Coca-Cola Co. v. Commissioner

The Coca-Cola Co. (TCCC) (plaintiff), a beverage maker and distributor, was the parent corporation of many foreign affiliates. TCCC received income from foreign manufacturers affiliated with TCCC (supply points) that produced ingredients for TCCC’s soft drinks. The supply points sold ingredients to foreign bottlers, most of which were not affiliated with TCCC, pursuant to a licensing agreement that allowed the supply points to use TCCC’s intangible property (e.g., trademarks, brand names, and patents). TCCC was the predominant owner of the intangible property. From 2007 to 2009, TCCC filed joint tax returns with TCCC’s domestic subsidiaries (plaintiffs) using a “10-50-50” profit-split method that allowed the supply points to retain a profit of 10 percent of gross sales, and the remainder was split evenly between TCCC and the domestic subsidiaries. TCCC had used the “10-50-50” profit-split method in prior years, following a 1996 closing agreement with the Internal Revenue Service (IRS) (defendant) that resolved TCCC’s pre-1995 tax liabilities only. The 1996 closing agreement did not govern the income allocation method after 1995. For the 2007 to 2009 tax returns, the IRS determined that the “10-50-50” profit-split method did not reflect arm’s-length pricing because the method inflated the supply points’ income and deflated TCCC’s income earned from the supply points’ use of TCCC’s intangible property. The IRS adjusted TCCC’s taxable income using a comparable-profits method (CPM) that treated the TCCC-affiliated supply points like unaffiliated bottlers within the industry. The IRS issued a tax deficiency to TCCC. TCCC petitioned for judicial review.