Coca-Cola has finally filed its long-awaited brief with the Eleventh Circuit in the company’s appeal of Coca-Cola Co. v. Commissioner, 155 T.C. 145 (2020). Although the brief is loaded with colorful analogies and provocative accusations, it does little to strengthen the company’s case.
Coca-Cola’s appellant brief, filed February 25, is the most recent development in a lengthy and contentious transfer pricing battle between the company and the IRS.
The saga began with an examination that led to a closing agreement in 1996, which established a formula for computing intercompany royalties for the 1987-1995 tax years and that Coca-Cola could use in following years without facing accuracy-related penalties on any adjustment. This “10-50-50” formula, which is either a simple apportionment formula or history’s laziest residual profit-split analysis, gave the Coca-Cola subsidiaries that produce and sell beverage concentrate internationally a 10 percent return on sales and half of the residual profit.
The remaining 50 percent residual profit share was the royalty paid to Coca-Cola, which was supposed to compensate the U.S. parent for the product formulas, manufacturing methods, brands, trademarks, and other intangible property necessary to produce and sell soft drink beverage concentrate to bottlers.
The idea that foreign subsidiaries responsible for producing the syrup used to make soft drinks, which the company refers to as “supply points,” should receive 10 percent of regional revenue and half of the residual never passed the smell test. The formula meant the U.S. parent that centrally manages the group’s global marketing and product development strategies, and that owns almost all the group’s core intangibles, received considerably less income than the entities that produced syrup in accordance with the parent’s instructions.
But Coca-Cola kept applying the formula for years, and the IRS kept accepting it — until 2011, when it didn’t. The IRS, with no apparent warning, abruptly refused to accept Coca-Cola’s use of the formula for its 2007 through 2009 tax years. The IRS instead computed the supply point royalties using the comparable profits method, which increased Coca-Cola’s taxable income by a total of over $9 billion for the three-year period.
In a development that took many by surprise, the Tax Court’s 2020 opinion in Coca-Cola upheld the IRS’s section 482 allocations and the method used to compute them, reducing the resulting deficiencies only to give the company credit for dividends paid in place of required royalty payments.
Coca-Cola announced its intent to appeal almost immediately after the Tax Court opinion’s release, but the appeal was delayed for years by the need to wait for an opinion on the blocked income issue in 3M Co. v. Commissioner, 160 T.C. No. 3 (2023).
But a Tax Court decision was entered in Coca-Cola in August 2024, and with Coca-Cola’s appellant brief, the appeal is officially underway.
Coca-Cola’s brief raises the same two general arguments that the company has made since the beginning, although it adds some new arguments and shifts emphasis among points it has already made. The first claim is that the closing agreement, especially its prospective penalty protection provision, and the IRS’s subsequent acceptance of the 10-50-50 apportionment formula for over a decade, bar the agency from applying the CPM for 2007 through 2009.
This has been alternatively framed by Coca-Cola as an estoppel-like claim, a constitutional violation, an arbitrary and capricious agency action, or all of the above. Coca-Cola’s second argument is that the IRS’s selection and application of the CPM was unreliable, which represents another taxpayer attempt to turn the regulations upside down by claiming that the CPM’s comparability standards are more exacting than those applicable to other methods.
The brief is a lively and engaging read, and for the most part, it makes Coca-Cola’s case about as well as anyone could. But some of its additions and adaptations to the company’s arguments are either transparently flawed or completely implausible, and its omissions raise questions about what exactly the company’s trying to argue.
‘Jaywalking’ Jackpot
The central premise of Coca-Cola’s reasonable reliance argument is that the IRS led the company into an ambush. The 1996 closing agreement between the IRS and Coca-Cola explicitly stipulated that for the 1987 through 1995 tax years, the 10-50-50 apportionment formula yielded arm’s-length results consistent with section 482.
The agreement further granted Coca-Cola prospective protection from any section 6662 accuracy-related penalties that would otherwise result from a future section 482 allocation, provided that the company kept applying the 10-50-50 apportionment formula in later years.
The IRS then proceeded to accept Coca-Cola’s use of the apportionment formula for all post-1995 tax years until, one fateful day, it suddenly reversed course. As Coca-Cola’s brief put it, with characteristic dramatic flair, “in 2011, the IRS shockingly declared that it would no longer honor 10-50-50 for the 2007-2009 tax years — long after those tax years were over and Coca-Cola could do anything about it.” The abrupt methodological switch to the CPM resulted in over $9 billion worth of section 482 allocations and deficiencies of about $3.4 billion for the three-year period.
