Opposition Brief — United States v. International Business Machines Corp.

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SUPE o., .- T COE Oricon L E b

JAN 22 1965

_ Anpreme Court of the Hnited States

OcTOBER TERM, 1965

-_

UNITED S7aTes oF AMERICA, Petitioner,

v.

INTERNATIONAL BUSINESS MACHINES CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

BRIEF FOR RESPONDENT IN OPPOSITION

3

DANIEL M. GRIBBON

WILLIAM H. ALLEN

Brice M. CLAGett

701 Union Trust Building

Washington, D. C. 20005

Attorneys for Respondent

Of Counsel:

CovINGToN & BURLING

January 1966 ton. |

TABLE OF CONTENTS

Page

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i vccecnh case ediee en éaededonesenehinceeennese 2

Meaneme Gor Deming the Wit... cccccccccccccscccccccces 8

IN 5.5564 cw abanw a swnle ake adeds cause cease waae oo 21

INDEX TO CITATIONS

Cases:

Automobile Club of Michigan v. Commissioner, 353 U.S. 180 wei

8, 11, 13,

Bornstein v. United States, 345 F.2d 558 (Ct. Cl. 1965) ...... 20

Brecklein v. Bookwalter, 231 F. Supp. 404 (W.D. Mo. 1964) .. 12

George Peck Caulkins, 1 T.C. 656 (1943), aff’d, 144 F.2d 482

CU SAS MED a dicikbineedeedecMbhscsctccausaded apehtens 9

City Loan & Savings Co. v. United States, 177 F. Supp. 843

(N.D. Ohio 1959), aff’d, 287 F.2d 612 (6th Cir. 1961) ..... 12

Connecticut Ry. & Lighting Co. v. United States, 142 F. Supp.

Se Se ee OT Sika ladehandacbue ee pactesceeeen ee 10, 12, 15

Dizon v. United States, 2% rrres errr ees 8, 9, 10, 11

Exchange Parts Co. v. United States, 279 F.2d 251 (Ct. CL.

BE ne caobsckdcuatandvencenscs casa bdedeheuets 10, 12, 15

Goodstein v. Commissioner, 267 F.2d 127 (1st Cir. 1959) . i2

Knetsch v. United States, 348 ¥.2d 932 (Ct. Cl. 1965) ........ 20

Lesavoy Foundation v. Commiesionor, 238 F.2d 589 (3d Cir.

SEL. sudiniscanéetinphasabaddsWaseewnckenteeahauses 12

Sioux City Bridge Co. v. Dakota County, 260 U.S. 441 ..... ~ 16

Township of Hillsborough v. Cromwell, 326 U.S. 620........ 16

United States v. Brosnan, 363 U.S. 237 PE hee. See 16

United States v. Gilbert Associates, Inc., 345 U.S. 361 ........ 16

United States v. Gilmore, 372 U.S. 39 ....... ccc eee c eee cence 16

United States v. Kaiser, 363 U.S. 299 .......... ce eee cece 16

United States v. Pelzer, 312 U.S: 399 ....... cee ce eee 16

Weller v. Commissioner, 270 F.2d 294 (3d Cir. 1959), cert.

GIR, SOO Ce DO hoo nec cdicdencncecscibosevoecsces 18

Statutes:

Excise Tax Reduction Act of 1965, § 206, 79 Stat. 140 ........ 2

Internal Revenue Code of —

: EE Ghdanbasted cndevesoducundsddvevdevesebnusestees 2

DIDEED Cérapacdsus vockecesnapecse tiene een wahewas 8

SD «hd cac0n0ne aes eween see penned snadezaeecenes passim

Revenue Act of 1926, § 1108(b), 44 Stat. (Pt. 2) 114 ........ 3, 6

ii Table of Contents Continued

Regulations and Rulings: Page

Rev. Rul. 55-318, 1955-1 Cum. Bull. 509 .................... 15

Rev. Rul. 55-533, 1955-2 Cum. Bull. 642 .................... 15

Rev. Rul. 56-189, 1956-1 Cum. Bull. 503 .................... 15

Rev. Rul. 57-611, 1957-2 Cum. Bull. 730 .................... 14

Rev. Rul. 58-582, 1958-2 Cum. Bull. 768 .................... 14

Rev. Rul. 59-112, 1959-1 Cum. Bull. 307 .................... 14

Rev. Rul. 59-262, 1959-2 Cum. Bull. 249 .................... 14

Rev. Rul. 60-391, 1960-2 Cum. Bull. 299 .................... 14

Be RED ec ccccuddnconenéasseccecees 3

7 .

