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Coca-Cola Disputes IRS’s Logic Behind $3 Billion Tax Bill (1)

June 4, 2021, 3:08 PMUpdated: June 4, 2021, 4:13 PM

Coca-Cola Co. is fighting back against a U.S. Tax Court ruling that left the company on the hook for most of a more-than $3 billion tax bill, arguing the IRS broke the law when calculating the amount.

The unprecedented nature of a November opinion upholding IRS adjustments to the company’s tax bill warrants further consideration, potentially by the full Tax Court, Coca-Cola said in a motion for reconsideration that was obtained by Bloomberg Law.

The case is one of the most high-profile IRS disputes involving transfer pricing, the way companies price transactions between their subsidiaries. The Coca-Cola case centers on how the company shifted profits to foreign affiliates operating plants in countries including Brazil and Ireland, both of which have lower corporate tax rates than the U.S.

Coca-Cola asked the court to review the ruling by Judge Albert Lauber, which upheld two IRS adjustments that contributed to increasing the beverage maker’s 2007-2009 taxable income by more than $9 billion, triggering the higher tax bill. That ruling raised “fundamental questions of tax, administrative, and constitutional law,” that merit another look, the company argued in its motion.

The IRS’s attempt to impose a new tax calculation method on Coca-Cola after approving its use of a different method for more than a decade is unconstitutional, the filing said.

The filing also argued that the IRS’s new tax calculation methods violated Treasury regulations by not taking into account that Coca Cola’s supply points hold valuable licenses and spent billions in marketing the brand, which it said the Tax Court didn’t acknowledge.

“The Court erred in failing to account for those licenses in its transfer-pricing analysis on the legally erroneous ground that Coca-Cola ‘was the registered legal owner of virtually all trademarks and other intangible assets,’” the company said.

The supply points paid for and bore the risk of marketing expenses in their regions, and are required to be compensated for their contributions to Coca-Cola’s brands, the company added.

The motion was signed by J. Michael Luttig, the former federal judge who the company hired in January; constitutional counsel Laurence H. Tribe; Massey & Gail LLP founding partner Jonathan Massey; Shay Dvoretzky, head of the Supreme Court practice at Skadden, Arps, Slate, Meagher & Flom LLP; and Gregory G. Garre, head of the Supreme Court practice at Latham & Watkins LLP.

The IRS declined to comment.

The case is The Coca-Cola Co. v. Commissioner, T.C., No. 31183-15, motion for reconsideration 6/2/21.

(Details added starting in sixth paragraph. )

To contact the reporters on this story: Jeffery Leon in Washington at jleon@bloombergindustry.com; Brian Baxter in New York at bbaxter@bloomberglaw.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com