To some, the IRS’s willingness to let Coca-Cola compute its U.S. tax liability using a permissive apportionment method like the 10-50-50 formula for two decades might sound like a good thing. Likewise, many would consider protection from accuracy-related penalties on what turned out to be billions of dollars in deficiencies to be a pretty good deal. But not Coca-Cola, which apparently considers the tax windfalls it enjoyed for decades to be an inalienable right.
For Coca-Cola, the end of its long run of good fortune was in fact the denouement of a devious IRS “bait-and-switch.” The “bait,” according to Coca-Cola, was the closing agreement’s pro forma characterization of the apportionment formula as “arm’s length” and its insidious offer of penalty protection contingent on the company’s future use of the formula. Reinforced by the IRS’s acceptance of the formula in examinations for over a decade, the closing agreement purportedly gave Coca-Cola a reasonable expectation that the formula was compliant with section 482. It also allegedly led Coca-Cola to forgo tax planning opportunities that, far-fetched as it may seem, would have been even more advantageous than the 10-50-50 apportionment formula.
The “switch,” of course, was the series of deficiencies that followed the IRS’s changed course. Based on the Tax Court’s 2017 opinion (149 T.C. 446 (2017)) in favor of Coca-Cola on a Mexican foreign tax credit issue, the court’s 2020 opinion upholding the IRS’s transfer pricing adjustments but allowing dividend offsets, and the court’s 2023 supplemental blocked income opinion (T.C. Memo. 2023-135), the total deficiencies of about $3.4 billion fell to about $2.7 billion. About a month after the Tax Court entered its decision in the case, Coca-Cola reported that it made a $6 billion “IRS tax litigation deposit” in September 2024 covering the deficiencies plus accrued interest.
In one of its many rhetorical flourishes, Coca-Cola’s brief likens the deficiencies determined by the IRS and largely upheld by the Tax Court to then-D.C. Circuit Judge Brett M. Kavanaugh’s hypothetical jaywalking ticket in PHH Corp. v. CFPB, 839 F.3d 1, 46 (D.C. Cir. 2016). In Kavanaugh’s hypothetical, a cop directs a pedestrian to cross the road at a particular point and then gives the pedestrian a $1,000 jaywalking citation for complying with the direction. As Coca-Cola’s brief argues:
“In short, to use then-Judge Kavanaugh’s “jaywalking” hypothetical, the IRS, in effect, handed Coca-Cola a $3 billion jaywalking ticket in the form of a transfer-pricing bill for following the same method repeatedly blessed by the IRS for over a decade. This Court should not tolerate the IRS’s attempted bait and switch.”
Coca-Cola vigorously contests the merits of the IRS’s CPM-based adjustments as well, but the agency’s right to abandon the 10-50-50 apportionment formula under applicable administrative law and the reliability of its substitute method are two different questions that must be assessed independently. If we assume that the IRS’s CPM-based allocations would have otherwise been well founded under the section 482 regulations, was the $2.7 billion upheld by the Tax Court still an arbitrary and capricious “jaywalking ticket”?
Obviously not. Fines are punitive financial obligations imposed on people who engage in proscribed behavior. The only reason the unsuspecting jaywalker in Kavanaugh’s example could have been liable for anything is that they complied with the malicious cop’s instruction. Tax liability is different. Taxpayers owe what they owe under the IRC and the regulations that implement it.
To stick with the jaywalking analogy, the legally stipulated price to cross the street was $2.7 billion higher than Coca-Cola actually paid to cross it. The notion that Coca-Cola passed on tax planning opportunities that would have been even more lucrative than using the 10-50-50 apportionment formula, without fear of accuracy-related penalties, is belied by the company’s ongoing refusal to use any other method after 2011.
Coca-Cola thus never got “a $3 billion jaywalking ticket” from the IRS. Accuracy-related penalties, which were never assessed, would be a jaywalking ticket. The $6 billion it paid in September 2024 comprised only the $2.7 billion in deficiencies that, according to the Tax Court, Coca-Cola owed plus accrued interest. The company really got a multibillion-dollar loan at a weighted-average annual interest rate of about 5 percent.
Coca-Cola incurred the obligation to pay about $3.3 billion in interest, which equates to a weighted-average interest rate of about 5 percent, completely voluntarily. It reported in its Form 10-K for 2015 that it had over $7.3 billion in cash and cash equivalents (and considerably more in short-term investments in marketable securities) at year’s end, which was about 3.5 months after the company received the notice of deficiency. The company also reported that the weighted-average interest rate on its $13 billion in outstanding short-term commercial paper borrowings was about 0.5 percent at the end of 2015.
