On 3 February 2023, the US Tax Court issued a rule approving an agreement between Eaton Corporation and the IRS to adjust Eaton’s tax bill for 2005 and 2006 to USD 8.8 million. The proposal stems from lengthy litigation in both the Tax Court and the Sixth Circuit Court of Appeals.
The case was originated due to Eaton’s advertent mistake in calculating its transfer pricing methodology for its Advance Pricing Agreement (APA) annual reports in 2005 and 2006. The IRS used this inadvertent error to justify the cancellation of Eaton’s APAs and proposed USD 75 million adjustment plus USD 51 million under the Section 6662 of Internal Revenue Code.
The Tax Court ruled that the IRS had no authority to terminate Eaton’s APAs and dismissed the IRS’s enforcement of penalties. The IRS appealed the tax court’s decision to the Sixth Circuit, but the appeals court ruled in favor of Eaton, noting that the IRS had the burden of proving that it had reasons to terminate the APAs under contract law principles and failed to do so.
In November 2022, Chief Judge asked Eaton and the IRS to submit a proposed ruling by 20 January 2023. The proposed ruling found deficiencies of USD 4.7 million in 2005 and USD 4.6 million in 2006, with no penalties. On 3 February 2023, Chief Judge Kerrigan issued a settled order identical to the proposed decision, which also accounted for tax overpayments for each year to result in a final adjustment of USD 8.8 million.
