Coca-Cola Files Reply Asking Tax Court to Reconsider Decision

The Coca-Cola Company and Subsidiaries,
Petitioner,
v.
Commissioner of Internal Revenue,
Respondent.

UNITED STATES TAX COURT

Reply to Response to Motion for Leave to File Out of Time Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161

PETITIONER'S REPLY IN SUPPORT OF MOTION FOR LEAVE TO FILE A MOTION FOR RECONSIDERATION OF THE COURT'S NOVEMBER 18, 2020, OPINION

Judge Lauber

Laurence H. Tribe (Bar # TL21319)**
Constitutional Counsel
The Coca-Cola Company
One Coca-Cola Plaza NW
Atlanta, GA 30313
617-512-7018
tribe@law.harvard.edu

J. Michael Luttig (Bar # LJ0835)*
Counselor and Special Advisor
The Coca-Cola Company
One Coca-Cola Plaza NW
Atlanta, GA 30313
847-770-5618
jluttig@coca-cola.com

Jonathan Massey (Bar # MJ21314)
Massey & Gail LLP
The Wharf
1000 Maine Ave. SW, Ste. 450
Washington, DC 20024
202-650-5452
jmassey@masseygail.com

Shay Dvoretzky (Bar # DS21303)
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Ave. NW
Washington, DC 20005
202-371-7370
shay.dvoretzky@skadden.com

Gregory G. Garre (Bar # GG21304)
Latham & Watkins LLP
555 Eleventh St. NW, Ste. 1000
Washington, DC 20004
202-637-2207
gregory.garre@lw.com

*Admitted in Virginia and the District of Columbia

**Admitted in California and Massachusetts

Counsel for Petitioner The Coca-Cola Company and Subsidiaries

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

ARGUMENT

I. Reconsideration is warranted here to correct substantial error and address unusual circumstances

II. The Court should grant leave to seek reconsideration because applying the IRS's new transfer-pricing method retroactively to Coca-Cola's 2007 to 2009 tax years would be arbitrary, capricious, and unconstitutional

III. The Court should grant leave to seek reconsideration because applying the IRS's new transfer-pricing method violates the Treasury Regulations by failing to credit the Supply Points' valuable intangibles and marketing contributions

CONCLUSION

TABLE OF AUTHORITIES

CASES

ACA International v. FCC, 885 F.3d 687 (D.C. Cir. 2018)

American National Bank of Jacksonville v. FDIC, 710 F.2d 1528 (11th Cir. 1983)

American Transit Insurance Co. v. Bilyk, 514 F. Supp. 3d 463 (E.D.N.Y. 2021), appeal docketed, No. 21-1860 (2d Cir. July 30, 2021)

Analog Devices, Inc. v. Commissioner, 147 T.C. 429 (2016)

Asiatic Petroleum Co. (Delaware) Ltd. v. Commissioner, 31 B.T.A. 1152 (1935), aff'd, 79 F.2d 234 (2d Cir. 1935)

Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)

Ax v. Commissioner, 146 T.C. 153 (2016)

Bank of New York Mellon Corp. v. Commissioner, T.C. Memo. 2013-225

Bokum v. Commissioner, 992 F.2d 1136 (11th Cir. 1993)

Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988)

Budinich v. Becton Dickinson & Co., 486 U.S. 196 (1988)

Campbell v. United States, 661 F.2d 209 (Ct. Cl. 1981)

Cherokee Nation of Oklahoma v. Leavitt, 543 U.S. 631 (2005)

Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988)

Cobell v. Jewell, 802 F.3d 12 (D.C. Cir. 2015)

Colvin v. Keen, 900 F.3d 63 (2d Cir. 2018)

Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967)

Cox v. Louisiana, 379 U.S. 559 (1965)

CWT Farms, Inc. v. Commissioner, 79 T.C. 1054 (1982), aff'd, 755 F.2d 790 (11th Cir. 1985)

De Niz Robles v. Lynch, 803 F.3d 1165 (10th Cir. 2015) (Gorsuch, J.)

