US: Update on current TP cases in the US
Litigation
Court Roundup: Updates in Facebook, Eaton and Coca-Cola Tax Cases
The IRS, in Facebook Inc.’s latest challenge in the U.S. Tax Court, rejected the social network’s claim that it properly valued intangibles, including Instagram technology, that the company transferred to its Irish unit in 2013.
The Internal Revenue ServiceTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... also denied Facebook’s statement that it correctly reported its foreign currency transaction gain/loss for the years 2011-13. These were two of many other claims the agency rejected in its Aug. 27 answer to Facebook’s June 26 petition.
The agency also refuted claims that the Irish subsidiary made arm’s-length payments to the parent company. For instance, the IRS denied that Facebook Ireland paid an arm’s-length contingent royalty of 1 percent of its revenue for marketing intangibles and that the Irish unit overvalued its user base because it developed the user base in its territory at its expense. The one percent calculus was based on Ernst & Young LLP’s analysis, which the IRS denied for lack of information.
Other claims the IRS rejected include Facebook’s domestic production activities deduction of $17 million for 2011 under Internal Revenue Code Section 199. The agency says it should’ve been zero.
The IRS argues Facebook underpaid its 2011 and 2013 income taxes and undervalued intangible property it made available to Facebook Ireland Holdings Unlimited in 2010 and 2013. Those adjustments resulted in more than $3.8 million due in additional taxes and about $26 million in penalties under Section 6662(h) of the Internal Revenue Code for gross valuation misstatements.
Meanwhile, Eaton Corp. and the IRS are conferring on the IRS’s income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... calculations for the company’s 2012 Tax Court case. The court released an opinion in 2017 siding with the company. Eaton found issues with the IRS calculations, such as the IRS including a 40 percent penalty and disregarding foreign tax credits and net operating loss carrybacks the company reported in years after those in the case. Parties agree the court needs to address the penalty issue. Eaton is also objecting to the IRS on its stance to disallow Eaton relief under Rev. Proc. 99-32. That revenue procedure allows taxpayers with Section 482 adjustments to make certain correlative adjustments. But the IRS has denied such relief as a result of the penalties.
In other developments, Coca-Cola Co.’s attorneys and the IRS have found errors in the transcript of their eight-week long trial in the Tax Court earlier this year. The parties have reviewed and agreed on corrections to most errors, but submitted an Aug. 27 motion for the audio of the trial to figure out if other potential errors need corrections.
Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Cases Pending in U.S. Courts
3M Co. v. Commissioner, U.S. Tax Court
Oral argument held November 2016. 3M is challenging the IRS’s $4.27 million assessment. IRS claims the company’s Brazilian subsidiary underpaid royalties for the use of patents and trademarks, but 3M says the subsidiary was barred by Brazilian law from paying more. Hearing concluded in fall of 2016.
Oral argument held November 2016. 3M is challenging the IRS’s $4.27 million assessment. IRS claims the company’s Brazilian subsidiary underpaid royalties for the use of patents and trademarks, but 3M says the subsidiary was barred by Brazilian law from paying more. Hearing concluded in fall of 2016.
Altera Corp. v. Commissioner, 9th Cir.
An Aug. 27 order said the parties can, but don’t have to, file optional supplemental briefs for the appeal by Sept. 28. “The briefs should be no longer than 6,500 words,” the order said. The Ninth Circuit Aug. 7 withdrew its July 24 opinion ruling against Intel subsidiary Altera. The federal court previously said the IRS didn’t violate the Administrative Procedure Act in issuing 2003 cost-sharing regulations, which was a reversal from the U.S. Tax Court ruling. In July 2015, the court said the IRS failed to take into account stakeholder testimony that unrelated parties don’t share the costs of stock-based compensation.
An Aug. 27 order said the parties can, but don’t have to, file optional supplemental briefs for the appeal by Sept. 28. “The briefs should be no longer than 6,500 words,” the order said. The Ninth Circuit Aug. 7 withdrew its July 24 opinion ruling against Intel subsidiary Altera. The federal court previously said the IRS didn’t violate the Administrative Procedure Act in issuing 2003 cost-sharing regulations, which was a reversal from the U.S. Tax Court ruling. In July 2015, the court said the IRS failed to take into account stakeholder testimony that unrelated parties don’t share the costs of stock-based compensation.
Altera Corp. v. Commissioner, U.S. Tax Court, filed 1/11/2018
The IRS issued Altera an $18.97 million tax bill on Oct. 16, 2017. The agency increased Altera’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... for 2012 to 2015 by allocating $95.15 million to it from Altera International Inc., a Cayman Islands company. This case has been consolidated with the company’s 2015 case below.
