Tax Court: Prior Closing Agreement May Have Relevance in Coca-Cola’s Transfer Pricing Case

By , and on October 20, 2017

Coca-Cola is seeking a re-determination in Tax Court of certain Internal Revenue Service (IRS) transfer-pricing adjustments relating to its 2007–2009 tax years. In the case, the IRS moved for partial summary judgment seeking a ruling that a 1996 Internal Revenue Code Section 7121 “closing agreement” executed by the parties is not relevant to the case before the court.

Closing Agreement Background

Following an audit of the taxpayer’s transfer pricing of its tax years 1987–1989, the parties executed a closing agreement for Coca-Cola’s 1987–1995 tax years. In the closing agreement, the parties agreed to a transfer pricing methodology, in which the IRS agreed that it would not impose penalties on Coca-Cola for post-1995 tax years if Coca-Cola followed the methodology agreed upon. Despite following the agreed-to methodology for its post-1995 tax years, the IRS determined income tax deficiencies for Coca-Cola’s 2007–2009 tax years, arguing that pricing was not arm’s-length.

Current Litigation

On August 28, 2017, the IRS filed a motion for partial summary judgment seeking a ruling that the prior closing agreement is not relevant to the case. The court denied the motion, explaining that the prior closing agreement is relevant because it contains the same transfer pricing methodology that Coca-Cola used in computing its taxable income at issue. The court further explained that the prior closing agreement was also relevant because the prior closing agreement provided penalty protection and the IRS could amend its answer to assert penalties. Lastly, the court questioned whether procedurally a motion for partial summary judgment was the proper vehicle for arguing the relevance of the prior closing agreement and suggested the proper vehicle to raise the issue would be a motion in limine.

In an interesting side note in this contentious battle between the IRS and Coca-Cola, earlier this year Coca-Cola filed a Freedom of Information Act suit against the IRS seeking certain documents related to the prior closing agreement that the IRS refused to turn over.

Practice Point: In litigation, parties should carefully pick their battles before the court. In the Coca-Cola matter, the IRS is fighting what seems to be a losing battle over whether the prior closing agreement is relevant, which is a very low threshold evidentiary question. Spending court resources on clearly questionable motions may negatively affect the court’s future rulings. Our advice to clients is to look at the big picture strategy and do not get mired into petty squabbles with opposing counsel.

Andrew R. RobersonAndrew R. Roberson
Andrew (Andy) R. Roberson focuses his practice on tax controversy and litigation matters. He represents clients before the Internal Revenue Service (IRS) Examination Division and Appeals Office and has been involved in more than 50 matters at all levels of the federal court system, including the US Tax Court, several US courts of appeal and the Supreme Court. Andy has experience settling tax disputes through alternative dispute resolution procedures, including Fast Track Settlement and Post-Appeals Mediation, and in representing clients in Compliance Assurance Process (CAP) audits. He also represents individuals in Global High Wealth Industry Group audits and in connection with offshore disclosure programs. Read Andy Roberson's full bio.


Kristina NovakKristina Novak
Kristina L. Novak, PC focuses her practice on defending individuals and businesses in all stages of federal civil and criminal tax controversies, including litigation, US Internal Revenue Service (IRS) examinations and administrative appeals. In addition, she has advised clients on tax-related aspects of public and private mergers and acquisitions, cross-border and private equity fund investments, and bankruptcies and restructurings of financially troubled companies. Kristina also has experience in estate planning and administration, and estate and trust taxation. Read Kristina Novak's full bio.


Kevin SpencerKevin Spencer
Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.

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