Coca-Cola’s lawyers told a federal appeals court on June 25 that the IRS pulled a “classic bait and switch” when it threw out a pricing formula the company had used for years. The government says each tax year stands on its own. Roughly $20 billion in taxes and interest rides on who is right.
The Eleventh Circuit heard the case in Miami. Coca-Cola, based in Atlanta, is appealing a 2020 Tax Court ruling that backed the IRS. The Thomson Reuters tax service described the resulting deficiency as roughly $2.7 billion, while Al Jazeera put the potential exposure at about $20bn once everything is counted.
A 1996 formula and a change of method
The roots go back to 1996, when Coca-Cola and the IRS settled an audit covering 1987 to 1995. Under the formula that came out of it, known as “10-50-50,” a foreign affiliate kept a profit equal to 10 percent of gross sales, and the rest of the income was split evenly between the U.S. headquarters and the overseas unit.
For the 2007, 2008 and 2009 tax years the IRS dropped that approach. It used the comparable profits method under Section 482 of the tax code instead, setting the foreign subsidiaries’ profits by comparison with independent Coca-Cola bottlers. The result was a reallocation of about $9 billion in income from seven foreign manufacturing affiliates, called supply points, to the U.S. parent. Those units are in Ireland, Brazil, Chile, Mexico, Costa Rica, Egypt and Eswatini.
The Tax Court found this was not an abuse of the IRS’s discretion.
What each side told the judges
Gregory Garre, arguing for Coca-Cola, said the IRS had acknowledged that 10-50-50 produced arm’s-length results and still applies it to 11 of 18 supply points worldwide. Dropping it for seven, he argued, is “the height of inconsistent treatment.” He conceded the agency is not bound to a method forever but said it owed the company notice before applying a new one retroactively. Coca-Cola’s brief says a decade of later audits that left the method alone created “serious reliance interests.”
Jennifer Marie Rubin, for the government, said the Tax Code does not require notice, that the requirements sit in the regulations, and that all tax deficiencies are retroactive. “That’s how it works,” she said. The 1996 agreement, in the government’s brief, “was not a promise that Coca-Cola could use 10-50-50 during post-1995 years.” It gave the company protection from accuracy-related penalties, nothing more.
Rubin also noted that the record says nothing on whether the supply points treated differently are comparable. Coca-Cola blames tax-treaty interference; she called that a “conspiracy theory.” The panel did not seem fully won over by the label, but several judges pressed Garre on the same gap in the record.
Money already paid, and a wider target
In 2024 Coca-Cola paid the IRS $6bn in back taxes and interest while preparing its appeal. It could owe up to $14bn more if the court sides with the government. The company says the IRS “misinterpreted and misapplied the applicable regulations” and has said it is confident of winning.
Others are watching. Alex Martin of the tax consulting firm KBKG said the IRS picked this case for litigation because it can serve as a template for auditing other U.S. companies with highly profitable subsidiaries. Reuven Avi-Yonah of the University of Michigan Law School said an IRS win on appeal could push more companies to settle rather than fight. The agency has lost a string of transfer pricing cases against Bausch & Lomb, US Steel and Hospital Corp of America.
Sources
- Why Coca-Cola and the US taxman are at war over a $20bn tax bill
- 11th Circuit weighs Coca-Cola, IRS clash over transfer pricing methodology change-up
- Coca-Cola $20 Billion IRS Tax Appeal Set for June 2026