DHS v. Regents of the University of California, 140 S. Ct. 1891 (2020)

Dickman v. Commissioner, 465 U.S. 330 (1984)

Dixon v. United States, 381 U.S. 68 (1965)

Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)

Estate of Emerson v. Commissioner, 67 T.C. 612 (1977)

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016)

FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009)

Finnegan v. Commissioner, 926 F.3d 1261 (11th Cir. 2019)

Florida Power & Light Co. v. Lorion, 470 U.S. 729 (1985)

Frank Sawyer Trust of May 1992 v. Commissioner, T.C. Memo. 2014-128

Garcia v. Casey, 440 F. Supp. 3d 1282 (N.D. Ala. 2020)

G.U.R. Co. v. Commissioner, 117 F.2d 187 (7th Cir. 1941)

Hamburgers York Road, Inc. v. Commissioner, 41 T.C. 821 (1964)

Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51 (1984)

Higgins v. California Prune & Apricot Grower, Inc., 3 F.2d 896 (2d Cir. 1924) (Learned Hand, J.)

H.S.D. Co. v. Kavanagh, 191 F.2d 831 (6th Cir. 1951)

Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939 (1997)

Kaiser Aetna v. United States, 444 U.S. 164 (1979)

Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781 (11th Cir. 1984)

Kolawole v. Sellers, 863 F.3d 1361 (11th Cir. 2017)

Kovarikova v. WellSpan Good Samaritan Hospital, No. 1:15-cv-2218, 2018 WL 2095700 (M.D. Pa. May 7, 2018)

Landgraf v. USI Film Products, 511 U.S. 244 (1994)

Law Office of John H. Eggertsen P. C. v. Commissioner, 800 F.3d 758 (6th Cir. 2015)

Lesavoy Foundation v. Commissioner, 238 F.2d 589 (3d Cir. 1956)

Louiseville & Nashville Railroad Co. v. Commissioner, 641 F.2d 435 (6th Cir. 1981)

Lyng v. Payne, 476 U.S. 926 (1986)

Estate of Magarian v. Commissioner, 97 T.C. 1 (1991)

Maine Community Health Options v. United States, 140 S. Ct. 1308 (2020)

Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998)

Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011)

McKinney v. Wormuth, 5 F.4th 42 (D.C. Cir. 2021)

Estate of McLendon v. Commissioner, 135 F.3d 1017 (5th Cir. 1998)

Medtronic, Inc. v. Commissioner, 900 F.3d 610 (8th Cir. 2018)

Messinger v. Anderson, 225 U.S. 436 (1912) (Holmes, J.)

Muratore v. U.S. Office of Personnel Management, 222 F.3d 918 (11th Cir. 2000)

National Mining Ass 'n v. U.S. Department of Interior, 177 F.3d 1 (D.C. Cir. 1999)

National Securities Corp. v. Commissioner, 137 F.2d 600 (3d Cir. 1943)

Neustar, Inc. v. FCC, 857 F.3d 886 (D.C. Cir. 2017)

Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), appeal docketed, No. 20-2117 (6th Cir. Nov. 12, 2020)

Office of Personnel Management v. Richmond, 496 U.S. 414 (1990)

Olin Industries v. NLRB, 72 F. Supp. 225 (D. Mass. 1947)

Perez v. U.S. Bureau of Citizenship & Immigration Services, 774 F.3d 960 (11th Cir. 2014)

Perry v. Sindermann, 408 U.S. 593 (1972)

PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016) (Kavanaugh, J.), reinstated in pertinent part on reh'g en banc, 881 F.3d 75 (D.C. Cir. 2018) (enbanc)

Pine Mountain Preserve LLLP v. Commissioner, 978 F.3d 1200 (11th Cir. 2020)

QinetiQ US Holdings, Inc. v. Commissioner, 845 F.3d 555 (4th Cir. 2017)

Raley v. Ohio, 360 U.S. 423 (1959)

Rauenhorst v. Commissioner, 119 T.C. 157 (2002)

Rivers v. Roadway Express, Inc., 511 U.S. 298 (1994)

Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006)

Safe Extensions, Inc. v. FAA, 509 F.3d 593 (D.C. Cir. 2007)

Shields v. Utah Idaho Central Railroad Co., 305 U.S. 177 (1938)

Shrader v. CSX Transportation, No. 94-cv-34S, 1994 WL 721364 (W.D.N.Y. Dec. 7, 1994), aff'd, 70 F.3d 255 (2d Cir. 1995)

Silco, Inc. v. United States, 779 F.2d 282 (5th Cir. 1986)