Congressional Record, Volume 106 .....:2..............005. 4

Staffs of Joint Committee on Internal Revenue Taxation and

Department, Explanatory Statement on the Tech-

nical Amendments Bill of 1960 (H.R. 9625 and 9626) (1960) 4

Caplin, ‘‘Taxpayer Rulings Policy of the Internal Revenue

Service: A Statement of Principles,’’ N.Y.U. 20th Inst. on

kee. 8 ER er eg ne 12

Lynn & Gerson, ‘‘Quasi-Estoppel and Abuse of Discretion as

Applied Against the United States in Federal Tax Contro-

versies,’’ 19 Tax L. Rev. 487 (1964) ..........ccccccceee 12

Supreme Court of the’ United States

OctoBEeR TERM, 1965

No. 820

UntTep States oF AMERICA, Petitioner,

= a

INTERNATIONAL BUSINESS MACHINES CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

BRIEF FOR RESPONDENT IN OPPOSITION

Se)

QUESTION PRESENTED

Whether it was an abuse of the discretion confided

to him by Section 7805(b) of the Internal Revenue

Code for the Commissioner of Internal Revenue, with

knowledge of all the relevant circumstances including

respondent’s request for parity of treatment which

was pending before him for nearly two and a half

years, to apply an excise tax to certain computer sys-

tems manufactured by respondent while at the same

time excusing respondent’s competitor from payment

of the same tax on identical systems,

>

4a

2. ssa semeacte ae:

STS SST A es a aes

ust.

2

STATUTE INVOLVED

Section 7805 (b) at the Internal Revenue Code pro-

vides :

*“(b) Retroaclivity of Regulations or Rulings.—

The Secretary or his delegate may prescribe the

extent, if any, to which any ruling or regulation,

relating to the internal revenue laws, shall be

applied without retroactive effect.”’

we STATEMENT

ee the years involved here® respondent IBM

and Remington Rand were the two principal manu-

facturers and marketers of electronic computers.

IBM’s Type 604 computer systems and Remington’s

Univae 120 and 60 systems were identical in all sig-

nificant respects.. (Pet., p. 3la). From 1951 -until

April 1955 both companies collected from their cus-

tomers and paid, in respect of these systems, a 10 per

cent manufacturers excise tax imposed by Section 4191

of the Internal Revenue Code of 1954 and its prede-

cessor section on the sale or lease of certain named

‘‘business machines.’” (Pet., pp. 3la, 37a-38a).

On April 13, 1955, Remington requested a ruling

from the Commissioner of Internal Revenue that, its

Univac computers were not ‘‘business machines’’ and

hence were not subject to tax. Two days later,

April 15, the Commissioner issued such a ruling in

the form of a telegram from the Chief of the Excise

Tax Branch to Remington, which thereupon ceased

collecting fhe tax from its customers and paying it to

the Government. (Pet., p. 32a).

<3 This tax has since been repealed. — Tax Reduction Act

of 1965, § 206, 79 Stat. 140.

if

Oo

3 °

IBM learned of this ruling from its customers and

on July 13, 1955, wrote the Internal Revenue Service

requesting a similar ruling for its identical Type 604

computers. IBM’s letter was captioned ‘Urgent!

Please Expedite.’ It referred to Remington’s ruling

and pointed out the identity of the two companies’

systems. In view of the grave competitive implica-

tions of different tax treatment of these identical and

competing systems, IBM requested the Service to rule

immediately and to inform IBM of its ruling by collect

telegram. (Pet., pp. 32a-33a).

It was at this point, at the’ latest, that the Commis-

sioner was put on notice that the‘two competitors were

being treated differently. Both Remington and IBM

submitted with their ruling requests material descrip-

tive of the systems as to which rulings were sought.

(Pet., pp. 2a, 32a-33a). The material was extensive

and made clear that the systems were. identical for tax

purposes, a fact at no time questioned by the Service.

Moreover, the Commissioner knew that on the basis of

his ruling Remington was protected by Section 1108 (b)

of the Revenue Act of 1926, 44 Stat. (Pt. 2) 114, which

provides that an excise tax may not be recovered from

a manufacturer who, in reliance on a ruling, fails to

collect the tax from its customers. See Treas. Reg.

§ 601.201(1) (8).

Upon his receipt of IBM’s request of July 13, 1955,

there were three possible rational courses of action

open’to the Commissioner. He could have (1) re-

solved doubts as to the taxability of both systems,

promptly and put his decision into effect as to both

competitors. Or, if he found it impossible to reach

a prompt decision, he could have either (2) given IBM

&

>

4

a ruling identical to Remington’s, knowing that if he

were later to decide the systems were taxable he could

issue a new prospective ruling; or (3) rescinded Rem-

-ington’s ruling and compelled both competitors to act

attheir peril while he made up his mind. He then

could have made his ultimate decision effective as to

both competitors, retroactively or prospectively as the

circumstances warranted.

