The IRS did not violate due process principles by assessing a federal excise tax against a manufacturer of hydraulic boat trailers but not its competitors, the 1st U.S. Circuit Court of Appeals has found.

The manufacturer argued that the IRS, which assessed the tax following a federal audit, subjected it to “disparate treatment” in violation of its Fifth Amendment due process rights.
But the 1st Circuit disagreed.

“It has been said … that the IRS has a duty to act consistently toward similarly situated taxpayers,” Judge Juan R. Torruella wrote for the court. “However … [t]he goal of treating similarly situated taxpayers consistently is general, not strict.”
The 1st Circuit affirmed a summary judgment for the government entered in U.S. District Court.

The 30-page decision is Hostar Marine Transport Systems, Inc. v. United States Department of Internal Revenue Service.

Permission to favor?

“This opinion appears to grant the IRS or any government official the prerogative to choose which companies to favor or not to favor,” said Braintree, Mass., lawyer Timothy J. Burke, who represented the taxpayer.

The ruling could be read “as finding that a U.S. company is not entitled to equal protection of the law when competing with a foreign company that is not complying with U.S. law,” Burke said, referring to language in the decision that states that the taxpayer is not “similarly situated” with its Canadian competitors.

However, G. Scott Nebergall, a tax lawyer in Providence, R.I., and a former trial attorney with the tax division of the U.S. Department of Justice, said he was not surprised by the ruling.
“From a practical point of view, it’s pretty clear that if taxpayers could come in on a regular basis and claim as a defense to paying a tax that, ‘Gee, the guy down the street isn’t getting hit up,’ then it would make administration of tax law impossible,” said Nebergall, who was not involved in the case. “It’s similar to how claiming that everyone else was speeding is not a defense to a speeding ticket.”

Nebergall added that, as a government lawyer, when confronting situations like the one at issue, “you do have sympathy for [the disparate treatment argument] because you want to be fair,” but that the solution for a taxpayer is to point the IRS in the direction of its competitors.

“You still won’t get relief from the court unless it’s the rare case where the auditor is auditing you because of the color of your skin or your religious views or some other impermissible reason,” Nebergall said. “And that’s not what we had here.”

Hans Lundsten, who practices tax law in Providence, said that it would be very difficult to determine whether, in fact, the IRS treated one taxpayer differently than another.

“You don’t get the other guy’s audit documents; they’re private,” he said. “And it’s unusual to have an audit based on only one issue. You won’t know if they dropped one issue in exchange for another. … That’s why courts in general are unwilling to get involved in these due-process analyses. They want to allow flexibility in the audit procedure.”

Bridget M. Rowan of the Department of Justice in Washington, D.C., who argued on behalf of the government, could not be reached for comment prior to deadline.

Tax dispute

Plaintiff Hostar Marine Transport Systems, a manufacturer of hydraulic boat trailers, was audited by an IRS agent in 1997 regarding possible tax issues relating to 14 trailers it sold between 1994 and 1996.

In May 2000, the IRS assessed excise taxes against the plaintiff under §4051(a) of the Internal Revenue Code, which imposes a 12 percent tax on heavy trucks and trailers when sold at retail for the first time. According to the IRS, the plaintiff owed nearly $200,000 in excise taxes from the sales.

Hostar eventually filed claims in U.S. District Court challenging the IRS’s assessment.
First, the plaintiff maintained that it was erroneously assessed the excise taxes, arguing that its trailers fell within a Treasury Department regulation that excluded certain vehicles specially designed for off-highway transportation from the tax, and another provision exempting vehicles with a “gross vehicle weight” of 26,000 pounds or less.

The plaintiff also alleged that the IRS violated its right to due process by arbitrarily assessing the tax only against Hostar despite knowing that some of its competitors in both the United States and Canada also manufacture hydraulic boat trailers.
The government filed a counterclaim demanding judgment in its favor for the amount of taxes owed plus interest and costs.

U.S. District Court Judge Douglas P. Woodlock in Boston granted the government’s motion to dismiss the due process claim and granted summary judgment for the government on the plaintiff’s erroneous-assessment claim and its own counterclaim.

The plaintiff appealed.

No due process violation

The 1st Circuit rejected Hostar’s contention that the IRS subjected it to “disparate treatment” in violation of its right to due process.
Regarding Hostar’s Canadian competitors that were allegedly treated differently, Torruella said, “we do not accept any argument that domestic and foreign competitors are ‘similarly situated’ and so there can be no claims of discrimination in violation of the Due Process Clause.”

And with respect to Hostar’s American competitors, the judge acknowledged that the IRS does indeed have a duty to act consistently toward similarly situated taxpayers, but he said that such a duty is aspirational rather than strict.

Meanwhile, the 1st Circuit stated that the IRS has good reason to retain such flexibility.
First, a strict obligation to ensure parity “‘could give rise to distracting disputes not over whether a tax is applicable, but rather over the management of an administrative and enforcement agency,’” said Torruella, quoting language from Woodlock’s lower court decision in the case. “‘Moreover, there is the prospect for competitive mischief if, as here, a tax refund plaintiff seeks broad discovery, on the grounds of a disparate enforcement theory, regarding its competitor’s financial and commercial information both from the IRS and from a third party with whom it competes.’”

Accordingly, Torruella wrote, “Hostar has not overcome what we find to be the IRS’s prerogative to tax it but not its competitors.”

The 1st Circuit also went on to find that the IRS did not erroneously subject the plaintiff to the federal excise tax in the first place, ruling that Hostar’s hydraulic boat trailers did not qualify for the exception concerning vehicles specifically designed for off-highway transportation and did not qualify for the exception concerning gross vehicle weight.

Eric T. Berkman, an attorney and formerly a reporter for Massachusetts Lawyers Weekly, is a freelance writer.