Smith v. Commissioner, 82 T.C. 705 (1984)

Spirit Airlines, Inc. v. U.S. Department of Transportation, 997 F.3d 1247 (D.C. Cir. 2021)

Texas Rural Legal Aid, Inc. v. Legal Services Corp., 940 F.2d 685 (D.C. Cir. 1991)

Tovar-Alvarez v. U.S. Attorney General, 427 F.3d 1350 (11th Cir. 2005) (per curiam)

United States v. Johnson, 12 F.3d 1540 (10th Cir. 1993)

United States v. Pennsylvania Industrial Chemical Corp., 411 U.S. 655 (1973)

United States v. Winstar Corp., 518 U.S. 839 (1996)

U.S. Capitol Police v. Office of Compliance, 908 F.3d 748 (Fed. Cir. 2018)

U.S. Commodity Futures Trading Commission v. Southern Trust Metals, Inc., 894 F.3d 1313 (11th Cir. 2018)

U.S. Postal Service v. Postal Regulatory Commission, 785 F.3d 740 (D.C. Cir. 2015)

U.S. Steel Corp. v. Commissioner, 617 F.2d 942 (2d Cir. 1980)

Utah Power & Light Co. v. United States, 243 U.S. 389 (1917)

Woodworth v. Kales, 26 F.2d 178 (6th Cir. 1928)

Zdanok v. Glidden Co., 327 F.2d 944 (2d Cir. 1964) (Friendly, J.)

STATUTES & REGULATIONS

I.R.C. § 197

I.R.C. § 482

I.R.C. § 7121

I.R.C. § 7441

I.R.C. § 7805

5 U.S.C. § 551

5 U.S.C. § 554

5 U.S.C. § 701

5 U.S.C. § 703

5 U.S.C. § 706

28 U.S.C. § 2342

39 U.S.C. § 410

47 U.S.C. § 402

49 U.S.C. § 46110

T.D. 9278, 71 Fed. Reg. 44,466 (Aug. 4, 2006)

Temp. Treas. Reg. § 1.482-1T, T.D. 9278, 71 Fed. Reg. 44,466 (Aug. 4, 2006)

Temp. Treas. Reg. § 1.482-4T, T.D. 9278, 71 Fed. Reg. 44,466 (Aug. 4, 2006)

Treas. Reg. § 1.197-2

Treas. Reg. § 1.482-1

Treas. Reg. § 1.482-4

Treas. Reg. § 1.482-5

RULES

Fed. R. Civ. P. 54

Fed. R. Civ. P. 59

Fed. R. Civ. P. 60

Tax Ct. R. 1

Tax Ct. R. 155

Tax Ct. R. 161

OTHER AUTHORITIES

B. John Williams, Jr., Remarks of IRS Chief Counsel, in United States Tax Court 2003 Judicial Conference Reports Part I (2003), https://www.google.com/books/edition/UnitedStatesTaxCourt_2003_Judicial_Co/24HiwgEACAAJ

David K. Thompson, Note, Equitable Estoppel of the Government, 79 Colum. L. Rev. 551 (1979)

Dep't of Justice, Manual on the Administrative Procedure Act (1947)

Internal Revenue Manual 33.3.6.1 (Aug. 11, 2004)

S. Rep. No. 79-752 (1945)

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INTRODUCTION

The IRS's Response (Dkt. No. 755) confirms that this case presents fundamental issues, substantial error, and unusual circumstances warranting reconsideration. The IRS's brief identifies no procedural barriers to granting Coca-Cola's Motion for Leave and considering Coca-Cola's Motion for Reconsideration (e-Lodged at Dkt. No. 748) on the merits. In fact, the IRS acknowledges that “the Court has broad discretion to grant a motion for leave to file a motion for reconsideration, as well as a motion for reconsideration.” Resp. 8. And on the merits, the IRS fails to engage with Coca-Cola's actual arguments or to provide any reason why the unusual combination of circumstances in this case do not warrant reconsideration. As Coca-Cola explained in its Motion for Reconsideration, the IRS acted unlawfully in retroactively changing the tax-calculation method on which it had induced Coca-Cola to rely for the tax years at issue through its course of conduct for over a decade. And on top of that, its new method contravenes the Treasury Regulations. Those legal errors require reconsideration.