The IRS issued Altera an $18.97 million tax bill on Oct. 16, 2017. The agency increased Altera’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... for 2012 to 2015 by allocating $95.15 million to it from Altera International Inc., a Cayman Islands company. This case has been consolidated with the company’s 2015 case below.
Altera Corp. v. Commissioner, U.S. Tax Court, filed 12/18/15
Computer chip maker is again challenging U.S. regulations requiring the cost sharing of stock options. Altera is challenging the IRS’s $3.3 million tax assessmentA tax assessment is a formal determination made by a tax authority to calculate the amount of tax an individual or entity owes. It is a comprehensive evaluation based on financial records, declared income, expenses, deductions, and any applicable tax laws or regulations. Tax assessments may arise from routine self-assessments by taxpayers, or they may be conducted by revenue authorities... for 2010-11, which is based on 2009 temporary and 2011 final regulations. Status report due Nov. 1.
Computer chip maker is again challenging U.S. regulations requiring the cost sharing of stock options. Altera is challenging the IRS’s $3.3 million tax assessmentA tax assessment is a formal determination made by a tax authority to calculate the amount of tax an individual or entity owes. It is a comprehensive evaluation based on financial records, declared income, expenses, deductions, and any applicable tax laws or regulations. Tax assessments may arise from routine self-assessments by taxpayers, or they may be conducted by revenue authorities... for 2010-11, which is based on 2009 temporary and 2011 final regulations. Status report due Nov. 1.
Amazon.com Inc. v. Commissioner, 9th Cir.
The IRS filed a reply brief on Aug. 22 to Amazon in which it argued for its interpretation of the language in Section 482 regarding intangibles. Several friend-of-the-court briefs filed in July. The IRS appealed in September 2017 the Tax Court’s decision in Amazon.com Inc. v. Commissioner, where Judge Albert G. Lauber said the IRS abused its discretion in making a $2 billion adjustment to Amazon’s income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...tax returnsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations..., which led to a $234 million tax bill. The case involves a cost-sharing arrangementCost-Sharing Arrangements (CSAs) are agreements between related entities within a multinational enterprise (MNE) to share the costs and risks of developing, producing, or acquiring assets, such as intellectual property. In exchange, each participant is entitled to a share of the benefits derived from those assets. CSAs are commonly used for research and development (R&D) projects, where multiple subsidiaries contribute to... in which IP was transferred to a European subsidiary.
The IRS filed a reply brief on Aug. 22 to Amazon in which it argued for its interpretation of the language in Section 482 regarding intangibles. Several friend-of-the-court briefs filed in July. The IRS appealed in September 2017 the Tax Court’s decision in Amazon.com Inc. v. Commissioner, where Judge Albert G. Lauber said the IRS abused its discretion in making a $2 billion adjustment to Amazon’s income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...tax returnsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations..., which led to a $234 million tax bill. The case involves a cost-sharing arrangementCost-Sharing Arrangements (CSAs) are agreements between related entities within a multinational enterprise (MNE) to share the costs and risks of developing, producing, or acquiring assets, such as intellectual property. In exchange, each participant is entitled to a share of the benefits derived from those assets. CSAs are commonly used for research and development (R&D) projects, where multiple subsidiaries contribute to... in which IP was transferred to a European subsidiary.
Coca-Cola Co. v. Commissioner, U.S. Tax Court
Coca-Cola is battling a $9.4 billion transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... adjustment connected to its licensing of intellectual property to related parties in Europe, Africa and South America. That adjustment led to a $3.3 billion tax bill. The IRS incorrectly reduced Coca-Cola’s Mexico foreign tax credits, the court held in a Dec. 14, 2017, division opinion. Trial concluded May 11. Post-trial briefs due in October with answering briefs due in February 2019. Parties are trying to correct certain portions of the trial transcript.
Coca-Cola is battling a $9.4 billion transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... adjustment connected to its licensing of intellectual property to related parties in Europe, Africa and South America. That adjustment led to a $3.3 billion tax bill. The IRS incorrectly reduced Coca-Cola’s Mexico foreign tax credits, the court held in a Dec. 14, 2017, division opinion. Trial concluded May 11. Post-trial briefs due in October with answering briefs due in February 2019. Parties are trying to correct certain portions of the trial transcript.
Eaton Corp. v. Commissioner, U.S. Tax Court, filed 2/29/12
Eaton argues the IRS improperly canceled two advance pricing agreementsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... and seeks to eliminate a subsequent $368.6 million adjustment that led to a $125 million tax bill. The IRS’s cancellation of Eaton’s two APAsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... was an abuse of discretion, Judge Kathleen Kerrigan said in her July 2017 opinion. Parties filed a joint status report Aug. 6.
