In AOD 2012-02; 2012-40 IRB 1,
here, the IRS formally announced its nonacquiescence in
International Business Machines Corp. v. United States, 343 F.2d 914 (Ct. Cl. 1965), cert. denied, 382 U.S. 1028 (1966),
here, "the
IBM case" or just "
IBM". For those unfamiliar with the IBM cases, here is a cut and paste from my Federal Tax Procedure book (footnoted version pp. 80-81; nonfootnoted version pp. 55-56); :
(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of discretion because of the favorable interpretation that the competitor secured in the interim before its ruling was revoked prospectively.
