The Tax Court held it has jurisdiction to review an APA cancellation because this action is an administrative determination necessary to determine the merits of deficiency determinations, and that such review is on an abuse-of-discretion basis.
Read the Tax Court opinion in Eaton Corp. [PDF 72 KB]
The taxpayer and the IRS entered into two advance pricing agreements (APAs) establishing a transfer pricing methodology for “covered transactions” between the taxpayer and its subsidiaries.
The IRS’s administration of the APAs was governed by certain revenue procedures.
Subsequently, the IRS determined the taxpayer had failed to comply with the applicable terms of the APAs and canceled them. The IRS then issued a deficiency notice and in applying an alternative transfer pricing methodology increased the taxpayer’s income under section 482 by over $102 million for 2005 and over $266 million for 2006.
The taxpayer filed a petition with the Tax Court. The taxpayer alleged that it did comply with the terms and conditions of the APAs, and demonstrated that compliance to the IRS by disclosing errors in its data in 2010 and rectifying those errors.
The taxpayer and IRS filed cross-motions for partial summary judgment, with the taxpayer claiming that the APAs were enforceable contracts, and that the IRS must show that it was entitled to cancel the APAs.
The IRS countered that it canceled the APAs under revenue procedures that reserve certain discretion to the Commissioner and that the cancellations were administrative determinations. As such, the IRS claimed that the Tax Court’s deficiency jurisdiction only permits review for abuse of discretion of the administrative determinations necessary to resolve the merits of a deficiency determination.
The Tax Court today held that:
- It has jurisdiction to review the cancellations of the APAs because they are administrative determinations necessary to determine the merits of the deficiency determinations.
- An APA cancellation is reviewed for abuse of discretion, and that the taxpayer must show that the APA cancellations by the IRS were arbitrary, capricious or without sound basis in fact.
For more information, contact a professional with KPMG’s Global Transfer Pricing Services practice:
+1 202 533 5588