On 18 November 2020, the U.S. tax court issued its opinion in a case of Coca-Cola Co. v. Commissioner, 155 T.C. No. 10. The tax court decision upheld two IRS adjustments that had contributed to increasing Coca-Cola’s taxable income by more than $9 billion in 2007-2009.

The Coca-Cola Co. (TCCC) is the ultimate parent of a group of entities (Company) that do business in more than 200 countries throughout the world. TCCC and its domestic subsidiaries (petitioner) joined in filing consolidated Federal income tax returns for 2007, 2008, and 2009. During 2007-2009 the supply points compensated Petitioner (P) for use of its IP under a formulary apportionment method to which P and Commissioner of Internal Revenue (R) had agreed in 1996 when settling P’s tax liabilities for 1987-1995. Under that method the supply points were permitted to satisfy their royalty obligations by paying actual royalties or by remitting dividends. During 2007-2009 the supply points remitted to P dividends of about $1.8 billion in satisfaction of their royalty obligations.

Upon examination of Petitioner (P)’s 2007-2009 returns Commissioner of Internal Revenue (R) determined that P’s methodology did not reflect arm’s-length norms because it overcompensated the supply points and undercompensated P for the use of its IP. R reallocated income between P and the supply points employing a comparable profits method (CPM) that used P’s unrelated bottlers as comparable parties.

1. Held: R did not abuse his discretion under I.R.C. sec. 482 by reallocating income to P by employing a CPM that used the supply points as the tested parties and the bottlers as the uncontrolled comparables.

2. Held, further, R did not err by recomputing P’s I.R.C. sec. 987 losses after the CPM changed the income allocable to P’s Mexican supply point, a branch of P.

3. Held, further, P made a timely election to employ dividend offset treatment with respect to dividends paid by the supply points during 2007-2009 in satisfaction of their royalty obligations. R’s re-allocations to P must accordingly be reduced by the amounts of those dividends.