Law360 highlighted Lauren Ross and Joanne Fay’s insights in an article detailing the top international tax cases to watch in 2026.
Lauren commented on The Coca-Cola Co. and Subsidiaries v. Commissioner, a case which centers on changes the IRS made to the division of income among the parent company and its foreign affiliates involved in bottling, distribution and marketing in countries such as Brazil, Mexico, and Ireland. Coca-Cola has contended that the agency pulled a "bait and switch" when applying a new transfer pricing method for the 2007 through 2009 tax years after allowing the company to rely on a different approach for more than a decade.
The 2020 Tax Court ruling held that the IRS properly rejected Coca‑Cola’s 10‑50‑50 method and correctly applied the Comparable Profits Method to reallocate over $9 billion of income, meaning that the Tax Court agreed that the IRS was right to discard Coca‑Cola’s old profit‑splitting formula and instead use a different method that showed Coca‑Cola should have reported over $9 billion more in U.S. income.
The 2023 Tax Court ruling addressed the remaining Brazil‑related issue and concluded that Brazil’s legal cap on royalties did not limit the IRS’s transfer‑pricing adjustment, because the court, relying on the Eighth Circuit’s 3M decision, found the blocked‑income regulation valid and applicable, allowing the IRS to disregard foreign restrictions when determining arm’s‑length pricing.
The Eleventh Circuit must decide whether the IRS lawfully rejected Coca‑Cola’s 10‑50‑50 method in favor of the Comparable Profits Method and correctly applied the blocked‑income regulation to disregard Brazil’s royalty restrictions when determining arm’s‑length pricing. In urging the Eleventh Circuit to reverse the Tax Court's ruling, Coca-Cola told the appeals court in February that the decision excused the IRS' decision to "abruptly" switch pricing methods. The agency "did not even attempt to justify" its change, which more than doubled royalties the company received from foreign affiliates that use its brand names and other trademarks, according to the company.
Lauren noted that the Eleventh Circuit will have to grapple with whether it agrees or disagrees with the Eighth Circuit's analysis. "Having a circuit split on this issue would be confusing for taxpayers outside the Eighth and Eleventh circuits, given the limited jurisprudence," she said.
Further, Lauren provided her thoughts on Medtronic Inc. et al. v. Commissioner, which focuses on Medtronic Inc.'s long-running dispute on the government's contention that the medical device maker charged its Puerto Rican affiliate an artificially low royalty rate for "uniquely valuable intangibles" as a way to shift more than $1 billion in income offshore.
The Eighth Circuit in September tossed Tax Court Judge Kathleen Kerrigan's August 2022 ruling, which deviated from a traditional method for pricing intangibles that Medtronic licensed to its affiliate in 2005 and 2006. In using an approach that combined elements of different methods, Judge Kerrigan rejected the IRS' arguments for using the CPM.
In sending the dispute back to the Tax Court, the panel held that the CPM is viable even though Medtronic's Puerto Rican affiliate, Medtronic-PR, performed only one function — manufacturing medical products — while the comparable companies performed additional operations, such as research and development. Lauren noted that there's not much in the opinion on this point regarding the CPM.
"I'm waiting to see what the Tax Court does, and then what the Eighth Circuit says when it comes back," she said. "This is an area where you could see the case affecting day-to-day transfer pricing practice."
Joanne commented on Liberty Global Inc. v. U.S., where Liberty Global's case will hinge on how the Tenth Circuit interprets the economic substance doctrine, which Congress codified in 2010 under IRC Section 7701(o) — along with a strict liability penalty of 20% under IRC Section 6662.
According to the statute, the IRS can deny tax benefits when a transaction "does not have economic substance or lacks a business purpose" in situations where the doctrine "is relevant."
A Colorado federal judge cited the doctrine in October 2023 when he ruled that Liberty Global wasn't entitled to a $109 million tax refund because "no reasonable fact-finder" could characterize the company's underlying reorganization as a basic business transaction.
As part of the transaction, known as Project Soy, the telecommunications company took several steps in 2018 — including reclassifying a Belgian subsidiary under U.S. tax law — that ultimately allowed Liberty Global to sell its stake in the affiliate to its U.K. parent company for $2.4 billion.
Liberty Global claimed a deduction against its gain from the sale under IRC Section 245A , created by the 2017 Tax Cuts and Jobs Act, which allows U.S. corporations to repatriate certain foreign earnings tax-free.
In challenging the IRS' denial of the deduction, which underlies Liberty Global's refund bid, the company told the Tenth Circuit that the economic substance doctrine helps courts determine whether a transaction falls within the meaning of a statutory or regulatory term. According to Liberty Global, the doctrine isn't relevant in the case, where the company followed the tax code and related regulations "to a tee" when reorganizing to claim the Section 245A deduction.
Joanne said that during oral arguments in November 2024, it seemed to come down to two different approaches to the meaning of "relevant" in the statute.
Specifically, she said, the issue is "whether or not, as Liberty Global argued, you rely on pre-codification case law or, as … the United States government argued, you look to congressional intent. That will be really an analysis to watch out for."
Back
