On 25 August 2022, the U.S. Court of Appeals for the Sixth Circuit affirmed in part and reversed in part a decision of the U.S. tax court regarding the transfer pricing case of Eaton Corp. v. Commissioner.

Facts of the case

Eaton Corporation and the IRS entered into two contracts: a pair of advance pricing agreements (“APAs”) meant to govern Eaton’s tax calculations from 2001 through 2010. A few years after entering in to the APAs, Eaton reviewed its records and caught some inadvertent calculation errors. After letting the IRS know, Eaton corrected the mistakes. But the IRS thought that Eaton’s mistakes were serious enough to warrant its unilateral cancellation of the APAs for tax years 2005 and 2006. And after cancelling the APAs, the IRS handed Eaton a notice claiming a deficiency of tens of millions of dollars.

In 2013, Eaton filed a petition in the Tax Court, challenging the deficiency notice and the IRS’s cancellation of the APAs. The Tax Court sided with Eaton on the major issues, concluding that the IRS had wrongfully cancelled the APAs. The IRS appealed to challenge the Tax Court’s holdings on cancellation and penalties. The parties raise a much-narrowed subset of arguments in their dueling appeals.

Sixth Circuit decision

The Sixth Circuit ruled in its opinion for the taxpayer on all of the issues raised, including whether the taxpayer was entitled to double tax relief under Rev. Proc. 99-32. The Tax Court had ruled that the taxpayer’s self-corrections did not constitute corrections under Section 482, and thus Rev. Proc. 99-32 could not apply. However, the Sixth Circuit found that those corrections were in fact Section 482 adjustments and therefore the taxpayer was entitled to double tax relief under the revenue procedure.