The Coca-Cola Tax Court case on transfer pricing ended, at the trial level, with the company on the hook for roughly $2.7 billion in tax deficiencies for the 2007 through 2009 tax years. In The Coca-Cola Company & Subsidiaries v. Commissioner, 155 T.C. No. 10 (2020), the court agreed with the IRS that Coca-Cola had left too much profit in its foreign manufacturing affiliates and reallocated $9.4 billion of income back to the U.S. parent. Coca-Cola paid the full $6 billion liability, tax plus interest, and is now appealing to the Eleventh Circuit.
What the Dispute Was About
Coca-Cola’s U.S. parent owns the trademarks, secret formulas, and brand equity built over more than a century. It licensed that intellectual property to foreign manufacturing affiliates the company called “Supply Points.” The Supply Points used the licensed IP to produce beverage concentrate and sold it to independent bottlers around the world.1U.S. Chamber of Commerce. 155 T.C. No. 10 – The Coca-Cola Company and Subsidiaries v. Commissioner of Internal Revenue
The fight was about how to split the profit from those concentrate sales between the U.S. parent and the foreign affiliates. Section 482 of the Internal Revenue Code lets the IRS reallocate income between related entities when their reported numbers don’t reflect what unrelated parties dealing at arm’s length would have agreed to.2Office of the Law Revision Counsel. 26 USC 482 – Allocation of Income and Deductions Among Taxpayers The Supply Points were recording extraordinary margins. Some foreign entities reported returns on assets over 100 percent, far above what any independent manufacturer doing similar work would earn. The IRS looked at those numbers and concluded the foreign affiliates were keeping profits that belonged to the U.S. parent.
The IRS’s Reallocation
The IRS treated the Supply Points as routine, low-risk contract manufacturers. Their job was to mix concentrate and ship it using formulas and brands they didn’t create. Under that view, they deserved only a modest return, and any profit above that belonged to the U.S. parent that owned the IP.
To measure what the Supply Points should have earned, the IRS applied the Comparable Profits Method (CPM). CPM identifies independent companies performing similar functions and bearing similar risks, then benchmarks profitability using indicators like operating margin or return on assets.3eCFR. 26 CFR 1.482-5 – Comparable Profits Method The agency selected independent beverage bottlers and routine manufacturers as its comparables. The Supply Points’ profits dwarfed what those benchmark companies earned.
The IRS treated the gap as excess profit attributable to U.S.-owned intellectual property and reallocated $9.4 billion back to the U.S. parent as additional royalty income, generating a tax deficiency notice of roughly $3.3 billion.
Coca-Cola’s Defense
Coca-Cola pushed back on several fronts. Its strongest argument was that the IRS had already agreed to a different method years earlier and was reneging on that deal.
The 1996 Closing Agreement
In 1996, the IRS and Coca-Cola signed a closing agreement resolving transfer pricing disputes for the 1987 through 1995 tax years. That agreement established a formulary approach called the “10-50-50 method”: the Supply Points retained a percentage of profit tied to gross sales, then split the remaining profit equally with the U.S. parent.4U.S. Chamber of Commerce. 155 T.C. No. 10 – The Coca-Cola Company and Subsidiaries v. Commissioner of Internal Revenue – Section: III. Threshold Considerations Coca-Cola kept using the method for the next eleven years. The IRS audited during that stretch and never challenged it.
From Coca-Cola’s view, the IRS had blessed 10-50-50 through years of acquiescence, and switching to CPM without warning was an arbitrary reversal. The argument attracted amicus briefs at the Eleventh Circuit from PricewaterhouseCoopers, Deloitte, and KPMG, filing jointly, and a separate brief from the U.S. Chamber of Commerce that called the switch “arbitrary and capricious.”
Functional Arguments
Coca-Cola also argued the IRS mischaracterized what the Supply Points actually did. These were not faceless contract manufacturers, the company said. They handled local marketing, quality control, and inventory management, and they bore meaningful market risk. Those functions justified a larger share of profits than CPM would assign to a routine manufacturer. The company’s experts proposed alternative methods that would have left more profit with the foreign affiliates, including the Residual Profit Split Method and the Comparable Uncontrolled Transaction method.
Blocked Income
Coca-Cola raised a separate argument about its Brazilian affiliate. Brazilian law restricted the royalty payments a subsidiary could send to a foreign parent. Coca-Cola argued the IRS couldn’t allocate income to the U.S. parent that the parent was legally barred from receiving. If Brazilian law blocked the payments, the income wasn’t real income in any economic sense.
What the Tax Court Decided
The Tax Court sided with the IRS on nearly every contested point. Its November 2020 opinion rejected each of Coca-Cola’s central arguments.