The Commissioner did none of these things. He took

no action on IBM’s request for nearly two and a half -

years and allowed Remington’s ruling exempting its

systems from tax to remain in effect for that period

and longer. As the Commissioner later explained,

again through the Chief of the Excise Tax Branch, the

Service entered upon an ‘‘extensive study of the ques-

tion of the taxability of electronic calculating or com-

puting equipment ....’” (Pet., p. 36a). Through- -

out the period of this study IBM necessarily con-

tinued to collect and pay the tax, since if it failed to

? The inference that might be drawn from the Government’s re-

peated references to taxes ‘‘concededly owed’’ (Pet., p. 2; see also

id. at 5, 14) that there was never any doubt that a tax was due

is wholly unfounded. Remington’s ruling of nontaxability was

signed by a high official, the Chief of the Excise Tax Branch of the

Internal Revenue Service. Moreover, the Service had a genuine

problem in determining to what extent a tax on business machines

first enacted in 1941 should apply to electronic computers not

conceived of at that time. Its difficulties in this respect persisted

beyond the time that it finally resolved the question of the tax-

ability of the systems involved inthis suit. The complexity of

the question was reported to Congress in 1960. See Staffs of Joint

Committee on Internal Revenue Taxation and Treasury Depart-

ment, Explanatory Statement on the Technical Amendments Bill of

1960 (H.R. 9625 and H.R. 9626), at 11 (1960); 106 Cong. Ree.

13172..(1960).

5 »

do so and were eventually held liable it would have

been wholly impracticable for it to recoup the amounts

-of tax not passed on to its customers. Remington,

being protected by its ruling, did not collect or pay

the tax on its identical and competing machines. Dur-

ing this lengthy period, then, the effect of the Service’s

action on behalf of Remington and its studied inaction

with respect to IBM was to impose on IBM an added

cost equal to 10 per cent of the sales price. The result

_ was a 10 per cent penalty on a purchaser who chose

to purchase or lease the same system from IBM rather.

than Remington. os

During the two-and-a-half-year period first IBM

and then Remington filed claims for refunds of excise

taxes paid on their respective systems prior to the

.time of Remington’s ruling. The Commissioner was

as silent on IBM’s claim for a refund as he was on its

urgent request for a ruling. However, in July 1956

the Commissioner granted Remington’s later-filed re-

fund claim and returned to Remington an amount

representing taxes collected and paid by it from 1952

to 1955. (Pet., pp. 37a=38a),

On May 1, 1957, the Chief of the Excise Tax Branch

wrote Remington that, on further consideration, the

Service had concluded that the computer systems in

question were taxable as business machines. The Serv-

ice therefore proposed to revoke, prospectively only,

its ruling of April 15, 1955 (Pet., pp. 33a-34a).

However, the letter continued, ‘‘we will withhold fur-

ther action on the matter for a period of thirty days

from the date of this letter in order to afford you an

opportunity, should you so desire, of submitting a pro-

«>

P 6

test or requesting a hearing in the case.’? Remington

took advantage of this offer, both conferring with the

Service and subsequently submitting its views in

writing. (Pet., pp. 34a-35a). On December 3, 1957,

the Service wrote Remington that it had finally con-

cluded that the computers were taxable. The Service,

however, exercised its discretion under Section 7805 (b)

by providing that the tax would apply only to trans-

actions occurring on and after February 1, 1958. (Pet.,

pp. 36a*37a). The Service was not barred by any

statute from recovering the amount refunded to Rem-

ington in 1956 representing taxes paid before Rem-

ington received its ruling, but it deliberately decided,

by making the revocation wholly prospective, to forgo

the opportunity to reclaim this amount.*

On November 26, 1957, the Service finally acted on

the request for a ruling that IBM had filed more than

two years before with an urgent plea for equality and

expedition. The Service denied the request for a favor-.

able ruling and stated its conclusion that IBM’s sys-

tems were taxable. The ruling, unlike the contem-

poraneous ruling to Remington, was made retroactive.

(Pet., pp. 35a-36a). The communications to IBM and

Remington left no doubt that the responsible officials

knew that identical systems of competing manufac-

turers were involved. Remington was informed that

its ruling of April 1955 was being revoked ‘‘to correct

a certain competitive irregularity which now exists,”’

and IBM was told that ‘‘the manufacturer of the ma-

chines which compete with and are similar to’? IBM’s

machines ‘‘is being appropriately advised by us re-

® Section 1108(b) of the Revenue Act of 1926 (p. 3, supra)

' ‘Was not applicable to the —- refunded, and the statute of

limitations had not run.

