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.
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.