That Coca-Cola chose to litigate the case in Tax Court and let interest accrue until entry of a decision meant that it was content to treat the tax it didn’t pay in 2007, 2008, and 2009 as a loan. It’s unsurprising that Coca-Cola wasn’t in any rush to pay it off. According to its 10-K filings, the company’s weighted-average interest rate on long-term debt was 5.8 percent in 2007, 5.7 percent in 2008, and 5 percent in 2009. The IRS’s devious bait and switch, it turns out, was really just a sensible financing arrangement for Coca-Cola.
Running Scared
Another prominent and seemingly novel theme in Coca-Cola’s appellant brief is its allegation that the IRS selectively targeted supply points that had no recourse to mutual agreement procedures under a treaty. The IRS’s section 482 adjustments reallocated income to Coca-Cola from its supply points with operations in Brazil, Chile, Costa Rica, Egypt, Ireland, Mexico, and Swaziland. As a branch of a U.S. group entity, the Mexican supply point was entitled to treaty benefits under the Mexico-U.S. treaty, but the six supply points relevant in the appeal enjoyed no treaty protections.
The affected supply points’ lack of treaty protection was a consequence of the Coca-Cola group’s international organizational structure. The Irish and Egyptian supply points were branches of Atlantic Industries, a group entity incorporated in the Cayman Islands, and the supply points in Costa Rica and Swaziland were Atlantic Industries’ disregarded-entity subsidiaries. The Brazilian and Chilean supply points had no recourse to MAP because the United States, during the tax years at issue, had no bilateral treaty with either Chile or Brazil.
Coca-Cola’s brief doesn’t leave its point to inference. It explicitly accuses the IRS of refraining from adjustments that could have been challenged by foreign tax administrations in MAP. “The IRS did not disturb the use of 10-50-50 for the many other supply-point companies Coca-Cola had in countries with a taxation treaty with the [United States], such as France, China, and India,” the brief observes, before remarking that the “inconsistency was hardly accidental.” Expanding on this scrutiny-evasion accusation, the brief argues that:
“The IRS’s selective imposition of its new method was entirely opportunistic. The IRS abandoned 10-50-50 selectively — and only for supply-point companies that were not protected by a double-taxation treaty with the U.S. — to evade scrutiny of its new CPM by foreign taxing authorities. If the IRS had applied its new method to supply-point companies protected by taxation treaties, then foreign taxing authorities could have — and almost certainly would have — challenged the IRS’s adoption of a method that shifted billions of dollars of income — and thus tax revenues — from their countries to the U.S.”
What better way to liven things up than to accuse the IRS of doing something to entities that can’t fight back, while cowering from those that can? There are a few problems with Coca-Cola’s hot take, however. For one thing, as acknowledged in paragraph 4.a.7 of Coca-Cola’s Tax Court petition, the IRS’s CPM analysis reallocated nearly $95 million in income from the U.S. parent to its unprofitable Egyptian supply point. It’s unclear how the reallocation of income from Coca-Cola to its Egyptian supply point can be reconciled with the company’s cherry-picking narrative, and its brief makes no attempt to do so.
More generally, potential blowback from treaty partners through MAP has never been a meaningful deterrent for the IRS when considering section 482 allocations. In particular, the notion that the IRS is fearful of “scrutiny” by the tax authorities of China, France, and India is almost comically far-fetched. It is highly unlikely, to say the least, that the U.S. competent authority was particularly desperate for approval from its counterparts in three other countries with rich traditions of tax unilateralism.
The United States’ treaties with China and India have no arbitration provisions, so the U.S. competent authority could simply decline to agree to relieve double taxation. The United States could thus have ended any MAP scrutiny from India and China by flatly refusing to withdraw an adjustment, just as footnote 7 of Coca-Cola’s brief accuses the IRS of doing with Mexico. The France-U.S. treaty, on the other hand, does provide for mandatory binding arbitration. It wouldn’t explain why there were no adjustments to Coca-Cola’s Indian and Chinese supply points, but could the IRS have been afraid that any French supply point adjustments would be struck down by an arbitrator?