The IRS's objection to the Court's reconsideration is that it will suffer “prejudice” if the Court grants Coca-Cola leave to seek reconsideration because then it will need to respond to Coca-Cola's arguments. For one thing, an opportunity to respond is precisely what prevents prejudice, not what causes it. For another, the IRS has already responded in its 65-page Response, which includes detailed (but erroneous and misleading) substantive arguments related to the merits of Coca-Cola's Motion for Reconsideration. Consequently, the primary consideration for the Court is the merit of Coca-Cola's Motion for Reconsideration. And on that, the IRS's primary response seems to be to mischaracterize or ignore what this case is about.

Here is what this case is about: This litigation centers on a highly unusual combination of circumstances that led Coca-Cola to reasonably rely on a particular tax-calculation method before the IRS retroactively changed its mind, unlawfully disregarding the reliance interests it had engendered. In brief, the IRS, in an exercise of its discretion under section 482 of the Internal Revenue Code, agreed in 1996 that a particular tax-calculation method, the so-called 10-50-50 method, produced arm's-length results for Coca-Cola's worldwide operations. Coca-Cola thus began to rely, and it continued to rely, on that method to structure its worldwide arrangements and operations for two decades. The IRS, in turn, continued to induce Coca-Cola's reasonable reliance, auditing Coca-Cola's tax returns five times, over the course of more than a decade, for compliance with the 10-50-50 method. And then one day, well after 2009, the IRS abruptly announced that it would retroactively use a different tax-calculation method not just going forward but for the 2007-2009 tax years, — when Coca-Cola could do nothing (short of inventing a time machine) to restructure its arrangements or operations in light of the IRS's new method. The IRS has stipulated that it did not provide notice to Coca-Cola that it would no longer accept application of the 10-50-50 method until after the tax years at issue. Third Stip. of Facts 338. The consequence for Coca-Cola was more than $3 billion dollars in additional, unwarned, and unavoidable tax liability. That retroactive change was arbitrary, capricious, and unconstitutional, because the IRS may not retroactively change a discretionary position on which it has induced a taxpayer to rely. Worse still, the IRS's new method contravenes the Treasury Regulations by failing to recognize the Supply Points' valuable intangibles and afford them any compensation.

Here is what this case is not about, contrary to the IRS's Response: Coca-Cola is not seeking to invoke traditional governmental estoppel. Coca-Cola is not arguing that the 1996 Closing Agreement bound the IRS to use the 10-50-50 method to evaluate Coca-Cola's tax liability in perpetuity. Coca-Cola is not arguing that the 1996 Closing Agreement or the IRS's decade-long course of auditing Coca-Cola for compliance with the 10-50-50 method somehow estopped the IRS from changing the tax-calculation method prospectively. Instead, Coca-Cola is arguing only that the IRS's retroactive change in the transfer-pricing method for the tax years at issue — after engendering Coca-Cola's reasonable reliance on the 10-50-50 method and without any prior notice to Coca-Cola that the IRS would no longer continue to apply the 10-50-50 method — was arbitrary, capricious, and unconstitutional.

In its 65-page response, the IRS simply does not engage with Coca-Cola's actual arguments. It says the circumstances do not satisfy traditional governmental estoppel, going so far as to misleadingly put all of Coca-Cola's arbitrary-and-capricious and constitutional arguments into an “Estoppel Issue” bucket. Resp. 12. At best, that response ignores what Coca-Cola has long actually argued; at worst, it misunderstands the governing legal framework. The IRS next says the Closing Agreement did not contractually bind the IRS to use the 10-50-50 agreement indefinitely. But, again, that is not the issue. Coca-Cola has never argued that it did. This case involves only the tax years 2007-2009. The IRS then says that the Administrative Procedure Act (“APA”) does not apply to its Notice of Deficiency. But Coca-Cola's point is that the arbitrary-and-capricious standard — which the APA merely codifies — does apply to the IRS's reallocations of income under section 482, as both this Court and the IRS have acknowledged. And the IRS has identified no reason that the arbitrary-and-capricious standard and the constitutional principles that undergird it permit the IRS to retroactively change a tax-calculation method on which it has induced a taxpayer to reasonably rely. Without engaging with the governing legal framework or the actual circumstances of this case, the IRS also does not dispute that the circumstances here are highly unusual.