Eaton argues the IRS improperly canceled two advance pricing agreementsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... and seeks to eliminate a subsequent $368.6 million adjustment that led to a $125 million tax bill. The IRS’s cancellation of Eaton’s two APAsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... was an abuse of discretion, Judge Kathleen Kerrigan said in her July 2017 opinion. Parties filed a joint status report Aug. 6.
Eaton Corp. v. Commissioner, U.S. Tax Court, filed 11/25/14
In a second petition involving cancellations of the APAsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges..., Eaton is challenging $1 billion in tax adjustments related to 2007-10. Parties proposed in a September 2017 status report a schedule for cross-motions for partial summary judgment on whether earnings and profits of certain controlled foreign corporations are increased. Parties met Jan. 17 for a hearing on issue involving earnings and profits of controlled foreign corporations. IRS filed March 19 a reply to opposition to motion for summary judgment, and Eaton filed a response to the motion on March 20.
In a second petition involving cancellations of the APAsAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges..., Eaton is challenging $1 billion in tax adjustments related to 2007-10. Parties proposed in a September 2017 status report a schedule for cross-motions for partial summary judgment on whether earnings and profits of certain controlled foreign corporations are increased. Parties met Jan. 17 for a hearing on issue involving earnings and profits of controlled foreign corporations. IRS filed March 19 a reply to opposition to motion for summary judgment, and Eaton filed a response to the motion on March 20.
Matter of Eaton Corp. Sec. Litig., S.D.N.Y.
South Carolina Retirement Systems Group TrustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. appealed the case on Aug. 20 after Eaton Corp. succeeded in getting a district court to dismiss an original class action alleging that the electrical equipment manufacturer and two of its top executives failed to disclose tax consequences of its inversion in Ireland, which led to a $3 billion loss in stock value. Opinion filed July 25.
South Carolina Retirement Systems Group TrustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. appealed the case on Aug. 20 after Eaton Corp. succeeded in getting a district court to dismiss an original class action alleging that the electrical equipment manufacturer and two of its top executives failed to disclose tax consequences of its inversion in Ireland, which led to a $3 billion loss in stock value. Opinion filed July 25.
Facebook Inc. v. Commissioner, U.S. Tax Court, filed 10/11/16
Facebook is contesting IRS calculation of more than $13.8 billion for the value of transferred intangibles, and the resulting $5.39 million increase in Facebook’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,.... Trial set for Aug. 21, 2019, in San Francisco. Pretrial schedule set.
Facebook is contesting IRS calculation of more than $13.8 billion for the value of transferred intangibles, and the resulting $5.39 million increase in Facebook’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,.... Trial set for Aug. 21, 2019, in San Francisco. Pretrial schedule set.
Facebook Inc. v. Commissioner, U.S. Tax Court, filed 6/26/18
Facebook is challenging another tax bill from the IRS, this time in the amount of $3.86 million for 2011 and 2013. The company could also face $26 million in penalties related to gross valuation misstatements. Facebook is also contesting the IRS’s inclusion of stock-based compensation costs. IRS filed its answer to Facebook’s petition Aug. 27 denying that Facebook Ireland paid arm’s-length prices for intangible property.
Facebook is challenging another tax bill from the IRS, this time in the amount of $3.86 million for 2011 and 2013. The company could also face $26 million in penalties related to gross valuation misstatements. Facebook is also contesting the IRS’s inclusion of stock-based compensation costs. IRS filed its answer to Facebook’s petition Aug. 27 denying that Facebook Ireland paid arm’s-length prices for intangible property.
Illinois Tool Works Inc. v. Commissioner, U.S. Tax Court
The U.S. Tax Court in an Aug. 6 opinion held for Illinois Tool Works and found that a transaction between two of its subsidiaries was a loan and not a taxable distribution. The IRS had handed the company a $70 million tax bill for 2006 based on the determination that a $356.8 million intercompany cash distribution wasn’t a loan, but was “in substance” a taxable distribution. Illinois Tool Works owes no additional taxes for 2006, according to an Aug. 13 order.
The U.S. Tax Court in an Aug. 6 opinion held for Illinois Tool Works and found that a transaction between two of its subsidiaries was a loan and not a taxable distribution. The IRS had handed the company a $70 million tax bill for 2006 based on the determination that a $356.8 million intercompany cash distribution wasn’t a loan, but was “in substance” a taxable distribution. Illinois Tool Works owes no additional taxes for 2006, according to an Aug. 13 order.
Microsoft Corp. v. IRS, W.D. Wash
Microsoft sued to enforce five consolidated FOIA requests filed between Dec. 12, 2014, and March 13, 2015. The company maintains that it seeks to compel disclosure of records unlawfully withheld by the IRS related to an audit of the company’s cost-sharing agreements. The IRS continues to comply with Microsoft’s document request and parties continue to work in good faith, according to an August status report.
