Use Office of Chief Counsel letterhead

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RESPONDENT MOVES, pursuant to I.R.C. § 7482(a)(2)(A) and Tax Court Rule 193, that the Court amend its order ruling of (Date), in the above docket to include a statement that a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation.

IN SUPPORT THEREOF, respondent respectfully states: STATEMENT OF FACTS

1. . . . [In numbered paragraphs, briefly summarize (1) the factual background out of which the question arose, (2) the procedure leading to the order (or ruling), and (3) the holding of the order (or ruling).]

STATEMENT OF THE CONTROLLING QUESTION

4. . . . [In continuing numbered paragraphs, state the question raised by the order (or ruling), with a statement of the reasons why the question is a controlling question which is not settled by applicable legal authority. The question is a controlling question if an answer contrary to that given in the Tax Court's order will terminate the litigation or the litigation of a particular substantive issue. A controlling question of law may also be one central to the litigation that, if answered as the Respondent believes it should be answered, will make unnecessary a considerable expense of effort by the Tax Court or the parties.]

STATEMENT OF THE REASONS WHY A SUBSTANTIAL BASIS EXISTS FOR A DIFFERENCE OF OPINION ON THE QUESTION

7. . . . [In continuing numbered paragraphs, briefly describe decisions of courts that are in conflict with the conclusion in the Tax Court's order (or ruling), citing legislative history, or other reasons why the Tax Court's order (or ruling) is improper or inappropriate.]

STATEMENT OF THE REASONS WHY AN IMMEDIATE APPEAL MAY MATERIALLY ADVANCE THE TERMINATION OF THE LITIGATION

10. . . . [In continuing numbered paragraphs, show how the proposed content of the order (or ruling) sought by Respondent will dispose of the litigation (or the litigation of a particular issue) or, if not, what effect Respondent's proposed order would have on the progress of the case in the Tax Court in terms of saving the time of courts and litigants.]

WHEREFORE, respondent requests that the Court grant this motion and certify the question for appeal.

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Digits 1 and 2 - filing location code

Digit 3 - type of tax involved

This is a critical digit. A 6 as the third digit signifies a nonmaster file assessment, whereas a 2 indicates individual income tax, fiduciary income tax, or a partnership return, for which master file assessments are normally made.

Digits 4 and 5 - document codes

These are also critical digits. A 51 in these positions indicates an expedited assessment and a 47 indicates a nonexpedited assessment. To illustrate: if the 3rd, 4th, and 5th digits are 651, a nonmaster file expedited assessment has been made. If the 3rd, 4th and 5th digits are 274, a nonexpedited master file assessment has been made.

Digits 6, 7, and 8 - Julian date of the underlying transaction (i.e., the assessment)

Julian dates begin with 1 for January 1 and end with 365 for December 31 (except for leap years). For example, 006 in the 6th, 7th, and 8th positions in the DLN indicates that the assessment was made on January 6; 138 in the 6th, 7th and 8th positions indicates that the assessment was made on May 18 (except in leap years).

Digits 9, 10, and 11 - block numbers that assist in locating the underlying documents

Digits 12 and 13 - serial numbers that identify individual documents within each block

Digit 14 (if present) - the year the DLN was assigned

For 1999, the 14th digit would be a 9; for 2000, a 0; and for 2001, a 1; etc.

Issue: Whether I.R.C. § 7805(b) requires the Service to apply an adverse ruling only prospectively if its retroactive application would treat a taxpayer who requested the ruling differently from a taxpayer who received a favorable ruling on the same subject.

Discussion: Taxpayer, one of two companies that manufactured, sold, and leased "larger electronic computing systems," filed a refund suit for excise taxes, claiming disparate treatment related to section 3406(a)(6) of the 1939 Code and section 4191 of the 1954 Code, which placed a 10% excise tax on the sale price of "business machines" sold by the manufacturer. Prior to April 1955, taxpayer and its competitor paid excise taxes on the computer systems they sold. In April 1955, responding to the competitor’s request, the Service issued a ruling that determined that two of the competitor’s computer systems were not subject to excise taxes. In September 1955, the competitor requested a refund for excise taxes it paid from January 1, 1952 to April 30, 1955, which the Service granted. The Service later revoked the competitor’s ruling, but did so prospectively. As a result of the refund and the ruling, taxpayer's competitor avoided paying excise taxes on two of its computer systems from January 1952 through January 1958.

