Do Investors Understand the Stakes of Coca-Cola’s $18B Tax Case?

The recent Coca-Cola transfer pricing appellate case in the 11th Circuit Court of Appeals has a far-reaching impact beyond just the litigants involved. Now that Coca-Cola has submitted a reply brief, the time seems right to ask if stakeholders have a clear picture of tax risks. Why? Coca-Cola estimates that the maximum tax liability for its transfer pricing case is $18 billion through June 30, 2025. However, the company has booked a $493 million tax reserve on a “More-Likely-Than-Not” basis. In essence, Coca-Cola management believes that there is a greater than 50% chance that this case will be settled for less than 3% of the maximum amount at risk. The Coca‑Cola Co. 2024 Annual Report Form 10‑K (disclosing IRS Tax Litigation Deposit and interest receivable); see also Financial Times, How a $16bn tax stand‑off stays unseen in Coca‑Cola’s earnings (Aug. 7, 2024).

US Tax Court Senior Judge Albert Lauber had another perspective: “Hope is not something that gives rise to legal or constitutional entitlements.” Order Denying Coca-Cola’s Motion for Leave to File Out of Time a Motion for Reconsideration of Findings or Opinion Pursuant to Tax Court Rule 161,The Coca-Cola Co. & Subs. v. Commissioner (T.C. Oct. 26, 2021).

Background

The Coca-Cola transfer pricing litigation for the 2007 to 2009 tax years originates from a 1996 transfer pricing audit settlement. The IRS conducted a transfer pricing audit for the 1987 through 1995 tax years. To resolve the tax under dispute, the IRS and Coca-Cola agreed on a “10-50-50" mechanism where the foreign beverage concentrate manufactured by supply points would earn a 10% margin on sales to independent bottlers. Any residual profit was split on a 50-50 basis. See 155 T.C. 10 and Eleventh Circuit briefs discussing the 10-50-50 settlement construct. In other words, more than 50% of international profits from manufacturing beverage concentrate would be earned by Coca-Cola’s supply point subsidiaries. In addition to manufacturing beverage concentrate for independent bottlers, the foreign supply point subsidiaries invested in various marketing activities.

The current dispute involves Coca-Cola’s decision to continue with the 10-50-50 transfer pricing mechanism after 1995 and appears to continue today. Coca-Cola argued that the 1996 settlement provided certain reliance interests for transfer pricing on a go-forward basis. By contrast, the IRS concluded that a 1996 settlement had no bearing on an audit for 2007 through 2009, and designated the case for litigation. The US Tax Court agreed with the IRS’s $9 billion transfer pricing adjustment, resulting in $2.7 billion in additional tax due. To appeal the case and stop interest from accruing, Coca-Cola deposited $6 billion with the US Treasury for the 2007 to 2009 case, $2.7 billion plus interest. The Coca-Cola Co. & Subs. v. Commissioner, T.C. Memo 2023-135 (Nov. 8, 2023) (supplemental opinion); reconsid. denied (T.C. Oct. 26, 2021), 155 T.C. 10 (Nov. 18, 2020).

What Is a “Reliance Interest”?

Coca-Cola did not pursue an Advance Pricing Agreement with the Internal Revenue Service to address transfer pricing on a prospective basis. Instead, Coca-Cola argued that the settlement agreement created a reliance interest because the IRS would not assess penalties if the company continued utilizing the 10-50-50 approach. In addition, Coca-Cola argued that the 10-50-50 settlement represented an arm’s-length result, and no adjustment was warranted. Coca-Cola also maintained that because the IRS had presumably audited this 10-50-50 transfer pricing mechanism from 1996 through 2006, the company should be able to rely upon this policy indefinitely. Opening Brief for Appellant Coca-Cola, No. 24-13470 (11th Cir. Mar. 12, 2025) (reliance arguments and 1996 Closing Agreement).

These reliance interest and “arm’s length” questions are crucial for Coca-Cola. If these arguments fail, Coca-Cola is forced to justify that foreign supply points in Ireland and elsewhere should earn a greater than 50% share of Coca-Cola concentrate sales profits for international markets.

The Tax Court Opinion categorically dismissed these arguments: “the agreement says nothing whatever about the transfer pricing policy that was to apply for years after 1995" and "[T]here is nothing within the four corners of the closing agreement to suggest the Commissioner regarded the 10-50-50 method as the Platonic ideal of arm’s-length pricing.”

Judge Lauber continued that the restriction on penalty protection actually hurts Coca-Cola’s position. Quoting the opinion, “the agreement specifically recognizes that the IRS might make transfer pricing adjustments after 1995, because it gives petitioner penalty protections.” In other words, penalties for transfer pricing only apply if there is an IRS transfer pricing adjustment in the first place. There would be no need for a penalty protection clause if the IRS were precluded from auditing Coca-Cola’s transfer pricing.

Why Not an Advance Pricing Agreement?

