Monthly Archives: August 2024

Coca-Cola has been ordered by a court to make billions in payments to the Internal Revenue Service (IRS) to cover back taxes.

On July 31, 2024 the U.S. Tax Court ruled that there were deficiencies in income tax dues payable by Coca-Cola to the IRS for the 2007–09 period to the tune of approximately $2.7 billion. Adding in interest, the total amount payable by Coca-Cola comes to around $6 billion, the company said in an Aug. 2 press release.

Coca-Cola said it will defend its position and criticized the decision, stating “the IRS and the Tax Court misinterpreted and misapplied the applicable regulations involved in the case.”

With 90 days to file a notice of appeal, Coca-Cola intends to pay the roughly $6 billion owed while it proceeds with the appeals process.

The IRS sent Coca-Cola a Notice in September 2015, in which the agency sought $3.3 billion in additional income tax for 2007–09. The 2015 notice sent by the IRS to Coca-Cola was related to transfer pricing, an accounting practice in which goods and services are exchanged between different divisions of the same company. The practice is used by firms to minimize the overall tax burden of the parent company.

The IRS said in the notice that it would reallocate more than $9 billion in income from the company’s accounts, thus resulting in the tax dues. The soft drinks manufacturer claimed the reallocation violated a previous calculation methodology that was agreed upon by both sides.

The IRS designated the issue for litigation, taking away any alternative means for Coca-Cola to resolve the matter other than by going to court, the firm said.

In 2020, the Tax Court issued an opinion siding with the IRS. Three years later in November 2023, the court issued a second opinion which was also in favor of the tax agency.

Back in 1996, the IRS and Coca-Cola agreed on a methodology to determine U.S. taxable income to resolve the transfer pricing issue, the filing said. The agency also audited the company’s compliance with the agreement in five audit cycles between 1996 and 2006.

In the 2015 notice, the IRS “retroactively rejected” this methodology for calculating taxes for 2007–09, introducing an “entirely different methodology without prior notice to the Company.”

It is through the new calculation methods that the IRS reallocated more than $9 billion in income to the U.S. parent company from its foreign licensees, thus resulting in additional taxes.

“The Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional,” Coca-Cola argued.

The firm noted that if it wins the appeal, the business should be refunded the approximately $6 billion it plans on paying to the IRS.

The U.S. Tax Court’s decision comes as the IRS announced an initiative back in October that targets transfer pricing practices of American subsidiaries of foreign companies that distribute goods in the United States.

“These foreign companies report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits,” the agency said. It accused foreign firms of not paying “their fair share of tax on the profit they earn” from U.S. subsidiaries.

The IRS aims to “crack down on this strategy” and is sending compliance alerts to around 150 subsidiaries of large foreign corporations to “reiterate” their tax obligations in America, the agency said at the time.

Have an IRS Tax Problem?

 

Read more at: Tax Times blog

In News Release 2024-199, 07/30/2024, the IRS Whistleblower Office (WBO) recognized the valuable contribution whistleblowers make in supporting nation's tax administration. Notably, over $1.2 billion in whistleblower awards have been paid out since 2007, with $88.8 million of that being paid in 2023 alone, based on collected proceeds from non-compliant taxpayers.

Since issuing its first award in 2007 through June 2024, the IRS has paid over $1.2 billion in awards based on the successful collection of $7 billion from non-compliant taxpayers.

“The IRS appreciates the valuable contributions that thousands of whistleblowers have made to help bolster the fair and effective enforcement of our nation's tax laws,” said IRS Whistleblower Office Director John Hinman.

“Information from whistleblowers continues to be an incredibly effective aid to IRS compliance efforts, and we are committed to improving our whistleblower program by increasing our capacity to use high-value whistleblower information effectively, awarding whistleblowers fairly and as soon as possible, and keeping whistleblowers informed of their claim's status and the basis for IRS decisions on claims.”

The IRS Whistleblower Office is strengthening collaboration with all whistleblower program stakeholders. The office also recently updated Form 211, Application for Award for Original Information, and is currently working on a digital submission portal for whistleblower claims, which it plans to have online in 2025.

In Fiscal Year 2023, The IRS Paid Awards Totaling $88.8 Million Based On Whistleblower Information Attributable To Tax And Other Amounts Collected Of $338 Million.

In Fiscal Year 2023, The Whistleblower Office Established 16,932 Award Claims, An Increase Of 44% Compared To The Average Of The Prior Four Years.

The IRS values the assistance it's received from whistleblowers and the whistleblower practitioner community. Whistleblower information that the IRS can act on is an important component of effective tax administration and contributes to identifying non-compliance and reducing the tax gap.

