The U.S. Tax Court today issued its opinion in a case upholding the IRS’s findings of deficiencies stemming from transfer pricing adjustments made under section 482 and by which the IRS reallocated substantial amounts of income (approximately $9 billion) to the taxpayer from its foreign manufacturing affiliates.
The case is: The Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (November 18, 2020). Read the Tax Court’s opinion [PDF 819 KB]
The purpose of this report is to provide text of this lengthy opinion. The following is based on the Tax Court’s summary of the case.
The taxpayer (a U.S. corporation) was the legal owner of the intellectual property (IP) necessary to manufacture, distribute, and sell some of the best-known beverage brands in the world. This IP included trademarks, product names, logos, patents, secret formulas, and proprietary manufacturing processes. The taxpayer licensed foreign manufacturing affiliates—called “supply points”—to use this IP to produce concentrate that they sold to unrelated bottlers, who produced finished beverages for sale to distributors and retailers throughout the world. The taxpayer’s contracts with its supply points gave them limited rights to use the IP in performing their manufacturing and distribution functions but gave the supply points no ownership interest in that IP.
On examining the 2007-2009 returns, the IRS determined that the taxpayer’s methodology did not reflect arm’s length norms because it overcompensated the supply points and undercompensated the taxpayer for the use of its IP. The IRS reallocated income between the taxpayer and the supply points employing a comparable profits method (CPM) that used the taxpayer’s unrelated bottlers as comparable parties. These adjustments increased the aggregate taxable income for 2007-2009 by more than $9 billion.
The Tax Court held:
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