Under the IRS Advance Pricing Agreement program, the company could reach an agreement with the IRS on a go-forward basis for a multiple-year period.APAs are deservedly praised as a process for resolving difficult transfer pricing issues in a less confrontational environment, providing certainty for both multinationals and the IRS.

Coca-Cola always had the option of negotiating an APA for certainty on these transactions. The 1996 Closing Agreement and the 2007 to 2009 litigation did not prevent Coca-Cola from negotiating an APA for other years.In fact, Judge Lauber referenced the APA program as one way to reach a binding agreement for post-1995 transfer pricing issues, where the company would have genuine reliance. Alternatively, the company could have attempted negotiating the 1996 settlement to include specified future years. Neither happened.

Coca-Cola has been a staunch supporter of the APA program since its inception in 1991. For example, Gary Faynard, former Chief Financial Officer of Coca-Cola from 1999 to 2014 stated:

“Our concentrate business model presents unique transfer pricing challenges. Our early APA experience in the 1990s helped establish appropriate returns for our concentrate manufacturing operations serving multiple jurisdictions.”

Dick Clark, Gerry Godshaw, Steve Wrappe, Use of APAs to resolve transfer-pricing issues for IP transactions, Int’l Tax Review (April 1, 2003) (citing National Foreign Trade Council Tax Committee (2002)).

Based on personal experience with the APA program, the IRS would likely reject any profit-split approach involving Coca-Cola intangibles.

What Did the Economists Say?

The IRS applied the Comparable Profits Method in determining the transfer pricing adjustment for 2007 through 2009. The Court found that since Coca-Cola’s US entities owned nearly all of the intangibles needed to produce and sell Coca-Cola beverages, any 50%-plus split of profits would lead to “astronomical” results according to Judge Lauber.

For instance, Coca-Cola Ireland earned a 215% return on operating assets; Coca-Cola Chile generated a 149% return on operating assets. The Irish, Brazilian, Chilean, and Costa Rican companies exceeded the return on operating assets of more than 2006 international food and beverage companies. The Mexican and Swaziland subsidiaries’ profit margins exceeded 99% of selected food and beverage comparable companies. 155 T.C. 10, 12. Id. (affiliate ROAs including ~214% for Ireland; “astronomical” results). Meanwhile, the consolidated Coca-Cola global company earned a 53% return on operating assets over the same time period. 155 T.C. 10 (Nov. 18, 2020) (accepting CPM with bottlers as comparables under Treas. Reg. §1.482‑5). See The Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. 10 (2020).

Judge Lauber concluded that these results led to two obvious questions:

“Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world? And why does their profitability dwarf that of [Coca-Cola US], which owns the intangibles upon which the Company’s profitability depends?”

Not every transfer pricing economist agrees with the Comparable Profits Method approach. However, one overlooked economic analysis by Dr. Brian Becker applied the Comparable Uncontrolled Transaction method. After reviewing other Coca-Cola’s contracts with independent companies, he concurred with the IRS position that the Coca-Cola subsidiaries were not paying arm’s-length royalties. 155 T.C. 10 (Dr. Brian Becker’s CUT analysis supporting royalty conclusions).

Coca-Cola also invested in highly regarded economists to support the 10-50-50 approach, but Judge Lauber found none of their analyses persuasive. For three of the economists:

“[t]here are so many flaws in [the] construct, it is difficult to know where to begin.”

“[The] asset management model does not remotely resemble any of the ‘specified methods’ for valuing intangibles under the section 482 regulations.”

”Finally, we regard the methodology as unreliable because it produces absurd results.” 155 T.C. 10 (intercompany contracts; ownership of marketing intangibles by the US parent; court’s critiques of Unni, Reams, and Cragg methodologies).

For investors, these economic findings underscore how far the Tax Court viewed Coca-Cola’s transfer pricing as departing from arm’s-length practices. The Comparable Profits Method approach accepted by the court is the basis for the $18 billion calculated tax risks.

What Facts Support Coca-Cola’s Position?

To support the company’s position, Coca-Cola argued that each of the foreign supply points owned highly valuable assets through large investments in marketing and advertising expenses. Judge Lauber dismissed this argument, concluding that Coca-Cola US simply assigned these expenses to each of the foreign affiliates. Coca-Cola’s Atlanta operations made the key decisions with respect to marketing and advertising outside of the independent bottlers local marketing activities.

The Tax Court noted that Coca-Cola’s intercompany contracts specifically assign all marketing intangibles to the US company. In essence, based upon the company’s internal intercompany contracts, neither the supply points nor other foreign service companies owned the marketing intangibles cited. 155 T.C. 10 (intercompany contracts). The Court noted that the US company could, and did, transfer supply point contracts with bottlers without compensation among foreign affiliates. In other words, Coca-Cola’s supply point activities could be terminated at will, without compensation for intangibles that were presumably developed.

As mentioned, Coca-Cola countered that the IRS audited the 10-50-50 transfer pricing up to and including the 2006 tax year and made no transfer pricing adjustments, giving the company additional reliance interests.

