuse of discretion because of the favorable interpretation that the competitor secured in the interim before its ruling was revoked prospectively.
IBM illustrates the tensions in this area. Certainly IBM had equities in its favor, and the Court responded. But, can it be that the IRS, by making an incorrect interpretation of law as to one taxpayer, determines the law -- in effect overrides the will of Congress by adopting the incorrect interpretation -- for all taxpayers while the incorrect interpretation is outstanding? That concept is disturbing indeed. n256 And, would it make any difference whether the incorrect interpretation were adopted on audit as opposed to in a private letter ruling? The bottom-line competitive result is the same – one competitor achieves a competitive advantage because of the inconsistent application of the tax law. The implications of IBM are startling and far-reaching indeed. Probably for this reason, IBM is generally considered sui generis -- that is, limited to its facts; and similar relief is virtually never given and even when a court recognizes any continuing validity limits it to situations where the taxpayer requested and was denied a PLR for beneficial treatment that a competitor was granted. n257 Nevertheless, in a large dollar case, even long shots must be pursued vigorously. n258
n255 343 F2d 914 (Ct. Cl. 1965), cert. denied, 382 US 1028 (1966), nonacq. AOD 2012-02; 2012-40 IRB 1.The IRS had earlier and consistently indicated its disagreement with the IBM decision, as the AOD notes. Normally, of course AODs do not take so long. It is unclear that this AOD would have any effect in any particular case, but the public is now formally on notice. The conclusion in the AOD is:
n256 See e.g., Merck & Co., Inc. v. United States, 652 F.3d 475, 487 (3d Cir. 2011) (3d Cir. 2011) (citing Hostar Marine Transp. Sys., Inc. v. United States, 592 F.3d 202, 210 (1st Cir. 2010).
n257 E.g., Baker v. United States, 748 F.2d 1465, 1469 n.9 (11th Cir. 1984) ("taxpayers who have not requested or received private letter rulings from the IRS will not succeed on a claim of discriminatory treatment because other taxpayers have received private letter rulings on the tax consequences of the same activities").
n258 Students desiring to pursue this issue further are referred to Lawrence Zelenak, Should Courts Require the Internal Revenue Service to be Consistent?, 40 Tax L. Rev. 411 (1985) (arguing that they should). An aggressive pursuit of a large dollar claim in the setting of a hokey tax shelter, might however evoke a judicial response of “chutzpah” with respect to some of the peripheral claims that gild the lily of the basic IBM claim. See e.g., Merck & Co., Inc. v. United States, 652 F.3d 475, 488 (3d Cir. 2011) (3d Cir. 2011).
Accordingly, the Service will not follow IBM in determining whether to apply adverse rulings or revocations of favorable rulings retroactively. In addition, the Service will not follow IBM in determining whether a taxpayer is entitled to a particular tax treatment because of a claim of disparity with respect to an alleged similarly situated taxpayer, whether or not the taxpayers applied for or received rulings on their respective positions.This AOD does not affect any of my Federal Tax Procedure text except to cite the AOD in footnote 255. I have also added the F.3d cite for Merck & Co., Inc.
I should also note that, in the Federal Tax Procedure text (footnoted p. 60; nonfootnoted p. 41), I describe the AOD process as follows:
When the IRS loses a legal issue in court and does not appeal it, the IRS may prepare a document called an Action on Decision (“AOD”) stating whether the IRS will follow the decision in other cases.In the text I then quote the IRS's explanation of the acquiescence and nonacquiesence procedure as follows:
The recommendation in every Action on Decision will be summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions; whereas, “acquiescence in result only” indicates disagreement or concern with some or all of those reasons. “Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.I guess, technically, the request for cert which is denied is not an appeal, but I am sure that the IRS felt the public was on notice without a nonacquiescence. Finally it apparently felt that it was appropriate to nonacquiesce. Still, I think everyone knew in the interim that the IRS did not agree with IBM.