David Schultz & Michael Rapoport (Bloomberg Law): Coca-Cola Meets Sympathetic Judges in $20 Billion IRS Case

A panel of federal appellate judges were receptive to Coca-Cola Co.’s arguments that the IRS improperly allocated its foreign income in a case that could cost the soft drink company up to $20 billion.

“The concept of retroactivity seems to me a bit of a due process violation,” Judge Barbara Lagoa said.

Jennifer Rubin, a Justice Department attorney representing the IRS, argued that all examinations of tax deficiencies are retroactive, saying, “that’s how it works.”

But Judge Nancy Abudu said when the IRS finds that a taxpayer has such deficiencies, it’s using the same rules and evaluation methods throughout. “Here it’s a completely different method that’s being used,” she said.

Coca-Cola says the IRS’s change amounted to an unfair bait-and-switch. “The IRS cannot impose billions of dollars in taxes based on a method that’s arbitrary and capricious. Full stop,” said Gregory Garre, a Latham & Watkins attorney representing Coca-Cola.

Robert Willens, a New York tax and accounting consultant who isn’t involved in the case, said he was surprised that the judges seemed to think the IRS was bound to continue using the methodology it was using before the switch, as the result of an earlier settlement with Coca-Cola. That agreement had a specified term and expired, but that “does not seem to have registered with the judges,” he said.

The judges also questioned why the IRS had applied its new method to Coca-Cola affiliates in some countries but not others. The company contends that’s because the IRS would have run into interference from tax treaties if it had done so.

Rubin dismissed that idea as a “conspiracy theory.” Cases like Coca-Cola are very “resource-intensive” for the IRS, she said, and so the agency has to choose what to audit.

A ruling last October in favor of 3M Co. in the Eighth Circuit in a case involving blocked-income rules supports Coca-Cola’s position, Garre said. It’s “on all fours with this case.”

But Rubin said the 3M ruling “simply got it wrong.”

Chandra Wallace (Tax Notes): Coca-Cola Relies on Fairness Arguments at Eleventh Circuit

Arguing for Coca-Cola, Gregory Garre of Latham & Watkins LLP focused on the legal errors the company asserts the Tax Court committed, but — in response to a pointed question from Grant — declined to commit the company to a specific relief request. If the panel determines there was legal error, it should send the matter back to the Tax Court for a redetermination, as was done in the long-running Medtronic transfer pricing dispute, he said.

The judges spent less time on another key issue in the case: whether the IRS can allocate to the U.S. parent royalty income that couldn’t be paid to it under Brazilian law.

In a parallel case involving the same issue (3M Co. v. Commissioner, No. 23-3772 (8th Cir. 2025)), the Eighth Circuit ruled for 3M in October 2025, finding that an IRS regulation allowing the allocation of blocked income isn’t binding law in the wake of the Supreme Court’s decision in Loper Bright Enterprises Inc. v. Raimondo, 144 S. Ct. 2244 (2024).

That outcome was at odds with the Tax Court’s conclusion that the blocked income regulations applied in Coca-Cola. As Garre noted in his argument, a decision by the Eleventh Circuit panel to affirm the Tax Court’s ruling would create a circuit split on the treatment of blocked income.

The government requested and received an extension of time to file a petition for Supreme Court review of the 3M decision, but didn’t file a petition or request a further extension by the extended deadline of June 22.

Previous Coverage:

Bloomberg: Coca-Cola, IRS Face Off in Tax Appeal With Huge Stakes for Both