## Facts

- A U.S. parent company owned valuable beverage-related intellectual property (trademarks, formulas, manufacturing processes) and licensed foreign manufacturing affiliates (“supply points”) limited rights to use that IP to produce concentrate for sale abroad.
- The supply points sold concentrate to unrelated bottlers, which produced and distributed finished beverages in foreign markets.
- For 2007–2009, the parent reported income using a long-used “10–50–50” profit-split approach derived from a 1996 closing agreement resolving transfer-pricing disputes for 1987–1995; the agreement did not state it applied after 1995.
- The supply points remitted significant dividends during 2007–2009, which the parent treated as satisfying royalty obligations under a dividend/royalty offset mechanism.
- On audit, the Commissioner concluded the 10–50–50 approach overcompensated the supply points and undercompensated the parent for IP, and reallocated income under I.R.C. § 482.
- The Commissioner applied the comparable profits method (CPM), treated the supply points as tested parties, used independent bottlers as uncontrolled comparables, and increased the parent’s taxable income by more than $9 billion for 2007–2009.
- The CPM reallocations affected income attributed to a Mexican operation treated as a branch, leading the Commissioner to recompute related I.R.C. § 987 foreign currency losses.

## Issues

1. Whether the Commissioner abused discretion under I.R.C. § 482 by reallocating income using CPM with the supply points as tested parties and independent bottlers as comparables.
2. Whether the 1996 closing agreement, prior administrative practice, or equitable doctrines barred the Commissioner from rejecting the 10–50–50 method for 2007–2009.
3. Whether the Commissioner erred in recomputing I.R.C. § 987 losses after § 482 reallocations changed income attributable to the Mexican branch operation.
4. Whether the taxpayer made a timely election to apply dividend offset treatment to dividends paid by the supply points in satisfaction of royalty obligations during 2007–2009.

## Decision

- The court held the Commissioner did not abuse discretion under I.R.C. § 482 by applying CPM using the supply points as tested parties and independent bottlers as uncontrolled comparables.
- The court held the 1996 closing agreement did not bind the Commissioner for 2007–2009, and related fairness-based arguments did not prevent the Commissioner from changing methodologies.
- The court held the Commissioner did not err in recomputing I.R.C. § 987 losses after the CPM reallocations altered the income allocable to the Mexican branch operation.
- The court held the taxpayer made a timely election for dividend offset treatment for 2007–2009.

## Legal Principles

- Under I.R.C. § 482 and implementing regulations, the Commissioner has broad discretion to reallocate income among controlled parties to clearly reflect income; the taxpayer must show the determination was unreasonable, arbitrary, or capricious.
- CPM may be a reasonable method where the tested party performs more limited functions and bears more routine risks, making it more susceptible to comparison than the IP-owning parent with significant unique intangibles.
- CPM does not require exact comparability; differences between tested parties and comparables may be addressed through adjustments consistent with the regulatory framework.
- A closing agreement is construed according to its text; absent an express commitment extending beyond covered years, it does not restrict the Commissioner’s ability to apply § 482 for later years.
- When § 482 reallocations change the income of a qualified business unit or branch, related I.R.C. § 987 currency gain or loss computations may be recomputed to reflect the revised income allocation.
- Where governing rules require an election for dividend/royalty offset treatment, timely compliance permits dividends to be treated as satisfying royalty obligations in calculating the net allocation effects.

## Conclusion

The Tax Court largely sustained the Commissioner’s transfer-pricing reallocations for 2007–2009, holding that CPM with supply points as tested parties and bottlers as comparables was a permissible exercise of § 482 discretion, that the earlier closing agreement did not control later years, and that § 987 losses could be recomputed to reflect the reallocations, while ruling for the taxpayer on the timeliness of its dividend offset election.


Coca-Cola Co. v. Commissioner, 155 T.C. 145 (2020)