7

garding the taxability of such machines of its man-

ufacture.”’

IBM in April 1958 filed a second refund claim for

the period June 1, 1955, to January 31, 1958, the date

after which the Commissioner commenced to exact

from Remington the tax that IBM had been paying all

along. The Commissioner took no action on either this

claim or the refund claim IBM had filed back in 1955

-until Febr@ary 3, 1959, when he denied both of them.

(Pet., p. 38a).

As a result of these events, IBM was held liable for

the 10 per cent excise tax on all of its systems of the

types involved in this litigation that were sold or leased

during the period June 1951 through January 1958.

Remington was absolved of the tax on the identical

systems of its manufacture for this period—for the

period after April 1955 by the Service’s ruling of that

month which was later revoked prospectively only, and

for the period prior to April 1955 by the refund the

Service awarded to Remington in July 1956 on the

basis of that ruling.

IBM brought this suit in the Court of Claims for

the amounts it would have received as refunds, or

would have been absolved from paying, had the Com-

missioner accorded it equal treatment with-Remington.

That court held in faver of IBM on the ground that

in “‘the totality of the circumstances”’ presented (Pet.,

p. 10a), which were entirely of the Commissioner’s

own making, it was an abuse of the discretion dele-

gated by Section 7805(b) of the Internal Revenue

Code for the Commissioner in applying his ultimate

determination to IBM to “opt for retroactivity”

where, non-retroactivity was “imperative” (Pet., p.

8

18a). Some 3,200 customers of IBM have executed

the consents provided for in Section 6416(a) (1) of the

Code, and IBM has agreed to pass on to them by far

the greater part}of any recovery it has—all except

about $252,000 in taxes paid by it on systems put to

its own taxable use.

REASONS FOR DENYING THE WRIT

The decision of the court below is a clearly correct

application of an established principle to a highly par-

ticularized and aggravated factual situation. The

situation is that the Commissioner of Internal Revenue

knowingly and without excuse or explanation created

a gross inequality in the administration of the tax

laws, allowed it to persist over a long period and then

failed to use the authority Congress had given him to

correct the inequity he had created. In holding that

the Commissioner may not lawfully act in such an

arbitrary manner, the-decision of the court below dogs

not conflict with any decision of any court and is en-

tirely consistent with the principles governing the

Commissioner’s exercise of discretion under Section

7805(b) of the Code, as laid down by this Court in

Dizon v. United States, 381 U.S. 68, and Automobile

Club of Michigan v. Commissioner, 353 U.S. 180.

Neither the decision itself nor the inferences reason-

ably to be drawn from it pose any threat to the system

under which the Internal Revenue Service issues letter

rulings. Accordingly, review by this Court is not

warranted. !

1. The Government contends that this Court’s de-

cision last term in Dizon v. United States, supra,

‘‘ecompels the conclusion’’ that the holding below is

9

incorrect. (Pet., p. 7). The contention is unfounded;

the decision below is entirely consistent with Dizon.

In Dizon, the Cofmmissioner of Internal Revenue had

acquiesced /in a Tax Court decision, George Peck

Caulkins, 1 T.C. 656 (1943), aff’d, 144 F.2d 482 (6th

Cir. 1944),\holding proceeds from the retirement of

a certain type of debt security taxable as capital gains.

Subsequently, the Commissioner ruled that the pro-

ceeds from a class of transactions that included, but

was broader than, the type of transaction involved in

Caulkins were taxable as ordinary income. This ruling

was applied retroactively except that as to the sub-

class of transactions involved in Caulkins it was ap-

plied prospectively only.

The petitioners in the Dizon case had realized gains

which the Commissioner’s ruling made taxable as_

ordinary income. They contended that he should have

given them equal treatment with the holders of the

Caulkins securities. The petitioners also made the

quite separate contention that, wholly apart from their

claim to equal treatment, the Commissioner abused his

discretion in making his later ruling retroactive as to

anyone who had relied on the earlier acquiescence.

The Government here quotes and relies on what the

Court ruled in answer to the second of these conten-

tions: that ‘‘the Commissioner’s acquiescence in an

erroneous decision, published as a ruling, cannot in

and of itself bar the United States from collecting a

tax otherwise lawfully due.’”’ (Pet., p. 6). But this

holding is inapplicable and irrelevanthere. The right

of the Commissioner to make his rulings retroactive,

as long as no discrimination is involved, was not at

issue in this case. It is the portion of the Dizon

10

opinion that deals with the argument founded on al-

leged discrimination that is relevant here.

In its discussion of this point the Court recognized,

without indicating any disagreement, the principle that

‘* “the Commissioner cannot tax one and not tax an-

other without some rational basis for the difference,’ ”’

381 U.S. at 77 n.9, and cited a number of cases that

support the principle, including two Court of Claims

decisions that the Government calls in question here.

