Coca-Cola, IRS Face Off in Tax Appeal With Huge Stakes for Both

A lot is on the line in Coca-Cola Co.’s big court battle against the IRS. For the company: as much as $20 billion. For the IRS: how much leeway it will have in pursuing multinational companies.

The beverage giant and the government will square off in oral arguments next week before the US Court of Appeals for the Eleventh Circuit in Miami. Coca-Cola is appealing US Tax Court rulings that side with the IRS over the company’s transfer pricing—how it priced transactions with its own foreign affiliates.

“We’re talking about truly massive dollars, almost unprecedented in the transfer pricing context,” Chad Martin, a principal at Eide Bailly, said. The case is “the Super Bowl of transfer pricing controversy.”

Coca-Cola has already paid the IRS $6 billion, which will be refunded if it ultimately wins the case. But the company has said it may be on the hook for up to $14 billion more if it loses.

On the IRS side, the outcome will help shape how aggressive the agency believes it can be in enforcing transfer pricing rules. The case, in which oral arguments are scheduled for June 25, may also help determine how much tax enforcement will be affected by a key Supreme Court ruling that weakened agencies’ regulatory authority.

Bait-and-Switch?

If the IRS wins, “I think this will allow them to be more aggressive going forward” in transfer pricing cases, said Anne Gordon, vice president for international tax policy at the National Foreign Trade Council, which filed a brief supporting Coca-Cola.

But if the agency loses, “the whole renewed emphasis on transfer pricing enforcement litigation is problematic,” said Reuven Avi-Yonah, a University of Michigan law professor. The IRS has been more active in recent years in pursuing transfer pricing litigation against companies including 3M Co., Meta Platforms Inc., and Medtronic Plc.

The dispute centers on how much Coca-Cola’s foreign affiliates paid it for the right to use its intangible property—trademarks, brand names, secret formulas. The IRS contends the affiliates didn’t pay enough and, thus, its US income and taxes should have been higher. The Tax Court ruled for the government in 2020 and 2023.

Coca-Cola argues it’s the victim of an IRS bait-and-switch: The company says it was relying on a transfer pricing method from a previous settlement with the IRS, but the agency arbitrarily switched to a different method that led to additional income and higher tax bills.

”The biggest focus of the oral argument’s going to be this reliance that, ‘Hey, you said so, right?’” Martin said.

But the IRS says Coca-Cola was wrong to assume the method would stay the same, and the Tax Court agreed with the agency. Robert Willens, a New York tax and accounting consultant, said he always thought the company’s argument was “specious on their part.”

Spokespeople for the company and the IRS didn’t respond to requests for comment.

Blocked Income

Coca-Cola also contends that regulations on “blocked income” that the IRS used against the company are invalid. Certain countries, notably Brazil, limit the amount of royalties that a US company’s local affiliate can pay to the US parent. But under the IRS regulations, the US parent’s income can include the entire amount the affiliate would owe if the limitation wasn’t in place.

The Tax Court ruled the IRS could allocate to the income of Coca-Cola’s US parent the full amount that a Brazilian affiliate owed. But Coca-Cola says that’s only because at the time, so-called “Chevron deference” required the court to accept the way the IRS interpreted the law, via its blocked-income regulations. The Supreme Court’s Loper Bright ruling of 2024 wiped away that deference, Coca-Cola argued, saying the Tax Court would have decided differently without it.

“I think they feel like the tides have changed,” Martin said.

But the IRS says Congress expressly gave the agency power to interpret transfer pricing law through regulation. In such cases, Loper Bright says courts should still defer to agencies.

“That’s something that’s up in the air,” Willens said. “The court will of necessity have to address that.”

Investor Impact

A ruling against Coca-Cola could also be a “a terrible surprise for investors,” said Alex Martin, transfer pricing leader at tax-consulting firm KBKG.

The company has reserved only $520 million for its potentially huge payment to the IRS; accounting rules give it the leeway to reserve such a small amount. “It’s not just a tax issue,” Alex Martin said.

Even if Coca-Cola loses at this stage, the case could ultimately end up before the Supreme Court.

Last October, the US Court of Appeals for the Eighth Circuit ruled for 3M in a case involving the blocked income rules. Coca-Cola claims the 3M ruling applies to its case and supports its position. But if the Eleventh Circuit disagrees and sides with the government in Coca-Cola, that could create a split among circuits, making it more likely the high court would take up the issue.

The June 25 arguments will be heard before judges Britt Grant and Barbara Lagoa, both appointees of President Donald Trump, and Nancy Abudu, a Biden appointee. Coca-Cola is represented by Skadden, Arps, Slate, Meagher & Flom; Latham & Watkins; and Gibson, Dunn & Crutcher.

The case is The Coca-Cola Co. v. Commissioner, 11th Cir., No. 24-13470, oral argument, 6/25/26.