One of the major IRS initiatives for a number of years is to enter Advance Pricing Agreements ("APAs) with taxpayers to determine, in advance, transfer pricing methodologies. APAs require taxpayer representations as to underlying facts and conditions and taxpayer economic studies justifying the methodology requested. The IRS reviews the presentations, performs such testing and economic studies as it deems appropriate, and then attempts to reach an agreement with the taxpayer. Those agreements are contracts, but do incorporate the terms of the relevant Revenue Procedure (currently Rev. Proc. 2006-9, 2006 IRB 1). Among the provisions of the Rev. Proc. is the IRS authority to terminate the APA is the terms and conditions are not met.
In Eaton Corp. v. Commissioner, 140 T.C. No. 18 (2013), here, the IRS revoked the taxpayer's Advance Pricing Agreement. Tax Court was presented the following arguments:
Taxpayer argument: The APA is a contract and, if the IRS terminates for failure to meet the terms and conditions, the IRS bears the burden of establishing that the taxpayer failed to meet the terms and conditions.
IRS argument: The taxpayer must show abuse of discretion for the IRS decision to terminate the APA.
Holding: For the IRS. Taxpayer must establish abuse of discretion.
Here are the key excerpts that show the line of reasoning (some footnotes omitted):