Exchange Parts Co. v. United States, 279 F.2d 251

(Ct. Cl. 1960); Connecticut Ry. & Lighting Co. v.

United States, 142 F. Supp. 907 Sita Cl. 1956). (See

Pet., pp. 14-15.).

The Court then considered whether- the Commis-

sioner had in fact taxed one group of taxpayers dif-

ferently from another without some rational basis for

distinguishing them. It held that he had not, since the

circumstances of the two groups of taxpayers and the

transactions were not so similar as to require the Com-

missioner to treat them alike. The Caulkins decision,

the Court held, had been based on a quite limited

rationale and could not fairly be extended to the secur-

ities owned by the petitioners and to the type of trans-

action in which they had engaged. The Court held

that the petitioners had the burden of showing that

the Caulkins securities ‘‘could not rationally be dis-

tinguished from’’ their own, 381 U.S. at 79, and had

not sustained this burden.

Thus, a premise of the Court’s analysis in Dizon

is that, in determining whether the Commissioner had

abused his discretion, it was material to decide whether

the petitioners there and the taxpayers who received

non-retroactive rulings owned securities that ‘‘could

ee

11

not rationally be distinguished.’’ The same principle

had previously been recognized by this Court in Auto-

mobile Club of Michigan v. Commissioner, 353 U.S.

180. In sustaining an exercise of the Commissioner’s

power to make a tax ruling retroactive in that case, the

Court was careful to inquire whether all taxpayers

similarly situated had been treated equally in the mak-

ing of the ruling. 353 U.S. at 185-86.

In the present case it is conceded that IBM and

Remington were similarly situated in all relevant re-

spects, that their computer systems were identical for

tax purposes and that the transactions involved, were

identical. There is no conflict in legal principat be-

tween this case and Dizon; it is simply that the ele-

ments of discrimination and resulting abuse of dis-

cretion that characterize the Commissioner’s conduct

here were not present in Dizon. *

2. The decision below rests upon an interpretation

of Section 7805(b) of the Internal Revenue Code. The

same statute governed the decisions in the Dizon and

Automobile Club cases. Plainly that section vests the

Secretary of the Treasury’s delegate, the Commis-

sioner of Internal Revenue, and his staff with discre-

tionary authority to make rulings relating to the

internal revenue laws retroactive or non-retroactive as

circumstances seem to counsel. Like any other dis-

eretionary power, this authority is subject to abuse.

While the petition nowhere squarely admits this, it is

clear that abuse of discretion in the administration of

Section 7805(b) is reviewable by the courts on familiar

principles. This Court so held in the Automobile Club

ease. And as we have indicated, the Court there recog-

nized' further that whether taxpayers similarly situ-

ated are afforded equal treatment is a highly relevant

12

factor in determining whether discretion has been

abused or not:

‘‘We must, then, determine whether the retro-

active action of the Commissioner wag an abuse

of discretion in the circumstances of this case....

The Commissioner adopted the General Counsel’s

interpretation and proceeded to apply it, effective

from 1943, indiscriminately to automobile clubs.

We thus find no basis for disagreeing with the

conclusion . . . that the Commissioner, having

dealt with petitioner upon the same basis as other

automobile clubs, did not abuse his discretion.”’’

353 U.S. at 185-86. (Emphasis added.)*

Other decisions have likewise recognized that con- -

scious, aggravated discrimination between taxpayers

similarly situated is a factor to be considered in de-

termining whether the Commissioner has abused his

discretion under Section 7805(b).° The decision be-

low therefore is no novelty or departure from con-

sistent interpretations of the tax laws.

. The only question in the present case was whether

én the facts presented the Commissioner had abused

* Other cases that have recognized the reviewability of discretion-

ary determinations under § 7805(b) are Lesavoy Foundation

v. Commissioner, 238 F.2d 589 (3d Cir. 1956), and Goodstein v.

Commissioner, 267 F.2d 127 (1st Cir. 1959) ; see generally Caplin,

‘‘Taxpayer-Rulings Policy of the Internal Revenue Service: A

Statement of Principles,’® N.Y.U. 20th Inst. on Fed. Tax. 1, 17-26

(1962), and Lynn & Gerson, ‘‘Quasi-Estoppel and Abuse of Dis-

cretion as Applied Against the United States in Federal Tax

Controversies,’’ 19 Tax L. Rev. 487, 505-16 (1964).