Actionable claims contain specific, timely and credible information. A whistleblower may qualify for an award when use of the whistleblower's information results in proceeds collected. The awards paid to whistleblowers generally range between 15 and 30% of the proceeds collected and attributable to their information.

National Whistleblower Appreciation Day is recognized on July 30 because America's first whistleblower law was passed by the Continental Congress on July 30, 1778. The first law related to whistleblowers on tax violations was enacted almost 90 years later in March 1867.

 

Read more at: Tax Times blog

A divided U.S. Tax Court ruled on August 1, 2024 that it lacked authority to review an Internal Revenue Service decision preventing a woman from challenging a federal tax lien the agency issued on behalf of the Canadian government to secure her tax debt to that country.

In a 7-6 vote, the Tax Court said it lacked jurisdiction over J.E. Ryckman's petition to review the agency's denial of a collections hearing in which she hoped to challenge a lien issued in response to a request from the Canada Revenue Agency under the Canada-U.S. Income Tax Treaty.

The question of the court's authority in the case was one of first impression, Judge Elizabeth A. Copeland wrote in the majority opinion, which drew both concurring and dissenting opinions about the interplay between the treaty and provisions of the Internal Revenue Code affording the right to collection due process hearings.

The court only has jurisdiction to review an agency determination regarding a collections hearing if the IRS was subject to obligations under Internal Revenue Code sections 6320 or 6330 affording rights to those hearings and granting jurisdiction to the Tax Court, the court said.

According to Canadian tax authorities, Ryckman owes about $200,000 in Canadian tax for 1993 and 1994, the court said. She lived in the U.S. in 2017 when the country's tax collector asked the IRS for mutual collection assistance under the tax treaty.

A dissenting opinion written by Judge Patrick J. Urda on behalf of six judges on the court agreed with Ryckman's argument that the CDP hearing statutes, which were added in 1998, should have trumped the requirements of the treaty because those statutes were enacted later. "The opinion of the court fails to pay due heed to the long-established rules governing the resolution of such conflicts, which dictate that the later-in-time statute applies to render the treaty provisions null to the extent of the conflict," Judge Urda said.

Judge Copeland said in the opinion that the provisions in the treaty shouldn't be overtaken "by the more general CDP statutes." She cited the U.S. Supreme Court ruling in Radzanower v. Touche Ross & Co. from 1976, which said, regarding statutory construction, "that a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum."

Have an IRS Tax Problem?

 

Read more at: Tax Times blog

On July 3, 2024 we posted "The Demise of Chevron Will Result In Increased Treasury Regulation Challenges" where we discussed that the decision in the Loper Bright case because the IRS has long relied on the Chevron doctrine, established in a 1984 opinion to defend tax regulations in litigation that it's demise may result in additional challenges to regulations and tax litigation.

One Regulation That May Be Challenged Concerns Late Filed Form 1120 F - U.S. Income Tax Return of A Foreign Corporation.

Under section 882, a foreign corporation engaged in a U.S. trade or business is subject to U.S. tax on its taxable income effectively connected with the conduct of the U.S. taxable business. Section 882(c)(2) ties the corporation’s ability to claim deductions against its gross income to its filing of a U.S. tax return. Reg. section 1.882-4 generally provides that deductions (and credits) otherwise allowed are available only for taxpayers that timely file a return within 18 months of the due date in section 6072.

Swallows Holding Ltd., a foreign corporation, failed to file within that time frame and was later denied the ability to claim deductions. It sued, arguing that the rule setting out an 18-month deadline was an invalid exercise of Treasury’s rulemaking authority. 

The Tax Court Agreed That The Reg Was Invalid, 
Concluding That The Statute Did Not Reflect An Intention
By Congress That The Requirement That A Foreign
Corporation File A Tax Return Included A Filing Deadline 
(Swallows Holding Ltd. v. Commissioner, 126 T.C. 96 (2006)).

The Third Circuit overruled, finding that the reg should be given Chevron deference and applying the Chevron two-step process, that the 18-month time frame was a reasonable exercise of the secretary’s authority (515 F.3d 162 (3d Cir. 2008)). 

The Swallows Holding decision presents an opportunity for taxpayers to challenge Reg. section 1.882-4's requirement that the return must be filed within 18 months of the due date.

Whether it opens an opportunity for taxpayers who made a similar mistake to bring the same claim for prior years, despite the majority’s statement in Loper Bright that it wasn’t questioning prior cases that relied on the Chevron framework, and that holdings in those cases are subject to statutory stare decisis, Remains to be seen?

Have an IRS Tax Problem?

 

Read more at: Tax Times blog