Microsoft sued to enforce five consolidated FOIA requests filed between Dec. 12, 2014, and March 13, 2015. The company maintains that it seeks to compel disclosure of records unlawfully withheld by the IRS related to an audit of the company’s cost-sharing agreements. The IRS continues to comply with Microsoft’s document request and parties continue to work in good faith, according to an August status report.
Medtronic, Inc. v. Commissioner, 8th Cir.
The Eighth Circuit sent the Tax Court decision back to the judge for further analysis after determining in an Aug. 16 opinion that the Tax Court had failed to properly explain how it reached its conclusion. The IRS appealed on April 21, 2017, the Tax Court’s decision in Medtronic, Inc. v. Commissioner. Judge Kathleen Kerrigan found the IRS erred in its characterization of the relationship between Medtronic and its Puerto Rican subsidiary in making a $2.2 billion income adjustment for 2005-06. Oral argument held March 14.
The Eighth Circuit sent the Tax Court decision back to the judge for further analysis after determining in an Aug. 16 opinion that the Tax Court had failed to properly explain how it reached its conclusion. The IRS appealed on April 21, 2017, the Tax Court’s decision in Medtronic, Inc. v. Commissioner. Judge Kathleen Kerrigan found the IRS erred in its characterization of the relationship between Medtronic and its Puerto Rican subsidiary in making a $2.2 billion income adjustment for 2005-06. Oral argument held March 14.
TBL Licensing LCC v. Commissioner, U.S. Tax Court
The sale of U.S. boot-maker Timberland Co. to VF Corp. in 2011 involved a reorganization that the IRS maintains shifted nearly $1.5 billion in untaxed assets to a Swiss affiliate. TBL Licensing, the successor corporation to Timberland, is challenging the reallocation, which involves a $504.6 million tax bill. Parties are still working to resolve issues. The next status report is due Nov. 16.
The sale of U.S. boot-maker Timberland Co. to VF Corp. in 2011 involved a reorganization that the IRS maintains shifted nearly $1.5 billion in untaxed assets to a Swiss affiliate. TBL Licensing, the successor corporation to Timberland, is challenging the reallocation, which involves a $504.6 million tax bill. Parties are still working to resolve issues. The next status report is due Nov. 16.
Thomas & Betts Corp. v. Commissioner, U.S. Tax Court
The manufacturer of electrical power components is challenging a $9.37 million tax bill in a case where the IRS reallocated more than $75 million in income to T&B from its affiliate T&B PR by lowering the prices of the affiliate’s products sold to the U.S. parent during 2009-12. Trial set for July 16, 2019 in Memphis. Parties have submitted request for admissions and response to request for admissions.
The manufacturer of electrical power components is challenging a $9.37 million tax bill in a case where the IRS reallocated more than $75 million in income to T&B from its affiliate T&B PR by lowering the prices of the affiliate’s products sold to the U.S. parent during 2009-12. Trial set for July 16, 2019 in Memphis. Parties have submitted request for admissions and response to request for admissions.
United States v. Facebook Inc., N.D. Calif.
The IRS sued to enforce seven summonses against Facebook Inc. in an audit of the company’s 2010 tax year. The IRS is seeking records related to the value of intangibles Facebook Inc. transferred to an Irish subsidiary as part of restructuring the company’s European operations. Parties are working through the summonses and have requested time to discuss remaining disputes and potential solutions. Management conference set for Sept. 27, according to a July 26 order.
The IRS sued to enforce seven summonses against Facebook Inc. in an audit of the company’s 2010 tax year. The IRS is seeking records related to the value of intangibles Facebook Inc. transferred to an Irish subsidiary as part of restructuring the company’s European operations. Parties are working through the summonses and have requested time to discuss remaining disputes and potential solutions. Management conference set for Sept. 27, according to a July 26 order.
Zimmer Biomet Holdings Inc. v. Commissioner, U.S. Tax Court
Indiana-based medical device maker challenges a $228.5 million adjustment related to the licensing of intangibles to its Dutch subsidiary in tax years 2005-2007. Status report filed Feb. 26 indicates ongoing discovery process. Parties still waiting for IRS Appeals’ consideration of later tax years. The parties continue to work on settling the case, according to an Aug. 23 status report.
Indiana-based medical device maker challenges a $228.5 million adjustment related to the licensing of intangibles to its Dutch subsidiary in tax years 2005-2007. Status report filed Feb. 26 indicates ongoing discovery process. Parties still waiting for IRS Appeals’ consideration of later tax years. The parties continue to work on settling the case, according to an Aug. 23 status report.
To contact the reporter on this story: Sony Kassam in Washington at skassam1@bloombergtax.com
To contact the editor responsible for this story: Kevin A. Bell at kbell@bloombergtax.com
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