IRS's Discriminatory Treatment of Similarly Situated Taxpayers
What is your recourse?
November 11, 2010
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.
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 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:
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:
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.