Almost certainly not. As the Tax Court’s 2017 opinion on the creditability of taxes paid to Mexico explained, the IRS refused to participate in MAP negotiations with the Mexican competent authority. This refusal was a consequence of the IRS’s designation of the case for litigation in October 2015, less than a month after it issued Coca-Cola the notice of deficiency. As provided in section 7.03 of Rev. Proc. 2006-54, 2006-2 C.B. 1035, and section 6.05(1) of Rev. Proc. 2015-40, 2015-35 IRB 236, the IRS generally will not accept or further consider a taxpayer’s competent authority assistance request if the taxpayer’s matter has been designated for litigation.
The notion that the IRS’s fear of pushback from China, France, and India (but not Mexico, for some reason) dictated its selection of supply points to target is hard to seriously entertain. There’s no reason to be particularly concerned about a treaty partner’s scrutiny unless the treaty has an arbitration provision that forces a decision. More importantly, treaty remedies and foreign tax administration scrutiny become moot as soon as the IRS designates the case for litigation. Because the IRS designated Coca-Cola’s case shortly after it issued the notice of deficiency, there was no foreign scrutiny for the agency to evade.
The whole premise becomes even less plausible when one considers what “designation” meant. By designating the case for litigation, the IRS was welcoming — demanding, even — scrutiny of its position from a court that (at least until 2020) had shown itself to be singularly hostile to the agency’s section 482 arguments. The same IRS that was ready to fight it out in a hostile venue like the U.S. Tax Court was afraid of what China, India, and France might think?
Demanding Extra Credit
The IRS selected, and the Tax Court upheld, the application of the CPM using independent bottlers as comparables and the return on assets (ROA) as the profit-level indicator. In other words, the IRS’s CPM analysis used the bottling companies’ ratios of operating profit to tangible assets to determine an arm’s-length return for the supply points. This approach aligned with the Tax Court’s finding that the “supply points were contract manufacturers that performed routine functions.”
Coca-Cola’s brief tries to illustrate the alleged absurdity of the approach accepted by the Tax Court, and of the CPM in general, with another provocative illustration:
“The only way for supply-point companies to owe less in royalties, and to keep more profits, is to invest more in their physical assets. As a result, under the IRS’s method, a supply-point company would get zero credit in the calculation of royalty amounts if it invested billions of dollars in marketing that boosted sales of Coca-Cola’s products, but the royalties it owed would decrease if it inflated its tangible assets by wastefully plating its buildings with gold.”
It’s true: The CPM, like other transfer pricing methods, assumes that controlled and uncontrolled taxpayers don’t intentionally engage in economically destructive behavior. Unfortunately for Coca-Cola’s argument, this is a perfectly reasonable assumption. We can safely rule out the possibility that controlled contract manufacturers will inflate their returns by building unnecessary particle accelerators or monumental mortuary temples because the negative effect on pretax operating profitability would almost always outweigh the tax benefit.
Those who remain vexed by the CPM’s “indirectness” and other purported flaws should find the reassurances they need in chapter 11 of Treasury’s 1988 white paper (Notice 88-123, 1988-2 C.B. 458), which proposes the “basic arm’s length return method” that evolved into the modern CPM. For reasons that have been exhaustively explained elsewhere, the Coca-Cola brief’s general claim that “the CPM must be used cautiously and with strict limitations in mind” has no sound regulatory basis.
The argument that the CPM is systematically inferior to other methods is especially absurd in Coca-Cola, which features an apportionment formula that makes no attempt to follow the reliability standards for any transfer pricing method (specified or unspecified) or incorporate market data in any way.
Absurd or not, Coca-Cola’s rejection of the CPM has been an important part of its case since the litigation began. What is new is the brief’s insistence on recharacterizing the supply points as investors. Although the Tax Court’s 2020 opinion considered (and rejected) the argument that the marketing costs allocated to Coca-Cola’s supply points generated CPM-disqualifying intangibles, the investor analogy is more forcefully articulated and far more heavily emphasized in the company’s appellant brief. In fact, the brief is so emphatic on the point that it refers to the supply points’ contributions using some variation of the words “invest” or “investment” over 50 times.
Coca-Cola’s term for the supply points is really a misnomer, the brief’s argument suggests. Supply point implies that the physical supply of beverage concentrate is, as the IRS alleged and the Tax Court found, their primary role. They’re really marketing investment points. Whether the actual marketing activities funded by the supply points’ investments were carried out by the supply points themselves or by other controlled entities on their behalf is beside the point, Coca-Cola argues. The six supply points at issue in the appeal incurred $8.5 billion in local marketing investments during the tax years at issue, according to Coca-Cola, and an ROA-based CPM denies them their rightful return on these investments:
“Supply-point companies’ primary and most valuable contributions are the billions of dollars they invest in consumer marketing to cultivate demand for Coca-Cola’s products. But the IRS’s CPM completely disregards those contributions, in violation of the regulations. Instead, it sets royalties to allow supply-point companies to earn the same fixed percentage of their tangible operating assets that bottlers earn, and no more.”
