Three of the Big Four accounting firms, as well as two major trade organizations, filed amici curiae briefs with the 11th U.S. Circuit Court of Appeals in support of Coca-Cola in the company’s transfer pricing dispute with the IRS.
Background.
The IRS audited Coca-Cola’s federal returns for tax years 2007, 2008, and 2009. At the close of the examination, the IRS made Code Sec. 482 transfer pricing adjustments to Coca-Cola’s aggregate taxable income based on royalty income from foreign manufacturing affiliates referred to as “supply points.” Coca-Cola licensed its intellectual property these supply points, which then sold concentrate for its beverages to “bottlers” that completed the production process.
In total, the IRS’ adjustments for the three years exceeded $9 billion, causing a tax deficiency of $3.3 billion. Coca-Cola challenged the IRS’ deficiency notice in December 2015, kickstarting what has become nearly a decade of litigation.
In 2020, the Tax Court ruled that the IRS did not abuse its discretion in applying its “comparable profits method” to calculate the adjustments. The method treated the independent bottlers as comparable entities despite Coca-Cola arguing that a “10-50-50” method had already been agreed to for arm’s-length royalty calculation purposes.
The 2020 decision did not cover Coca-Cola’s supply point in Brazil, a tax jurisdiction with a cap on royalty payments. To conform with Brazilian law, the affiliate made its payments in the form of dividends, which Coca-Cola later treated as royalties.
This case went unresolved until the Tax Court ruled in August 2024 that the net transfer-pricing adjustment should reflect the Brazilian affiliate’s royalty obligation, less the amount paid as dividends.
Taken altogether, the Tax Court found Coca-Cola liable for $2.7 billion. The company appealed and filed its opening brief with the 11th Circuit late February, calling the IRS’ comparable profits method a “bait and switch” from the prior 10-50-50 agreement made with the agency well before the tax years at issue.
Briefs agree with Coca-Cola.
PricewaterhouseCoopers, Deloitte, and KPMG filed a joint amicus brief with the circuit court March 19. The large accounting firms cautioned that the IRS does not have “unlimited” discretion in applying Section 482, saying adjustments are meant to only occur when “necessary to prevent the evasion of taxes or clearly to reflect the income of the relevant taxpayers.”
The firms in their brief continued that the IRS “abruptly” deviated from the transfer pricing method mutually agreed upon and “blessed by the IRS multiple times.” The agency “abandoned that method selectively, discarding it only for jurisdictions that lack an income tax treaty with the United States under which Coca-Cola could object to the adjustments.”
At stake with the circuit court’s decision is the precedent set potentially affecting “tens of thousands of companies of all sizes” the firms provide services for, the brief said, advocating for “consistency and predictability” in the application of tax laws.
The same day, the National Foreign Trade Council in consultation with Holland & Knight LLP attorneys filed an amicus brief opposing the Tax Court’s handling of the IRS’ reliance on the so-called blocked income rule.
The rule, according to the Council, “allows the IRS to allocate to a taxpayer ‘income’ that the taxpayer legally could not receive” from foreign jurisdictions. The Tax Court erroneously allowed the IRS’ determination that the blocked income rule applied to the Brazilian affiliate case. Thus, the court “concluded that the IRS could permissibly allocate the value of significant IP royalties from the Brazilian Supply Point to Coca-Cola” as income under Section 482 “despite” local law.
In critiquing the rule, the Council’s brief argued it produces “manifestly unjust results” that Congress did not anticipate nor intend, much less authorize. “As real-world examples make clear, it is unfair and unreasonable for the IRS to reallocate foreign income to a U.S. taxpayer that did not-and could not-receive that income.”
On March 20, the Chamber of Commerce’s amicus brief in support of Coca-Cola added to the calls against the IRS’ course-reversal in favor of its own comparable profits method.
The Chamber provided three reasons this is “arbitrary and capricious.” First, the change was done “without providing any good reasons.” Next, the IRS “retroactively imposed its changed position to impose billions of dollars of additional tax liability without fair notice.” Lastly, the new method “applies inconsistently to different companies without providing any reasons for that irrational, arbitrary disparate treatment,” said the Chamber.
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