Taxpayer learned of its competitor’s ruling, and, in July 1955, requested that the Service issue the same ruling with respect to one of its "identical" computer systems. In July 1955, taxpayer filed a refund claim for the excise taxes it paid from June 1951 through May 1955. The Service responded to taxpayer’s ruling request in November 1957, determining that taxpayer’s computer system was a taxable business machine. In April 1958, taxpayer filed a second refund claim for June 1955 through January 1958, which was generally the period covered by the competitor’s ruling. The Service denied both refund claims, and taxpayer sued for a refund in the United States Court of Claims.

The Court of Claims approached the refund suit by analyzing whether section 7805(b) should prevent disparate treatment by requiring the Service to apply certain rulings prospectively to equalize the treatment between taxpayers in the "same class," irrespective of the rulings' correctness on the merits. The Court of Claims reasoned that, because section 7805(b) provides the Service with discretion to "prescribe the extent, if any, to which any ruling . . . shall be applied without retroactive effect," the Service abuses its discretion when a ruling’s retroactive effect causes the inequitable treatment of competitors. The Court of Claims concluded that the Service abused its discretion by applying taxpayer’s ruling retroactively because fairness required the Service not to tax the taxpayer for the period its competitor avoided excise taxes.

The Service's position is that IBM was incorrectly decided. The Service has never agreed with the holding. The government petitioned the United States Supreme Court, albeit unsuccessfully, for a writ of certiorari, plainly stating its disagreement with the holding. The Service also publicly announced its disagreement with the IBM holding. In AOD 1976-414, in re Rue R. Elson Co., Inc. v. United States, it was stated, "With respect to IBM, we believe the Court of Claims erred in ordering refund of taxes legally owed under the excise tax provisions of the Code." The AOD succinctly describes some of the fundamental difficulties with the IBM concept:

IBM's vitality as precedent has been substantially eroded by later judicial pronouncements, including by both the original forum that decided it and its successor court. The same year that IBM was decided, two subsequent decisions of the en banc Court of Claims effectively limited the IBM holding to its facts. See Knetsch v. United States, 348 F.2d 932, 940 n.14 (Ct. Cl. 1965) (limiting IBM as "based on the court's evaluation of the particular circumstances in that case" ), and Bornstein v. United States, 345 F.2d 558, 564 n.2 (Ct. Cl. 1965) (distinguishing IBM on the basis of "controlling factual differences" ). More recently, the Court of Federal Claims held that taxpayers "cannot claim entitlement to a particular tax treatment on the basis of a ruling issued to another taxpayer." Fla. Power & Light Co. v. United States, 56 Fed. Cl. 328 (2003), aff’d, 375 F.3d 1119 (Fed. Cir. 2004) (rejecting an electric utility’s argument that it could rely on private letter rulings issued to other taxpayers in order to seek refunds of heavy vehicle excise taxes). In affirming Florida Power & Light, the Court of Appeals for the Federal Circuit cited Knetsch and Bornstein, supra, noting that the en banc Court of Claims itself had limited the IBM holding to its facts. The Federal Circuit also hinted that the holding in IBM may have been effectively overruled by the Supreme Court's opinion in Dickman v. Commissioner, 465 U.S. 330, 343 (1984), in which the Court acknowledged the Commissioner's authority to change retroactively an earlier interpretation of the law. 375 F.3d at 1124-25 & n.10. See also Peerless Corp. v. United States, 185 F.3d 922, 929 (8th Cir. 1999), in which the Eighth Circuit concluded that the Supreme Court’s holding in Dickman foreclosed the disparate treatment argument under IBM. In Atchison, Topeka, and Santa Fe Railway Co. v. United States, 61 Fed. Cl. 501, 506-07 (2004), involving a claim of disparate treatment under the Railroad Retirement Tax Act, the Court of Federal Claims again directly acknowledged its reluctance to extend the holding of IBM beyond the unique facts of that case. The court held that for a plaintiff to succeed on an "unequal treatment" argument, it must be considered through the equal protection component of the Fifth Amendment's Due Process Clause, i.e., whether the retroactive application of a change in interpretation of the law bears a rational relation to a legitimate governmental purpose.

In rejecting a disparate treatment argument based on IBM, the Third Circuit in Merck & Co., Inc. v. United States, 652 F.3d 475, 487 (3d Cir. 2011), stated:

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.

Recommendation: Nonacquiescence.