Tax Notes Quotes Clark Armitage on Recent Coca-Cola Ruling

Tax Notes

The U.S. Tax Court’s recent Coca-Cola decision upholding nearly $10 billion in transfer pricing adjustments represents a major IRS victory, and aspects of the opinion may improve the agency’s prospects in future cases as well.

. . .

Another possibility is that the outcome simply reflects key factual differences between Coca-Cola and other major transfer pricing cases decided by the Tax Court in recent years. Although it rejects Coca-Cola’s general argument that the CPM is inherently inferior to the CUT method, the opinion is heavily fact driven. One key fact is that Coca-Cola argued in favor of a CUT method analysis that wasn’t actually based on CUTs, according to J. Clark Armitage of Caplin & Drysdale

Instead of comparable trademark and product formula licenses, the CUT method analysis prepared by Coca-Cola's expert witnesses used master franchising arrangements of the kind entered into between fast food chains and regional franchisees. The opinion rejects that application of the CUT method based on major differences between the purported comparables and Coca-Cola's intercompany licenses — including in the relevant industry and the parties' contractual rights and functions — and the convoluted series of questionable assumptions and adjustments used in the analysis. 

"I think that the judge went to some pains to explain why this is different from the typical case," Armitage said. "Those are not CUTs; those are analogies. There were no CUTs."

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But the apparent comprehensiveness of the opinion and the deferential standard of review of the Tax Court’s factual findings may make a successful appeal difficult, according to Armitage. "There were legal determinations made in here, but they're all imbued with highly intensive factual questions. It's pretty hard to tease them out from one another," he said. 

However, Armitage said there still may be some potential arguments to raise on appeal. Coca-Cola could potentially argue that the Tax Court’s decision leaves the supply points with an insufficient return relative to the expenses they incurred, he said. 

"The key to the taxpayer's whole position is that the supply points bore all these expenses, and you can't just ignore that," Armitage said. "There may be room to say that at some point, the level of expenses incurred by the supply points and paid to the [service companies] does justify some enhanced ownership. But I think they still need to get past the other prong of that test, which according to the judge is that only the IRS can set aside the form of the contract."

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