Amgen, Coke Set Aside Only Fraction of Billions They May Owe IRS

Amgen Inc. may ultimately have to pay as much as $10.7 billion in taxes, interest and penalties to the IRS—nearly as much as the company’s total profits for the past two years. Coca-Cola Co. may owe the IRS up to $16 billion—about as much as its earnings for the past year and a half. Airbnb Inc. may have to pay $1.9 billion.

The amounts that the companies have actually set aside to prepare for potential payment of those huge IRS bills? Not so much.

Coca Cola has reserved just 3%, or $465 million, of its giant possible bill. Amgen and Airbnb appear to have set aside less than half of what they may need. They’re not alone. Many companies facing IRS lawsuits have set aside relatively small amounts to pay the agency if they lose.

The trouble for the companies is, the IRS is winning more blockbuster tax cases—especially those involving transactions among related entities in a multinational group—in a marked improvement from previous decades. It has also been bolder in imposing stiff penalties, bumping up the potential tax bills companies would have to pay if they lose in court.

“If I’m an investor, I’d be P.O.'ed,” said William Byrnes, a Texas A&M University law professor who specializes in international and federal tax issues.

By under-reserving, which companies have a lot of leeway to do under accounting rules, they can avoid a hit to their earnings. Lack of disclosure about a big future potential IRS bill can make it harder for investors to evaluate a company’s financial prospects.

It could come back to haunt the company if it ultimately loses to the IRS and suddenly has to pay for a court judgment it hasn’t sufficiently prepared for.

Coca-Cola has borrowed billions of dollars this year to help make a $6 billion interim payment to the IRS as it appeals court rulings that went against it. That kind of borrowing can leave a company more leveraged and increase its interest costs.

Broader Issues

Under-reserving is only part of a broader problem: Companies aren’t required to tell investors much about how they determine their reserves, or much about their potential IRS liabilities at all.

“They’re going to offer as little information as they can to you about it,” said Brett Whitaker, a professor in accounting at Indiana University.

Companies like Coca-Cola may also be worried that accounting for reserves could send the wrong message to the court, said Andrew Silverman, a tax policy analyst at Bloomberg Intelligence. The company has to maintain in court is that it expects to win, and that it doesn’t owe what the IRS says it does, and that “basically forces you not to reserve for the worst-case scenario,” Silverman said.

Concerns about under-reserving have taken on greater importance recently because the IRS has seen increasing success in cases such as the one against Coca-Cola, and that’s “predictive” with regard to the IRS’ pursuit of other companies, said Alex Martin, leader of the transfer pricing practice at tax-services firm KBKG.

The IRS continues to battle other companies in court like Meta Platforms Inc. and Medtronic Inc., as well as pursuing big audits of companies like Microsoft Corp.

Decisions on reserves could also be affected by the US Supreme Court’s recent Loper Bright ruling giving judges more power to overrule agencies like the IRS. That could embolden companies to believe they’re more likely to beat the IRS in court and thus not need high levels of reserves, tax experts say.

Amgen, in addition to its IRS court case, is also facing shareholder litigation that it dragged its feet on disclosing how much it potentially might have to pay the IRS.

An Amgen spokesperson said the company isn’t under-reserved and that its process for determining reserves is “rigorous and comprehensive,” including careful analysis and evaluation of its tax positions.

All three companies have maintained in their securities filings that their decisions on reserves are justified. Airbnb, for instance, said in its annual report that it “believes that adequate amounts have been reserved” for its IRS liabilities. But the company also acknowledged that evaluating the matter is “inherently uncertain and require(s) making judgments, assumptions, and estimates.”

A Coca-Cola spokesperson declined to comment for this article; an Airbnb spokesperson didn’t respond to a request for comment.

‘Potential Mischief’

In the Coca-Cola case, the US Tax Court has ruled the company’s affiliates didn’t pay enough for the right to use its intangible property like trademarks and brand names to make and sell its soft drinks. Coca-Cola has appealed those rulings to the 11th US Circuit Court of Appeals, and will get a refund of the $6 billion it’s paid if it ultimately prevails.

