The Coca-Cola tax court case, formally The Coca-Cola Company & Subsidiaries v. Commissioner, 155 T.C. No. 10 (2020), is a transfer pricing dispute in which the U.S. Tax Court held the company liable for roughly $2.7 billion in tax deficiencies for the 2007 through 2009 tax years. The court found that Coca-Cola’s method of dividing profits between its U.S. parent and its foreign manufacturing affiliates did not satisfy the arm’s length standard, allowing the IRS to reallocate $9.4 billion of income back to the United States. Coca-Cola has since paid the full $6 billion liability (tax plus interest) and is pursuing an appeal at the Eleventh Circuit.
What the Dispute Was About
Coca-Cola’s U.S. parent owns the company’s trademarks, secret formulas, and brand equity. It licensed that intellectual property to foreign manufacturing affiliates the company called “Supply Points,” which produced 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 question was how the profits from those concentrate sales should be split between the U.S. parent that owned the IP and the foreign affiliates that manufactured the product.
The Supply Points were extraordinarily profitable. Some foreign entities reported returns on assets exceeding 100 percent, well above what any independent manufacturer performing the same work would earn. The IRS looked at those margins and concluded the foreign affiliates were keeping profits that economically belonged to the U.S. parent, effectively shifting taxable income out of the United States.
The IRS’s Reallocation
The IRS characterized 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 anything above that belonged to the U.S. parent that owned the underlying IP.
To measure the appropriate return, the IRS applied the Comparable Profits Method (CPM), which benchmarks a controlled entity’s operating profit against independent companies performing similar functions.2eCFR. 26 CFR 1.482-5 – Comparable Profits Method Using independent beverage bottlers and routine manufacturers as its comparables, the IRS concluded that the Supply Points’ profits far exceeded arm’s length levels. It reallocated $9.4 billion of that excess back to the U.S. parent as additional royalty income for 2007 through 2009 and issued a deficiency notice of approximately $3.3 billion. The IRS’s authority for that move comes from Section 482 of the Internal Revenue Code, which permits reallocations between related entities when reported numbers don’t reflect what unrelated parties would have agreed to.3Office of the Law Revision Counsel. 26 USC 482 – Allocation of Income and Deductions Among Taxpayers
Coca-Cola’s Central Defense: The 1996 Closing Agreement
Coca-Cola’s strongest argument was that it had already settled this exact issue with the IRS years earlier. In 1996, the two sides 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,” which allowed the Supply Points to retain a percentage of profit tied to gross sales and 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 continued using the 10-50-50 method for the next eleven years. The IRS audited the company during that period and never challenged the methodology. From the company’s perspective, the agency had blessed the approach through years of acquiescence, and switching to CPM without warning was an arbitrary reversal.
Coca-Cola also argued the IRS mischaracterized what the Supply Points actually did. They weren’t 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 profit than CPM would give a routine manufacturer. Company experts proposed alternatives, including the Residual Profit Split Method and the Comparable Uncontrolled Transaction method, both of which would have left more profit with the foreign affiliates.
What the Tax Court Decided
The Tax Court sided with the IRS on nearly every contested point in its November 2020 opinion.
On the closing agreement, the court found the 1996 deal was a settlement of specific tax years, not a permanent methodology. It 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 an ongoing 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 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 selecting CPM or by using independent bottlers as comparables. The substance of the transaction, not the form of an earlier agreement, had to align with the arm’s length standard.5eCFR. 26 CFR 1.482-1 – Allocation of Income and Deductions Among Taxpayers
In August 2024, after resolving remaining issues, the Tax Court entered its final decision setting Coca-Cola’s deficiency at approximately $2.7 billion.
The Blocked Income Question and the 3M Decision
Coca-Cola raised a separate argument about its Brazilian affiliate. Brazilian law restricted the amount of royalties 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.
In a November 2023 opinion, the Tax Court rejected that argument. It found the Brazilian royalty restriction did not apply equally to controlled and uncontrolled parties. Because the cap primarily targeted payments to controlling foreign parents, it wasn’t the kind of across-the-board legal barrier that would limit the IRS’s reallocation authority.
The picture changed in October 2025, when the Eighth Circuit Court of Appeals ruled on a strikingly similar issue in 3M Company v. Commissioner. Like Coca-Cola, 3M had a Brazilian subsidiary that couldn’t remit full royalties under local law. The Eighth Circuit reversed the Tax Court and sided with 3M, holding 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.”6U.S. Court of Appeals for the Eighth Circuit. 3M Company and Subsidiaries v. Commissioner of Internal Revenue
The Eighth Circuit leaned heavily on the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, which eliminated Chevron deference. Under the old regime, 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 approach 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 told the Eleventh Circuit 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 attributable to blocked Brazilian income could fall away.
Where the Appeal Stands
Coca-Cola appealed to the U.S. Court of Appeals for the Eleventh Circuit after the Tax Court’s August 2024 final decision. To pursue the appeal, the company paid the full $6 billion liability, which covered both the tax deficiency and accrued interest. It expects a refund if it prevails.
The appeal challenges two main issues: the Tax Court’s endorsement of CPM 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 (PricewaterhouseCoopers, Deloitte, and KPMG) filed a joint amicus brief cautioning that the IRS does not have unlimited discretion under Section 482 and should not abruptly abandon a mutually agreed method. The U.S. Chamber of Commerce filed a separate brief calling the switch “arbitrary and capricious,” and the National Foreign Trade Council also filed in support of the company.
As of early 2026, the Eleventh Circuit has not yet issued a decision. Industry observers expect a ruling within the year.
Why the Ruling Matters for Other Multinationals
The Coca-Cola case sits at the intersection of several unresolved questions in international tax law that affect thousands of companies with cross-border operations.
The first is how much weight the IRS’s past conduct carries. Coca-Cola relied on a method the IRS had endorsed for over a decade, only to face massive liability when the agency changed course. The Tax Court said past acquiescence doesn’t bind the IRS. If that holds on appeal, every multinational’s transfer pricing position is provisional, subject to reversal in the next audit cycle.
The second is the post-Loper Bright status of Treasury regulations. Courts can no longer defer to the IRS’s reading of ambiguous statutory language just because it seems reasonable. The Eighth Circuit’s 3M decision already used this new framework to invalidate the blocked income regulation. If the Eleventh Circuit reaches the same conclusion, the blocked income doctrine is effectively dead in two circuits, and a Supreme Court showdown becomes more likely.
The third is the practical question of how CPM should apply when the tested party has access to extraordinarily valuable intangibles. 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.