The main attraction in the US Tax Court (Tax Court) is just a few weeks away. On March 5, 2018, The Coca-Cola Company (TCCC) and the Internal Revenue Service (IRS) square-off for a much anticipated six-week trial before Judge Lauber. The parties recently filed their Pretrial Memoranda in the case, although the IRS’s memorandum was filed under seal. TCCC’s Pretrial Memorandum gives us deep insight into the issues and how the trial will be conducted. The primary issue in the $3 billion transfer pricing case is the proper amount of the arm’s length royalties payable by six foreign licensees to TCCC for the licenses of TCCC’s trademarks and certain other intangible property for exploitation in international markets. In its Pretrial Memorandum, TCCC contends that the IRS’s application of an approximately 45 percent royalty rate using a bottler-based Comparable Profit Margin (CPM) that allocates to TCCC more than 100 percent of the aggregate operating (after accounting for the amounts paid pursuant to the Royalty Closing Agreement) profits of the six foreign licensees is arbitrary and capricious. (more…)
“[W]e are not inclined to carve out an approach to administrative review good for tax law only.” Mayo Found. for Medical Educ. & Research v. United States, 562 US 44, 55 (2011).
With this language, the US Supreme Court put taxpayers and the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) on notice that administrative law applies equally to tax law. Since this announcement, administrative law issues have figured prominently in several tax cases with the result that certain practices of the IRS and Treasury in issuing regulations have been called into question. (Please see our most recent post on the Administrative Procedures Act [APA] as applied to notices of deficiency issued by the IRS.) One such practice is the issuance of temporary regulations—without prior opportunity for comment by the public—that the IRS and Treasury treat as binding rules of law. One such example is the temporary anti-inversion regulations issued in April 2016 that address transactions that the IRS and Treasury believe are structured to avoid the purposes of Internal Revenue Code (Code) Section 7874 and 367.
As is common practice by the IRS and Treasury, the regulations were simultaneously issued in both proposed and temporary form. The regulations include the rules described in prior Notices, as well as new rules designed to address issues not covered by the Notices. The regulations totaled more than 200 pages, addressing many issues in the area. (more…)