5 Exchange Parts Co. v. United States, 279 F.2d 251 (Ct. Cl.

1960); Connecticut Ry. & Lighting Co. v. United States, 142

F. Supp. 907 (Ct. Cl. 1956); City Loan & Savings Co. v. United

States, 177 F. Supp. 843 (N.D. Ohio 1959), aff’d, 287 F. 2d 612

(6th Cir. 1961) ; Brecklein v. Bookwalter, 231 F. Supp. 404 (W.D.

Mo. 1964).

13

his discretion. The court below held that he had. That

holding was clearly justified by the evidence and by

the court’s findings. The holding was upon a record

showing what must be a nearly unique course of delay

and mistakes on the part of the Service resulting in

‘“‘a manifest and unjustifiable discrimination against”’

IBM. (Pet., p. 17a). The Government does not assert

even now that there was any rational basis for the

course of action followed by the Commissioner. Its

defense rather is that the taxes in question were levied

by Congress, and accordingly the manner in which the

Commissioner discriminated between taxpayers is

quite immaterial.

In so defending, the Government ignores Section

7805(b) and the powers it creates in the administra-

tion of the tax laws. That section is part of the

Internal Revenue Code; it represents a decision by

Congress that in certain circumstances taxes, even

though they would otherwise be due, should not be

collected where their collection would be inequitable

and unfair. The Government simply ignores this de-

cision by Congress when it repeatedly describes the

‘holding below as, for example, permitting taxpayers

“to escape taxes which they owe”’ (Pet., p. 16). See-

tion 7805(b) bears just as much on what taxes are

“‘owed”’ as any other section of the tax code. It au-

thorizes, indeed enjoins, the Commissioner to make a

ruling: prospective when considerations of fairness

and equity so require.* If the circumstances are such,

as they were in this case, that it was an abuse of dis-

* As the Court observed in Automobile Club of Michigan v. Com-

missioner, 353 U.S. 180, 184, § 7805(b) empowers the Commissioner

“‘to limit retroactive application to the extent necessary to avoid

inequitable results.’

f

14

*

cretion for the Commissioner to make his ruling retro-

active, then the taxes were not ‘‘owed’’; to the con-

trary, they were improperly paid and should be re-

funded.

The Commissioner regularly and in the routine dis-

charge of his administrative duties forgives taxes that,

in the terms of the petition here, are ‘‘owed.’’ He

does so when he makes a ruling effective prospectively

on the ground that a prior ruling or rulings have been

inconsistent with it. Moreover, it is not the case that

the Commissioner so exercises his discretion under

Section 7805(b) only when the prior ruling has been

published.” In many instances he has made a ruling

prospective only for an entire industry because of in-

consistency with prior unpublished rulings issued to

one or several members thereof or a position. infor-

mally taken. See, e.g., Rev. Rul. 57-611, 1957-2 Cum.

Bull. 730; Rev. Rul. 58-582, 1958-2 Cum. Bull. 768;

Rev. Rul. 59-112, 1959-1 Cum. Bull. 307; Rev. Rul.

59-262, 1959-2 Cum. Bull. 249; Rev. Rul. 60-391 1960-2

Cum. Bull. 299.

The Government makes much of the fact that there

was no ‘‘reliance’’ by IBM in this case. (Pet., pp.

13-14). As the rulings cited in the preceding para-

™The Government attempts to attach significance to the fact that

the rulngs here in question were not published (Pet., pp. 7-10),

implying that the ordinary limitations on the exercise of discretion

ean therefore be ignored. The short answer to this suggestion is

that § 7805(b) makes no distinction between published rulings and

rulings issued to particular taxpayers by letter or otherwise and

thus) gives the Service the same discretionary authority and re-

sponsibility as to retroactivity in the case of either type of ruling.

Rulings are published when they are thought to have significant

value as precedents. Naturally, a ruling affecting only two tax-.

payers would not be selected for publication.

15

graph make clear, the Commissioner does not insist

upon reliance, in the sense of a.person’s not having

paid’ a tax, in his own excise-tax rulings practice.®

It is enough te justify prospective treatment for all

that there has been a private ruling or a position

taken that was generally known, and no showing

of actual reliance by any particular taxpayer is re-

quired. Here,,of course, the ruling to Remington

was known to All who were interested, the two com-

petitors and their customers. But at bottom reliance,

as the term is customarily used in the cases, is irrele-

vant to excise-tax cases. Reliance upon a ruling as to

the. income-tax consequences of a prospective trans-

action may well be an element in proving that harm

was caused by the Government’s retroactively with-

drawing its ruling after the transaction was entered

into. In the excise-tax situation the damage caused

by having some percentage of the sales price added to

a manufacturer’s costs is direct and immediate.

