Jack Cummings

IRS's Discriminatory Treatment of Similarly Situated Taxpayers

What is your recourse?

November 11, 2010
by Jack Cummings, JD

Taxpayers, particularly in the same industry, may learn that their competitors have enjoyed certain tax treatment that the Internal Revenue Service (IRS) has denied to them, either on audit or a request for private guidance. They will ask: "Aren't I entitled to the same treatment on the grounds of an anti-discrimination right to equal treatment, which is due process of law?" The answer is that there are grounds for such a claim, but they are not as straightforward as in other areas of administrative law.

Discrimination Claims

Although a taxpayer can assert an antidiscrimination claim in any situation in which it knows discrimination to have occurred, the taxpayer is likely to be successful only if these elements are present:

  • The taxpayer can prove the treatment received by other named persons.
  • The taxpayer's treatment was the result of affirmative IRS action and not of IRS inaction in the face of an election made by the other person that this taxpayer also could have made.
  • There is some practical reason why this taxpayer cares how the other taxpayer was treated, the most obvious being competition.
  • Last but most important, the IRS action somehow involved or can be seen to involve, a discretionary decision by the IRS to make a change of position retroactive or not retroactive in a way that discriminates against the taxpayer.


The large body of administrative law requiring agencies to exercise their discretion in a consistent manner does not directly apply to the IRS, because in most instances the IRS is not or claims it is not, exercising discretion but rather applying law under which it is not supposed to have discretion. See Zelenak, Should Courts Require the Internal Revenue Service to Be Consistent?, 40 Tax L. Rev. 411 (1985).

Another stumbling block to discrimination claims is IRC sec. 6110(k)(3), which states that letter rulings cannot be cited as precedent. See Amergen Energy Co. v. U.S., 2010–2 USTC 50,600 (Cl. Ct. 2010) (rejecting a taxpayer effort to rely on the ruling issued to the counterparty in taxpayer's transaction at issue in the case).

Nevertheless, there are some authorities to be cited for consistency:

  • Vesco, 39 TCM 101 (1979), stated that the IRS practice in taxing or not, family use of empty seats on company airplane should be applied consistently to taxpayer as to other taxpayers.
  • IBM v. U.S., 343 F2d 914 (Cl. Ct. 1965), cert. denied, 382 US 1028 (1966). Remington Rand had received a letter ruling exempting its computers from an excise tax. IBM asked for, but did not receive, such a ruling. Then IRS revoked Rand's ruling, but prospectively only, meaning that Rand had enjoyed several tax-free years. IBM sued and the court ruled that the IRS acted unreasonably in effectively making the revocation of the Rand rule prospective as to Rand but retroactive as to IBM, in violation of sec. 7805(b). This decision is not a general endorsement of antidiscrimination but a limited one in the context of discretion exercised under 7805(b). Primarily because IBM was not the recipient of the ruling revoked, the decision has been criticized extensively and its reach limited.
  • Sirbo Holdings, Inc. v. CIR, 476 F2d 981 (2d Cir. 1973), observed that IRS had conceded the same issue in a recent case and indicated that absent an explanation of a reason for different treatment, the IRS should treat taxpayers consistently; on remand the IRS supplied the explanation that the concession was error.
  • Farmers & Merchant's Bank v. U.S., 476 F2d 406 (4th Cir. 1973). This is another sec. 7805(b) case in which similarly situated banks were allowed to compute a bad debt reserve in a certain way until the IRS issued a non-retroactive revenue ruling in 1968. Taxpayer claimed a refund for 1964 under the method allowed other banks and the IRS denied it. The 4th Circuit said taxpayer must be treated consistently.

Court Citations in Discrimination Claims

Taxpayers frequently raise discrimination claims and IBM is frequently cited in those cases but the courts generally reject the claims, with statements such as the following:

  • "Petitioner has not provided the names of its competitors who have allegedly obtained the Commissioner's consent to a change in method of accounting or described the method of accounting to which the Commissioner has supposedly consented. Petitioner's conclusory allegation of disparate treatment without any showing of specific facts that could possibly bring it with the ambit of the IBM case is insufficient grounds for granting partial summary judgment on the issue before us." FPL Group, Inc., TC Memo 2005-210.
  • "This is not a situation where two similarly situated taxpayers simultaneously sought official written pre-filing rulings, i.e., private letter rulings, from the Internal Revenue Service and the Internal Revenue Service intentionally chose to treat one differently from the other at the National Office level. See Intl. Bus. Machs. Corp. v. United States, 170 Ct. Cl. 357, 343 F.2d 914 (1965)." Lowe, TC Summ. Op. 2004-54.
  • "The present case does not involve a determination by the Commissioner, which has the effect of penalizing petitioners and favoring similarly situated taxpayers so as to give them a significant competitive or financial advantage." Harbor Bancorp., 105 TC 260 (1995).
  • "Unlike in IBM, however, there is no evidence here that respondent ever gave a competitor preferential treatment … That many of petitioner's competitors initially adopted the cash method of accounting is immaterial since petitioner also originally had that option." Cochran Hatchery, Inc., TC Memo 1979-390.

The Meaning of Discretion in Ruling Retroactively

As illustrated by IBM, cases in which the discretion of the IRS may be questioned as to making a ruling retroactive have an elastic quality. IBM did not receive the letter ruling that the IRS later revoked prospectively. Nevertheless, the court allowed it to complain that the revocation should have been retroactive so as to put its competitor on the same footing as its own filings.

Assume that a taxpayer has been computing an item one way and changes to another proper way and the IRS objects. The taxpayer contends that other taxpayers have been using the other method because it is generally an allowed method. This may not be so much a discrimination issue as it is a change of accounting method issue.

One of the peculiarities of the change of accounting method rules is that taxpayers cannot just change from one proper method to another proper method, much less from an improper method to a proper method, without IRS consent. IRC sec. 446(e). Therefore, the taxpayer has to be sure that the change is not one of accounting method, which generally concerns timing.

If it is not a change of accounting method and the taxpayer is merely trying to use an approved method that affects the computation of a tax item, there is no requirement for IRS prior consent and the taxpayer should be able to do it. If on audit the IRS disputes the taxpayer's right to use the method on the grounds that the taxpayer changed something, the complete answer should be that an accounting method was not changed and the new method is proper and taxpayer can use it and taxpayer need not rely on a right to equal treatment.

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Jasper L. Cummings, Jr., JD, is of counsel in the Raleigh office of Alston & Bird LLP. He practices in the areas of corporate taxation and has served as Associate Chief Counsel (Corporate), IRS. He can be reached at 919-862-2302.