Packet loss when IP precedence bit set by upstream Cisco router

[David Whipp]

Upstream ISP uses IP precedence bit to classify and rate limit Internet
traffic. We see a 10 - 20% packet loss at our linux firewall when
traffic is high (6-8Mbps traffic with precedence bit set). Testing with
iperf, traffic is not dropped when IP precedence is not set. No TOS or
tc/qdisc has been configured (latest 2.4 kernel and 1.2.11 netfilter).

Tried
iptables -A PREROUTING -t mangle -j TOS --set-tos Normal-Service
Still had packet loss.

Has anyone seen this? Suggestions for fix?