Finally, the Government is simply wrong in urging

that in no circumstances is the standard of fairness

that the Commissioner has adopted for his own guid-

ance judicially enforceable. The Government says

that ‘‘we know of no legal principle that compels the

8 At one time the Commissioner’s practice was.to require some

kind of ‘‘reliance,’’ making rulings that reversed positions favor-

able to taxpayers prospective except that refunds would -not be

allowed to those who had been paying their taxes. E'g., Rev. Rul.

55-318, 1955-1 Cum. Bull. 509; Rev. Rul. 55-533, 1955-2 Cum.

Bull. 642; Rev, Rul. 56-189, 1956-1 Cum. Bull. 503. The practice

was abandoned about the time the Court of Claims held that to draw

a distinction between a taxpayer who had paid his tax and one

who had not was to discriminate arbitrarily and illegally. Con-

necticut Ry. & Lighting Co. v. United States, 142 F. Supp. 907

(Ct. Cl. 1956); see also Exchange Parts Co. v. United States,

279 F.2d 251 (Ct. Cl. 1960) (involving Rev. Rul. 56-189, supra).

16

Commissioner, once he has erroneously permitted one

taxpayer to escape liability, to . . . permit another

similarly to escape liability in the name of ‘equality

of treatment.’’’ (Pet., p. 11). Mr. Justice Frank-

furter has aptly stated the very principle that the

Government rejects: ‘‘The Commissioner cannot tax

one and not tax another without some rational basis .

for the difference.’’ United States v. Kaiser, 363 U.S.

299, 308 (concurring).* The principle is-broader than

its expression in Section 7805(b). Even were that

section not in the Revenue Code, the constitutional

prohibition against knowing and deliberate discrimi-

nation. between taxpayers identically situated would

still apply. Where that principle has been violated,

the proper remedy is the refund of the tax discrimina-

torily collected even though that is the correct tax

owed according to the tax law on the statute books.

E.g., Sioux City Bridge Co. v. Dakota County, 260 —

U.S. 441, Township of Hillsborough v. Cromwell, 326

US. 620.

In summary, the Government does not deny that the

Commissioner had power under Section 7805(b), by

making his ruling prospective, to correct the effects of

his delay of more than two years in ruling on IBM’s

* This Court has often recognized that ‘‘a cardinal principle of

Congress in its tax scheme is uniformity, as far as may be.’’ United

States v. Gilbert Associates, Inc., 345 U.S. 361, 364, quoted with

approval in United States v. Brosnan, 363 U.S. 237, 241. ‘‘We

should be slow to attribute to Congress a purpose producing such

unequal treatment among taxpayers, resting on no rational founda-

tion.’”’? United States v. Gilmore, 372 U.S. 39, 48. ‘‘[A]s we

have often had occasion to point out, the revenue laws are to be

construed in the light of their general purpose to establish a

nation-wide scheme of taxation uniform in its application.’’ United

States v. Pelzer, 312 U.S. 399, 402.

j

-

17

request for simple competitive parity; it does not

forthrightly deny what this Court has held, that exer-

cise of the discretion given to the Commissioner by

Section 7805(b) is reviewable for abuse. The question,

then, comes down to whether the facts here—which

were of Commissioner’s own creation—made it an

“abuse of discretion not to act prospectively in the

eases of both competitors instead of retroactively as

to one and prospectively as to the other. We submit

that the court below was plainly correct on its view

of what the facts demanded, so that its decision -was

an unexceptionable application of principles this

Court has held inhere in Section 7805(b). ~

3. The Government, making no real effort to justify

the course of action followed by the Commissioner, a

course which even the dissenting judge below regarded

as ‘‘deplorable’”’ (Pet., p. 30a), seeks review by this

Court largely on the ground that the decision below

will necessitate significant changes in the system under

which the Internal Revenue Service issues letter rul-

ings. (Pet., pp. 11-13, 14-16). To the extent that

any changes are necessary to prevent a recurrence of

what has happened here, surely they are in order and

if they have not been made should be made as quickly

as possible. We do not believe that the Government

seeks a license to repeat with impunity what the Com-

missioner has done and has failed to do here.

Presumably, however, the Government is appre-

hensive that broader changes will be necessitated. It

sees the decision below as ‘‘fraught with alarming

ramifications’’ prejudicial to the administration of the

tax laws. (Pet., p.11). At worst, those ramifications,

which are elsewhere described as posing a ‘‘serious

18

threat’’ to the rulings system (Pet., p. 5), are some-

thing less than horrendous. It is claimed that fewer

rulings can be issued if a ruling is to be regarded .as

anything more than a private compact between the

Service and an individual taxpayer (Pet., pp. 2, 8, 12),

and that more time will be required to process rulings

" (Pet., p. 16).° -

Even these consequences, however seriously they

may be viewed, flow not from the decision of the court

below but from what the Government perceives quite

erroneously as the ‘‘far-reaching implications’’ of the

decision. (Pet., p. 14). The decision of the court

below does not hold or imply, as the Government re-

peatedly asserts, that a taxpayer has the right to take

advantage of any error made by the Service in dealin»

with any other taxpayer. The court carefully dis-°

tinguished the line of cases that includes .Weller v.

