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When making decisions about taxation, the Internal Revenue Service (IRS) is required to treat similarly situated taxpayers equally. Not only does its decisions need to be fair, its equality of treatment must be predicable and consistent. In fact, if the IRS does decide to treat one party differently than another similarly situated party, it must explain why.
Inequality of Treatment
The term "similarly situated" usually implies direct competitors in business. Treating direct business competitors equally in a consistent manner is essential to free and fair competition. An important 1965 tax case illustrates what happens when the IRS does not follow its equality of treatment rule. After the IRS exempted the computer company Remington Rand from an excise tax for its business machines, IBM, Remington Rand's direct competitor, also sought an exemption for its competing product, but the IRS did not act on IBM's request more than two years. Finally, the IRS ruled that not only would it not exempt IBM from the tax, it would revoke Remington Rand's exemption, subjecting both companies to the excise tax.
Restoring Equality
Even though both companies now had to pay the tax, that wasn't enough to restore the IRS's equal treatment of these two companies, said the Court of Claims. The court ruled that the IRS needed to refund the excise taxes that IBM had paid during those two years while Remington Rand's products were exempt and that, in granting the exemption to Remington Rand alone, the IRS had abused its discretion without explaining its decision.
Two Wrongs Don't Make a Right
The IBM court made clear that its decision did not allow one taxpayer to rely on an incorrect ruling that benefits another taxpayer. In 2003, Florida Power and Light (FPL) requested that FPL trucks be considered machinery, exempting them from excise and diesel fuel tax. When FPL trucks failed the tests designating them as machinery, FPL reasoned that other utility companies received the exemption for the same kinds of trucks, and cited IBM. The court replied that the IRS's error in failing to collect a tax from a similarly situated taxpayer does not give other taxpayers special rights. The IRS then suspended 1254 excise tax claims of other utility companies.
Flexible, but Predictable
So fundamental is the goal of maintaining and protecting free and fair competition that a conservative approach by the IRS would result in an absolute prohibition of any unequal treatment of similarly situated taxpayers, especially if one taxpayer is taxed and another is not. But, because of the myriad situations and conditions that might arise, the IRS has the flexibility to choose among reasonable interpretations of law as long as its interpretations are consistent. The IRS's interpretations must be so consistent that they are predictable by taxpayers, whether individuals or businesses. If the IRS's interpretations are unpredictable, a taxpayer may claim that it had made decisions relying on the IRS's earlier documented position, and that any current action against him is therefore inequitable.
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