What About Appeals?

On October 22, 2024, the company appealed the Tax Court’s decision to the 11th Circuit Court of Appeals, with many of the same reliance arguments dismissed by the Tax Court. In its appeals response brief of August 27, 2025, Coca-Cola continued to argue about how the IRS operated inconsistently through a bait-and-switch approach. The company also references the Administrative Procedure Act as another reason for reversing the Tax Court decision. Judge Lauber dismissed these and similar arguments in his opinion and subsequent Tax Court order. Opening/Appellee Briefs (11th Cir. 2024) (addressing APA and administrative law arguments).

What Should an Investor Believe?

Coca-Cola’s SEC disclosures in annual and quarterly reports consistently state that the company expects Judge Lauber’s decision to be overturned and is more likely than not to settle these issues for approximately $493 million as of June 30, 2025.

The company’s uncertain tax position disclosures are intended to inform investors of probable tax risks. Under ASC 740-10, Coca-Cola is required to estimate a More Likely than Not outcome based upon a probability analysis involving the technical merits and the probable outcome of the litigation. As part of this process, the company disclosed in SEC filings that it “consulted with outside advisors and [it] reviewed and considered relevant laws, rules, and regulations, including, though not limited to, the Opinion and relevant caselaw.” Furthermore, the company states that the Tax Court misinterpreted and misapplied the applicable tax and transfer pricing regulations. The annual and quarterly SEC disclosures include an explanation that the company did include the tax court methodology, CPM, in its probability assessment of likely outcomes. The Coca‑Cola Co., Annual Report Form 10‑K (Feb. 22, 2021) (ASC 740 uncertain tax position following Tax Court opinion).

In the June 30, 2025, quarterly SEC filing, Coca-Cola updated its estimates to $493 million for the reserve and $18 billion for potential liability, respectively.15 In other words, if Coca-Cola’s litigation does ultimately fail, the company explains that it may owe $18 billion in tax as of the June 30, 2025, quarterly filing. The calculation helps put the entire amount of tax at risk in perspective.

The SEC disclosures also include statements that “the Company and the IRS had agreed on an arm’s-length pricing methodology” in its 1996 Closing agreement, and that “the Company would not be assessed penalties” for using the same 10-50-50 policy going forward. The Coca‑Cola Co. Form 10‑K (2019/2020) (statutory notice and litigation posture); see also Brief for Appellee (July 7, 2025).

By contrast, the 250-page opinion noted that “the 10-50-50 method was simply a formula to which the parties agreed in settling the dispute.” As mentioned previously, Judge Lauber concluded that the logical conclusion of excluding penalties in a settlement agreement meant that the IRS could audit transfer pricing in the future, just no penalties would be applied.

Where Does This Leave Investors?

As Coca-Cola presses its appeal, the company’s minimal tax reserve and other SEC disclosures risk giving investors a false sense of security. The potential $18 billion exposure is staggering, even for a company with $12 billion in cash and cash equivalents plus a $6 billion deposit with the US Treasury. Coca-Cola has also established it has the balance sheet capacity to borrow while paying the deposit with the US Treasury.

For investors, Coca-Cola’s 63rd consecutive annual dividend increase, including $8.4 billion of dividends for 2024, signals stability. Yet that consistency obscures the reality that dividend-paying capacity ultimately depends on how this litigation is resolved. In the end, investors relying on the stock price and dividend stream face the greatest risk if Coca-Cola comes up short in court.

What’s Next?

December 2025 marks ten years of litigation over The Coca-Cola Co. & Subs. v. Commissioner case, and the Appeals process only started on October 22, 2024. Amended Opening Brief for Appellant Coca-Cola, No. 24-13470 (11th Cir. Mar. 12, 2025); Brief for Appellee IRS (11th Cir. July 7, 2025). Of course, the 11th Circuit or the Supreme Court can overturn the tax court decision; Medtronics, Loper Bright, and other cases may ultimately lead to a win for Coca-Cola.

However, it is important to recall Judge Lauber’s conclusion.

“[t]he premise for petitioner’s arguments – that the IRS violated petitioner’s legitimate reliance interest—is erroneous. Petitioner had no legitimate reliance interests in believing that the IRS would adhere to the 10-50-50 method indefinitely.”

U.S. Tax Court, Order (Doc. 762), The Coca‑Cola Co. & Subs. v. Commissioner, No. 31183‑15 (Oct. 26, 2021).

The questionable 10-50-50 transfer pricing system apparently continues to this day. Until the case is resolved, the real question is whether Coca-Cola shareholders understand the stakes and the risks posed to both Coca-Cola share value and dividends.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alex Martin is KBKG LLC’s Transfer Pricing Practice Leader.

The views and opinions expressed herein are those of the author alone and do not necessarily reflect those of his employer, KBKG. The author and his family do not and have never held short positions in Coca-Cola, and any holdings are only through widely held mutual funds.

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