Coca-Cola denied reconsideration in transfer pricing dispute due to ‘futile’ arguments

By Doug Connolly, MNE Tax

The US Tax Court will not reconsider its 2020 transfer pricing decision that increased Coca-Cola’s US taxable income by about USD 9 billion in a case involving the pricing of cross-border intercompany royalties.

In an order dated October 26, the court denied Coca-Cola’s motion for leave to file out of time a motion for reconsideration – stating that granting the motion for leave would be “futile” as the court would, in any event, ultimately deny the motion for reconsideration.

In the motion for reconsideration that Coca-Cola had filed in June, it argued that it had “reasonable reliance interests” in a 1996 closing agreement that it had completed with the Internal Revenue Service. Under the agreement, Coca-Cola had applied a “10-50-50” formulary apportionment transfer pricing method, and it continued to apply this method in years subsequent to the agreement. However, the court, in its 2020 decision, had found the agreement inapplicable to the years at issue (2007–2009).

The Tax Court has now effectively denied Coca-Cola’s motion for reconsideration of the 2020 decision, noting that the motion was not filed within the normal 30-day deadline – rather, 196 days after the November 2020 opinion – and that the justifications for the delay were not compelling.

In denying the motion, the court also criticized Coca-Cola’s underlying arguments, noting the “futility of the positions petitioner seeks to advance.”

No reliance interest in pricing method

The court stated that the 1996 closing agreement in question related to a dispute involving Coca-Cola’s 1987–1995 tax years, to which the agreement applied the 10-50-50 method. The fact that the IRS initially seemed to acquiesce in Coca-Cola’s continued use of this method in subsequent years (which the agreement did not cover) did not create a legitimate reliance interest, the court contended.

“Petitioner had no legitimate reliance interests in believing the IRS would adhere to the 10-50-50 method indefinitely,” the court stated.

In addition, the court concluded that the IRS is entitled to take different positions in different years (“each tax year stands on its own”) and it is not “required to give a taxpayer prior notice that it is planning to revise its stance.”

If Coca-Cola desired certainty with respect to the continued use of the 10-50-50 method, the court contended, it should have attempted to negotiate a closing agreement for subsequent years, or – if it truly believed the 10-50-50 method to be the best method – sought an advance pricing agreement.

However, Coca-Cola did not pursue such contractual commitments but instead only hoped the IRS would not challenge its continued use of the method in future years. However, the court stated, “hope is not something that gives rise to legal or constitutional entitlements.”

Arguments to justify motions

Regarding the justifications for the delay in filing the motion, Coca-Cola had contended that it hired new lawyers who needed time to catch up on a complex case. The court dismissed this argument, saying hiring new lawyers does not entitle taxpayers to a “do-over” – explaining that holding otherwise would allow those with deep pockets to stretch out litigation indefinitely. Moreover, the court noted that Coca-Cola had announced the legal arguments it would make in a press release months before it made them in the motion for reconsideration.

With respect to the merits of the underlying motion for reconsideration, the court explained that it has denied motions for leave to file a motion for reconsideration where the underlying arguments are “meritless and would not change the outcome.”

The court added that it generally does not grant reconsideration absent a showing of substantial error or unusual circumstances. In this respect, the court noted that it had already addressed a version of Coca-Cola’s reliance interest argument in the 2020 decision and found the premise for it to be erroneous.