## Facts

- The Coca-Cola Company and its subsidiaries (TCCC) licensed U.S.-owned intangible property (including trademarks and formulas) to foreign “supply points” that manufactured beverage concentrate and sold it abroad to independent bottlers.
- TCCC historically compensated itself for the use of those intangibles through a “10-50-50” formula originally reflected in a 1996 IRS closing agreement for earlier tax years: supply points retained 10% of gross sales as profit and split remaining profit 50/50 with TCCC.
- For 2007–2009, TCCC reported income consistent with the 10-50-50 method on consolidated U.S. returns.
- After examination, the IRS made reallocations under I.R.C. § 482 that shifted roughly $9 billion of income from foreign supply points to TCCC, producing alleged deficiencies exceeding $3.3 billion.
- In a 2020 Tax Court decision, the court largely upheld the IRS’s transfer-pricing approach, rejecting the 10-50-50 method and approving the IRS’s Comparable Profits Method (CPM) using independent bottlers as comparables.
- The 2020 decision left unresolved how Brazilian legal restrictions that purportedly capped related-party royalty payments (blocked-income rules) affected § 482 reallocations involving TCCC’s Brazilian manufacturing affiliate.
- The 2023 supplemental opinion addressed only that remaining Brazil blocked-income question and applied the court’s intervening analysis in a similar blocked-income case.

## Issues

1. Whether Brazilian legal restrictions limiting outbound related-party royalties (“blocked income”) constrain the Commissioner’s authority under I.R.C. § 482 to reallocate income to reflect arm’s-length results.
2. Whether the Treasury regulations addressing blocked income under § 482 are valid and, if so, whether they permit § 482 allocations without giving effect to Brazil’s royalty limitations for the Brazilian supply point.

## Decision

- The Tax Court upheld the IRS’s § 482 reallocations as applied to TCCC’s Brazilian manufacturing affiliate.
- The court rejected TCCC’s argument that Brazilian blocked-income rules barred additional imputed or allocated royalty income under § 482.
- The court held the blocked-income regulations under § 482 valid and applied them to permit arm’s-length allocations notwithstanding foreign legal limits on actual payment or deduction of royalties.
- The supplemental opinion completed the court’s disposition of the disputed 2007–2009 transfer-pricing adjustments by resolving the Brazil-specific issue left open in the earlier decision.

## Legal Principles

- I.R.C. § 482 authorizes the Commissioner to allocate income and deductions among commonly controlled entities as necessary to prevent tax evasion or clearly reflect income under an arm’s-length standard.
- In determining arm’s-length results under § 482, Treasury’s blocked-income regulations generally allow allocations to be computed without regard to foreign legal restrictions on payments, absent satisfaction of specified regulatory exceptions.
- A taxpayer’s inability (under foreign law) to pay or deduct the full amount of an arm’s-length royalty does not, by itself, prevent the Commissioner from imputing or reallocating income under § 482 to reflect arm’s-length compensation for intangibles.

## Conclusion

The Tax Court sustained the Commissioner’s § 482 allocation with respect to TCCC’s Brazilian affiliate, holding that Brazilian royalty caps did not preclude imputing arm’s-length royalty income and that the blocked-income regulations validly permit § 482 allocations despite foreign legal restrictions.


Coca-Cola Co. & Subs. v. Commissioner, 2023 WL 7410872 (T.C. 2023)