If Coca-Cola were right that the supply points should be considered investors in the development of marketing intangibles, then an ROA-based CPM would give them no credit for their contributions, and they would likely own unique assets or bear nonroutine risks that would disqualify them as tested parties in any CPM analysis.
But the Tax Court rejected the earlier formulation of this investor theory for many reasons, including the lack of any legal or accounting recognition of the assets allegedly created by the supply points’ investments and the inappropriateness of retrospectively casting the entities as cost-sharing participants. However, the most important factor in the Tax Court’s assessment concerned the assumption of risk.
An investment isn’t an investment unless the purported investor’s outlay comes before the returns are known or reasonably knowable. In other words, what makes a cash contribution an investment rather than a cost is risk — the real risk that the expected returns will not materialize. The Tax Court’s rejection of the earlier version of Coca-Cola’s investor theory was based on its finding that for the supply points’ marketing expenses, the risk that defines an “investment” was an artificial contrivance. As the 2020 opinion explained:
“Petitioner simply charged certain [service company] marketing expenses to the supply points’ books, and it made these charges roughly concurrently with the supply points’ receipt of vastly larger amounts of income from the bottlers. . . . Since the flow of revenue and marketing expenses to the supply points was controlled by [Coca-Cola Co.], and since the revenue invariably exceeded the marketing expenses by a very wide margin, we do not see how the supply points bore “marketing risks” in any realistic sense. Risk is not something that can be assigned after the fact. [Emphasis added.]”
It was the illusory nature of the supply points’ marketing investment risk, not (as Coca-Cola’s brief contends) their reliance on other entities to perform the marketing activities, that led the Tax Court to treat them as supply points instead of marketing investment points. The supply points’ purported investments were controlled by Coca-Cola in the United States, the amounts were unilaterally and arbitrarily charged out by Coca-Cola to the supply points (or so the Tax Court found), and Coca-Cola controlled the intragroup flow of revenue to ensure that the cost allocations were accompanied by a contemporaneous allocation of a far greater amount of revenue. Characterizing the supply points as investors in this context would be contrary to the principle underlying reg. section 1.482-1(d)(3)(iii)(B), which specifies that ex post risk allocations lack economic substance.
The Tax Court thus rejected Coca-Cola’s investor theory based on its factual findings about the concurrent allocation of marketing costs and revenue, along with its legal interpretation that this voided any attempt to allocate risk and the corresponding returns to the supply points.
To be reversible error, the Tax Court’s denial of investor status for the supply points would have to be based on clearly erroneous findings of fact, an error of law, or both. However, after vaguely alluding to “both legal error and clear factual error” on the point, the brief identifies no specific reversible error in the Tax Court’s reasoning or conclusion.
As expected, Coca-Cola’s brief also criticizes the Tax Court’s finding that the independent bottlers used in the IRS’s CPM analysis were reliable comparables. After refusing to credit the supply points with their marketing investments, the Tax Court allegedly “proclaimed supply-point companies and bottlers comparable merely because both were involved in making, distributing, and marketing Coca-Cola products.” The lack of comparability claimed by Coca-Cola largely ties back to the company’s characterization of the supply points as investors, but the brief also notes that the bottlers and supply points “operate at different levels of the marketplace, have different functions, and own a drastically different mix of tangible and intangible assets.”
There were certainly differences between the supply points and the bottlers used to apply the CPM. The supply points produced beverage concentrate using Coca-Cola’s formulas and methods, and they sold the concentrate to independent bottlers under Coca-Cola’s trademarks and brand names.
The bottlers then mixed the concentrate with water and other ingredients, bottled and labeled the finished beverage, and sold the branded products to distributors and retailers. But the Tax Court neither denied nor ignored these differences. It concluded that the bottlers satisfied the regulations’ comparability standards after a comprehensive review of their functions, assets, risks, contractual terms, and economic conditions.
The Tax Court found that producing beverage concentrate and blending concentrate with water consisted “largely of mixing ingredients according to detailed protocols supplied by petitioner,” and that they required similar levels of quality control. The principal functional difference, according to the opinion, was that the bottlers’ distribution functions were more robust and complex than those performed by the supply points. The court also found that the bottlers and supply points faced similar economic conditions because both operated in the same soft drink industry, but that the bottlers had greater bargaining power and enjoyed more favorable contractual terms.
