Coca-Cola Tanks Again in the Last Round of Transfer Pricing Litigation in the Tax Court (11/9/23)

I have written before on Coca-Cola's massive transfer pricing case as the results dribbled out over the years (reverse chronological order).

• Tax Court (Judge Lauber) rejects Coca-Cola’s Untimely Motion for Reconsideration (12/3/21), here.
• Tax Court (Judge Lauber) Issues Significant Transfer Pricing Decision in Coca-Cola; Burden of Proof Issues (11/19/20; 11/25/20), here; and 
• More Coca-Cola - On Transfer Pricing and Blocked Income Regulation (11/23/20), here.  

Yesterday, the Tax Court rendered another opinion, here, apparently the last merits opinion before moving, if required, to fine-tuning the calculations required by its decisions on the merits. (The docket entries are here.)

Three key points:

1. Transfer pricing adjustments turn on valuations, with many larger taxpayers preferring to use some type of IRS-recognized safe harbor methodology to take the risk out of the potential for adverse results given the uncertainties involved in valuations.. There can be some tricky rules to qualify for certain real or imagined safe harbors, but at the end of the day transfer pricing cases are principally valuation cases.

The relevant comments from a Coca-Cola news release dated 11/9/23 around 7am Eastern. here, are

ATLANTA, November 09, 2023--(BUSINESS WIRE)--On Nov. 8, the U.S. Tax Court issued a supplemental opinion in The Coca-Cola Company & Subsidiaries v. Commissioner of Internal Revenue. The Coca-Cola Company disagrees with the actions of the IRS and the latest decision by the U.S. Tax Court.

While we disagree with the court’s interpretation of the facts and law in this case, we are pleased to move closer to a final resolution of the Tax Court case so that we can pursue an appeal, where we can assert our claims and vigorously defend the company’s position.

This includes our belief that it is unconstitutional to face retroactive tax liability based on the IRS’ use of a calculation methodology that was different from what was long agreed upon and approved in audits for more than a decade.

We do not expect the results in this recent supplemental decision to change the methodologies we have used to calculate the tax reserve we have taken or the potential aggregate incremental tax and interest liability we have disclosed related to the dispute with he IRS or our effective tax rate.

I do not know how much Coca-Cola has reserved any tax, penalties, or interest for the litigation or what percentage of the total claimed liabilities is reserved: at this stage of litigating the matter, that reserve number might be a useful indication of whether the corporation really believes there is some expected value to its claims.

2. I noted that in the most recent blog prior to this one that the docket entries were not available because Tax Court procedures then in effect, if a single document was sealed, the entire docket entries were unavailable to the public on DAWSON. That issue has apparently been fixed because the list of docket entries is available, here, with the access to sealed documents.

3. In the immediate past posting, I noted that Coca-Cola brought some big guns (including Michael Luttig, a prominent conservative lawyer who was formerly a 4^th Circuit judge (Wikipedia here.)). The current opinion lists the attorneys for Coca-Cola as:

John Michael Luttig, Sanford W. Stark, Lisandra Ortiz, Jonathan S. Massey, Steven R. Dixon, Gregory G. Garre, Laurence H. Tribe, Carl Terrell Ussing, Lamia R. Matta, John F. Craig III, Shay Dvoretzky, Saul Mezei, Michael D. Kummer, and Kevin L. Kenworthy, for petitioner.

Some of the attorneys in that list seem to have been hired for their names and perhaps for their perceived expertise in shaping appellate arguments as Coca-Cola looks to an ultimate appeal or arguments on the appeal itself. I include in that list Gregory Garre and Laurance H. Tribe each of whom has name recognition as a lawyers but do not think either of them would refer to themselves as a tax lawyer knowledgeable in transfer pricing tax law. Their appearances at the trial level appears to be an implicit suggestion (dare I say threat) that Coca-Cola has the big boys entering the fray.  The big boys of course are lawyers with national gravitas and high fees that I am sure is calibrated to their or their firms perception of their gravitas).

My experience is that some persons in the corporate taxpayer's officer chain of authority to decisions for lawyer hiring in big cases are quite risk averse in their choice of counsel. As a lawyer with a two-man firm well known for tax litigation, I occasionally (but not often) was invited to a “beauty contest” to sell our abilities to the large taxpayer gearing up for litigation. In one case, I met with the President of a large corporation and his chief deputies on a major transfer pricing case. Toward the end, he asked that I summarize what I could do for the company. I said that I and my team (including limited special expertise and support outside my small firm) could bring as good quality in the representation as could any of the firms that were being interviewed; in the same vein, I would produce at least as good a result as those firms could; and I would generate fees that will be 60 percent or less than the other firms (because those firms constantly overbilled work that was not necessary). He said he believed that I could do all of that, but if something appeared to go wrong, even if the best result that could be achieved, his Board of Directors would chastise and otherwise punish for hiring Jack Townsend who they had never heard of (in comparison to the beauty contest list of super law firms). That is just a dynamic encountered by those in law firms, even when the decision-maker is not quite so candied.

By contrast, I had another major transfer pricing case that the "decider" -- the CFO -- was just looking for the best result he could get and he believed we could deliver that result. We did where we came in even below the low fees I promised above.