On the closing agreement, the court found that the 1996 deal settled specific tax years, not a permanent methodology. The 10-50-50 formula resolved the 1987 through 1995 dispute and nothing more. The IRS’s failure to challenge the method in later audits did not convert a settlement into a lasting entitlement.4U.S. Chamber of Commerce. 155 T.C. No. 10 – The Coca-Cola Company and Subsidiaries v. Commissioner of Internal Revenue – Section: III. Threshold Considerations
On methodology, the court agreed that CPM was the best method for these transactions. The Supply Points performed routine functions, and their extraordinary profit levels confirmed the distortion. The IRS had not abused its discretion by picking CPM or by using independent bottlers as comparables. The substance of the controlled transaction, not the form of an earlier agreement, had to satisfy the arm’s length standard.5eCFR. 26 CFR 1.482-1 – Allocation of Income and Deductions Among Taxpayers
In a later opinion issued in November 2023, the Tax Court rejected the blocked income argument as well. The court found that the Brazilian royalty restriction did not apply equally to controlled and uncontrolled parties. Because the cap primarily targeted payments to controlling foreign parent corporations, it wasn’t the kind of across-the-board legal barrier that would limit the IRS’s authority to reallocate income.
In August 2024, the Tax Court entered its final decision. After accounting for the Brazilian affiliate’s royalty obligation and dividends already paid, the deficiency came to approximately $2.7 billion.
The 3M Ruling and Its Effect on the Appeal
The blocked income question got more interesting in October 2025, when the Eighth Circuit ruled on a similar issue in 3M Company v. Commissioner. Like Coca-Cola, 3M had a Brazilian subsidiary that couldn’t remit full royalties under local law. Like Coca-Cola, 3M argued the IRS couldn’t allocate income the parent was legally barred from receiving.
The Eighth Circuit reversed the Tax Court and sided with 3M. It held that the Treasury regulation permitting blocked income allocations, 26 C.F.R. § 1.482-1(h)(2), exceeded the IRS’s statutory authority. For income to be reallocated under Section 482, the court reasoned, the taxpayer must have “complete dominion over it,” meaning it must be money the parent “could have received.” Attributing unpaid royalties to 3M was inconsistent with the reality that 3M could not receive those payments without putting its Brazilian subsidiary in legal jeopardy.6U.S. Court of Appeals for the Eighth Circuit. 3M Company and Subsidiaries v. Commissioner of Internal Revenue
The Eighth Circuit’s reasoning leaned on the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, which eliminated Chevron deference. Under the old framework, courts routinely deferred to agency interpretations of ambiguous statutes. Under Loper Bright, courts exercise independent judgment about what a statute means. The Eighth Circuit concluded that the IRS’s strategy of authorizing by regulation what Section 482 had not contemplated “might have worked before . . . but not now.”6U.S. Court of Appeals for the Eighth Circuit. 3M Company and Subsidiaries v. Commissioner of Internal Revenue
Coca-Cola immediately pointed the Eleventh Circuit to the 3M decision, noting that the IRS itself acknowledged the same blocked income theory applies in both cases. If the Eleventh Circuit follows the Eighth Circuit’s reasoning, the portion of the deficiency tied to blocked Brazilian income could be reversed.
Where the Case Stands Now
After the Tax Court entered its final decision in August 2024, Coca-Cola appealed to the U.S. Court of Appeals for the Eleventh Circuit. To pursue the appeal, the company paid the full $6 billion liability covering both the tax deficiency and accrued interest. It has said it expects a refund if it prevails.
The appeal challenges two main issues: the Tax Court’s endorsement of CPM as the best method over the 10-50-50 approach the IRS had previously accepted, and the rejection of the blocked income defense. Coca-Cola’s opening brief reportedly called the IRS’s switch to CPM a “bait and switch.” Three of the Big Four accounting firms, the U.S. Chamber of Commerce, and the National Foreign Trade Council all filed amicus briefs supporting the company.
As of early 2026, the Eleventh Circuit has not issued a decision. Industry observers expect a ruling within the year.
Why the Outcome Matters
The case sits at the intersection of several unresolved questions in international tax law. One is how much weight the IRS’s past conduct carries. If the agency can switch methods retroactively without notice, every multinational’s transfer pricing position is provisional. The Tax Court said past acquiescence doesn’t bind the IRS. The Eleventh Circuit will decide whether it agrees.
Another is the post-Loper Bright landscape for Treasury regulations. Courts can no longer defer to the IRS’s reading of ambiguous statutory language just because it seems reasonable. The Eighth Circuit already used the new framework to invalidate the blocked income regulation. If the Eleventh Circuit reaches the same conclusion, the doctrine is effectively dead in two circuits, and a Supreme Court showdown becomes likely.
The third is a practical question about CPM itself. Coca-Cola argued that reducing the Supply Points to routine manufacturers ignored the reality that their access to the world’s most recognized brand is what generated the profits. That tension between the legal characterization of a related entity and its economic reality is something every IP-heavy multinational faces when setting transfer prices.