Commissioner, 270 F.2d 294 (3d Cir. 9959), cért. de-

mied, 364 U.S. 908, quoted by the Government (Pet.,

p. 12), holding that, as the court put it, ‘‘one taxpayer

has no right to rely on an incorrect private ruling to

another”? (Pet., p. 19a). The court did not decide

‘‘that IBM had a right to invoke or rely upon Reming-

ton’s private ruling’’ but rested on the different

. ground that IBM was entitled to have its ruling in

10 Tt is hardly the province of this Court or any other court to

tell the Revenue:Service how many rulings it should issue or how

much time it should spend.on each ruling. It is the province of

+ “the courts, however, to review administrative action whether by

the Commissioner of Internal Revenue or any other official of the

executive department to protect against abuse of discretion. In

a limited number of situations, such abuse may be found. Where

it is found, it is surely the f ion. of the Executive to effect such

corrections in its procedures as appear necessary or Sppropriste

to prevent repetition.

-

19

response to its request ‘‘controlled by the standard of

equality and fairness incorporated in Section 7805

(b).”? (Pet., p. 20a). |

That standard, the court properly. held, required

non-retroactivity, not because the Service had ‘‘erred’’

with respect to Remington, but because of ‘‘the totality

of the circumstances” (Pet., p. 18a) surrounding its

treatment of IBM. The Commissioner had, and let

pass, a number of opportunities to act without in-

curring liability to IBM or any other taxpayer. Ulti-

mately, it was what the Commissioner did-and failed.

to do to IBM and not the error he made in dealing with

Remington that gave rise to the liability found by the

court below.

4

- The decision below, therefore, neither in its holding

nor in its implications, allows a taxpayer to take ad-

vantage of any error made by the Service in favor of

another taxpayer. Like most cases involving an al-

leged abuse of discretion, this case turns on its par-

ticular facts. Those facts did not consist of a single

error of law or fact made by the Service as to the

proper construction of the taxing statute. They pre-

sented rather a systematic and™consistent coursé of

substantive and procedural discrimination extending

over a long period and,carried out with full knowledge

of all the relevant facts." If the decision stands, we

have no doubt that the Government will be the first to

deny that it represents a “holding that a taxpayer may

escape liability for tax it owes because of an erroneous

-_

11 As the court below observed, there is ‘no charge of ‘‘maley-

olence’’ on the part of the Government officials concerned. (Pet.

p. 17a).

hall

20

ruling given to another taxpayer.’’ (Pet., p. 14): The

Court of Claims has had no difficulty in distinguishing

this case when, in subsequent cases, it was argued to

- be controlling in circumstances where an abuse of dis-

cretion had not been established. See Knetsch v.

Umited States, 348 F.2d 932, 940. n.14 (Ct. Cl. 1965);

Bornstein v. United States, 345 F.2d 558, 564 n. 2 (Ct.

Cl. 1965).

Neither the holding nor the fair implication of the

decision of the court below is that the Government is

accountable for every error, inconsistency or inadvert-

ence committed in the administration of the tax laws.

What the decision does mean is that the Commissioner

in the exercise of his considerable powers, including

his authority under Section 7805(b), must act ra-

tionally in the light of all the circumstances known

to him. One must assume, and surely hope, that the

behavior of the Service Here represents a wholly

atypical departure from the standards of administra-

tive efficiency and fairness it normally displays. The

court below invoked a_ well-established principle

peculiarly suitable for correcting aberrations such as

that involved here—judicial review to correct abuse

of administrative discretion. Surely the Reventte Serv-

ice is not and should not be immune from such réview.

Indeed, at least since Automobile Club of Michigan v.

Commissioner, 353 U.S. 180, was decided, it should

have known that there were limitations on the exercise

of discretion by the Commissioner under Section

7805(b). It is, therefore, hardly credible that a de-

cision that there has been an abuse of discretion in

this highly particularized situation will entail sweep-

ing changes in the operations of the Service.

~

21 °

CONCLUSION

The petition for a writ of certiorari should be

denied.

“4

Respectfully submitted,

° ' Dantet M. Grieson

Wim H. ALLEN

Brice M. CLacett

701) Union Trust Building

Washington, D. C. 20005

| 7 Attorneys for Respondent

Of Counsel:

Covinaton & Bur.ina

January 1966