The company initially set aside only $438 million in reserves for its potential liability of up to $16 billion, though it later increased its reserves to $465 million. It’s allowed to do that because when a company determines how much it should reserve for such “uncertain tax positions,” all it must do under accounting is to decide whether it’s “more likely than not” to prevail, or to pay a particular amount.

In theory, a company could avoid any reserve at all simply by maintaining that it will triumph over the IRS in the end.

It’s “an area fraught with potential mischief and potential error,” said John R. Robinson, a professor in the accounting department at Texas A&M’s business school.

Amgen may be in a position similar to Coca-Cola’s. Its potential $10.7 billion bill relates to what the IRS contends is Amgen’s shifting of US profits to Puerto Rico to take advantage of its lower tax rate. By comparison, Amgen’s unrecognized tax benefits—a rough proxy for its total reserves for the IRS liability and its other uncertain tax positions—are about $4.1 billion.

A Tax Court trial in the case began earlier this month, during which the spokesperson said Amgen intends “to demonstrate that our tax position is correct” and consistent with the position the IRS has accepted in previous audits.

Amgen also says in its securities filings that any additional tax the IRS imposes would be reduced by repatriation tax previously accrued on the company’s foreign earnings, up to $3.1 billion.

In the Amgen shareholder litigation, plaintiffs have alleged that Amgen “waited years to disclose the specific amounts” it might have to pay the IRS. In September, a judge rejected Amgen’s attempts to dismiss a separate shareholder lawsuit making related allegations, saying the complaint “permits a strong inference” that the company’s lack of disclosure was “reckless under the circumstances.”

Airbnb faces the prospect of paying $1.33 billion plus $573 million in penalties in a dispute over the valuation of intellectual property. The company said in its latest annual report that that amount “exceeds our current reserve” by more than $1 billion. Airbnb’s unrecognized tax benefits total $780 million.

The reserving process is murky and subjective even for the outside auditors who review companies’ finances. Auditors for Coca-Cola, Amgen, and Airbnb have all singled out the companies’ approach to their IRS liabilities as “critical audit matters”—issues that the auditors found particularly subjective and difficult to check and verify.

Auditing Amgen’s unrecognized tax benefits, for example, was “challenging due to the high degree of estimation and management judgment,” said Ernst & Young, Amgen’s auditor, in its opinion on the company’s 2023 financial statements.

Should Investors Care?

For investors and securities analysts, under-reserving and big potential IRS liabilities are issues that most don’t seem to have made a major point of. The issue doesn’t seem to have hurt the company’s stock price, which trended slightly higher after it said it would pay the $6 billion bill, though the price has slipped since then.

Still, when Coca-Cola’s analysts talk to company executives on quarterly earnings conference calls, for instance, ”I never hear any questions on how this court case is going,” Martin said. “That to me is a big surprise.” Securities analysts tend to “lack a thorough understanding of the tax issues,” and investors rely on the company’s summary of its case in its securities filings rather than delve into the Tax Court’s rulings, which were “highly critical” of Coca-Cola’s arguments, he said.

Analysts may not be concerned simply because they “just believe the company” when it assures them it expects to prevail, Silverman said. The analysts’ thinking, he said, may be “‘well, they have good lawyers - a lot of smart people are saying they’re going to win; who am I to disagree?’”

But if a company doesn’t record big reserves for a big potential tax liability, it can avoid cutting into its earnings. That could mislead investors: They want to see growth in the company’s earnings, and a company that under-reserves is effectively downplaying the possibility that a big court loss to the IRS may decimate those future earnings.

“You’re betting on the following year,” Byrnes said. “Coca-Cola, by under-reporting the reserve, has artificially inflated its go-forward forecast number.”

Even if a company establishes a reserve, it would probably have to raise funds externally anyway if it’s forced to pay a giant IRS bill, but at least the reserve would give users of the firm’s financial statements “insight” into the extent of its potential need, said Allison Koester, an associate professor of business administration at Georgetown University.

Martin said he is “especially concerned” about investors who rely on dividends. Coca-Cola pays a quarterly dividend of 48.5 cents a share, a rate it’s increased every year since the 1960s, but Martin wondered how the company can maintain that if it keeps losing in court and has to pay a giant IRS bill.

“Do investors have the whole story?” Martin said.