Coca-Cola Co. v. Commissioner

Beverage manufacturer the Coca-Cola Company (TCCC) (plaintiff) was the parent company of numerous subsidiaries, many of which were foreign. TCCC used certain foreign manufacturing affiliates, known as supply points, to produce the syrups used in Coca-Cola products. TCCC licensed the supply points to use TCCC’s intangible property. In exchange, the supply points essentially paid TCCC a royalty on their sales of the syrups to independent bottlers that used the syrups to make finished Coca-Cola products. When calculating the royalties, which were a form of transfer pricing, TCCC used a 10-50-50 formula under which a supply point was entitled to keep 10 percent of the gross sales as profits and the remaining profit amount was divided equally between TCCC and the supply point. TCCC and its domestic subsidiaries (plaintiffs) relied on that formula when calculating their income for purposes of their consolidated federal income tax returns for 2007 to 2009. The Internal Revenue Service (IRS) (defendant) disagreed with the income calculation. The IRS believed that the 10-50-50 method did not fairly compensate TCCC for the use of its intellectual property and therefore inflated the supply points’ income while deflating the income of TCCC and its domestic subsidiaries. Consequently, the IRS used the comparable-profits method to reallocate some of the supply points’ income to TCCC and its domestic affiliates. It considered the independent bottlers to be comparable parties for purposes of doing the calculation. The reallocation increased the TCCC and the domestic affiliates’ taxable income by over $9 billion and resulted in an alleged tax deficiency exceeding $3.3 billion. TCCC and its domestic subsidiaries filed for review of the IRS’s decision by the United States Tax Court.