The Tax Court likewise found that producing beverage concentrate and mixing beverage concentrate involved a similar mix of assets, but that the bottlers’ more extensive distribution activities required greater operating asset intensity. Regarding risk, the court found that the bottlers bore incrementally greater risk than the supply points because of their more robust distribution functions, greater working capital intensity, and higher accounts receivable risk.
However, because the supply points and bottlers employed a similar asset mix in the same industry, the Tax Court concluded that they were otherwise “highly comparable” in risks assumed. The court rejected the risk purportedly assumed by the supply points as consumer marketing investors for the reasons already identified.
The Tax Court thus concluded, based on detailed findings of fact, that the bottlers were sufficiently comparable to the supply points for CPM purposes. The principal differences concerned the bottlers’ more favorable economic conditions, better contractual terms, and more complex distribution operations requiring greater functional and asset intensity along with increased risk exposure.
The opinion acknowledged the level-of-market difference but noted that Coca-Cola failed to establish how this difference undermines “the comparability of the functions the two sets of companies discharged or the operating profit they could earn.” The opinion succinctly states:
“Although concededly there are differences between the two sets of companies, we find on balance that these differences tend to make the bottlers deserving of a higher ROA than the supply points. To that extent [IRS expert witness] Dr. Newlon’s CPM will tend to overcompensate rather than to undercompensate the supply points, and it is therefore conservative.” [Emphasis added.]
Coca-Cola’s brief essentially trots out the same list of qualitative differences that the company raised during the Tax Court proceedings, almost as though the court had simply overlooked or failed to comprehend them.
But the Tax Court provided a detailed explanation of the factual findings underlying its comparison of functions, assets, risks, and other relevant factors. Coca-Cola’s brief does not allege clear error in any of the court’s specific findings, only that the Tax Court’s overall comparability assessment was wrong. And the brief certainly doesn’t explain how the supply points’ functions, assets, and risks could be more reliably accounted for using a crude apportionment method with no legal or economic basis whatsoever.
The brief doesn’t identify any specific error of law either. The Tax Court opinion followed the CPM comparability factors identified in reg. section 1.482-5(c)(2) and, to the extent relevant, the general criteria contained in reg. section 1.482-1(d)(3). As provided in reg. section 1.482-1(d)(2), the general standard of comparability requires that the comparables provide a “reliable measure of an arm’s-length result.”
The Tax Court found that the supply points and bottlers were comparable in all key respects, and that the differences identified by Coca-Cola lacked factual support (ownership of unique marketing intangibles and assumption of investment risk), had no demonstrable distorting effect on the ROA comparison (level-of-market difference), or distorted the ROA comparison in Coca-Cola’s favor (the bottlers’ more favorable economic conditions and contractual terms and their more extensive distribution-related functions, assets, and risks).
It’s hard to mine for reversible error in a lower court’s conclusion supported by detailed factual findings and a straightforward application of the regulatory standards. The lead firm representing Coca-Cola in its appeal has highlighted this difficulty in the past, albeit in a far less compelling context, when doing so served its client’s interest.
In its February 2024 brief filed with the Eighth Circuit, Medtronic forcefully argued that “the Commissioner’s attempts to manufacture legal error do not come close to demonstrating clear error in the Tax Court’s extensive, cumulative factual findings.” Medtronic’s brief, which also approvingly cited a commentator’s assessment that Coca-Cola was “more susceptible to CPM analysis than other cases,” alleged that the IRS failed to identify clear error in the Tax Court’s balancing of similarities against differences:
It offers no reason why the Tax Court’s weighing of those differences, and ultimate conclusion that they precluded comparability, was clearly erroneous. The Tax Court explained that none of the comparables “performed only the function of finished device manufacturing,” and all instead performed a combination of additional, often lower-profit, functions. The Commissioner asserts that these different “returns would tend to average out,” but never explains how, or why the Tax Court’s rejection of the reliability of any such “blending mechanism” was clear error.
Evidently, counsel for Coca-Cola hasn’t gotten this memo. The company’s brief never offers any reason to conclude that the Tax Court’s weighing of similarities against differences was clearly erroneous. It never alleges any specific error in the Tax Court’s findings regarding the effect of the differences identified on profitability, and it never justifies the premise that the level-of-market difference would materially distort the ROA comparison. It’s a good thing for taxpayers that their indignant objections about agency opportunism and inconsistency don’t apply to the law firms that represent them.
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