Michael Rapoport & David Schultz (Bloomberg Law): Coca-Cola, IRS Face Off in Tax Appeal With Huge Stakes for Both

The beverage giant and the government will square off in oral arguments [on June 25] 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.

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.

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.

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.

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.