This Court has discretion to grant Coca-Cola leave to seek reconsideration. See, e.g., Louisville & Nashville R.R. Co. v. Commissioner, 641 F.2d 435, 443-44 (6th Cir. 1981) (allowing the Tax Court to grant reconsideration out of time as a matter of “sound discretion” where “the interests of justice in accurate fact-finding outweighed any negative impact” of “untimeliness,” and there was no “inherent 'unfairness' in the court's decision to correct an error”); June 8, 2021, Order 2 (“Order”). And the IRS's and Court's errors here warrant reconsideration “for the 'obviously valid reason' of correcting an error of law.” Colvin v. Keen, 900 F.3d 63, 69 (2d Cir. 2018) (citation omitted). This isn't just any tax case. This case presents an extraordinary combination of events amounting to an unlawful bait and switch.If that weren't enough, the IRS's switch is itself unlawful because it contravenes the Treasury Regulations that bind the IRS and this Court.Coca-Cola respectfully submits that “[i]n all forms of human endeavor, people make mistakes, and in most circumstances the best course of action is to correct them. Judging is no different.” Id. at 68. The Court should take advantage of the additional briefing and elaboration on these important issues, reconsider its November 18, 2020, opinion, and correct these substantial errors, which Coca-Cola believes were brought on by the fallacious arguments made by the IRS from this case's inception.

ARGUMENT

I. Reconsideration is warranted here to correct substantial error and address unusual circumstances.

A. The Court has discretion to reconsider its November 18, 2020, opinion to correct substantial error and address unusual circumstances.

As the Court recognized in its June 8, 2021, order, “a showing of substantial error or unusual circumstances” justifies reconsideration, and the merits of that showing are relevant to whether to grant leave to seek reconsideration. Order 2 (citing cases). Here, Coca-Cola has shown substantial error and unusual circumstances, and neither reconsideration nor leave to seek reconsideration will prejudice the IRS.

As explained further below and in Coca-Cola's Motion for Reconsideration, not only does requiring Coca-Cola to use Dr. Newlon's comparable profits method (“CPM”) in calculating its taxes contravene the Treasury Regulations, but it violates fundamental principles of administrative and constitutional law. See infra pp. 15-67. Coca-Cola respectfully suggests that the Court erred by not applying the correct administrative, regulatory, and constitutional principles, based on the IRS's erroneous position that its decision to retroactively require a different tax-calculation method was insulated from review under either the arbitrary-and-capricious standard or the Constitution. Coca-Cola further respectfully submits that, because of the IRS's erroneous position, the Court “did not give prior adequate consideration to the possible ramifications of its opinion,” Frank Sawyer Tr. of May 1992 v. Commissioner, T.C. Memo. 2014-128, at *5, instead retroactively imposing massive unforeseeable and unexpected liability on The Coca-Cola Company based on a new transfer-pricing method different from that agreed upon by IRS and relied upon by Coca-Cola during the tax years in question. The Court has ample discretion to correct those errors. See, e.g., Colvin v. Keen, 900 F.3d 63, 68-69 (2d Cir. 2018); Law Off. of John H. Eggertsen P.C. v. Commissioner, 800 F.3d 758, 765 (6th Cir. 2015); Order 2.

B. The IRS's objections to reconsideration and leave to seek reconsideration lack merit.

The IRS has identified no procedural barrier to granting Coca-Cola's Motion for Leave and considering Coca-Cola's Motion for Reconsideration on the merits. Indeed, in response to one of the questions raised by the Court, the IRS acknowledges that “[t]he fact that petitioner hired new counsel does not impact whether the Court should grant leave to file a motion for reconsideration out of time.” Resp. 8. The IRS primarily argues that “allowing [Coca-Cola] to file its Motion for Reconsideration would prejudice [the IRS] and damage principles of finality in litigation.” Resp. 11. But the IRS is wrong as to both finality and prejudice. The IRS's repeated contention that Coca-Cola is merely rehashing old arguments lacks force too. As the Court noted in its June 8 Order, “whether to grant a Rule 161 motion . . . rests with this Court's discretion.” Order 2 (citing CWT Farms, Inc. v. Commissioner, 79 T.C. 1054, 1057 (1982), aff'd, 755 F.2d 790 (11th Cir. 1985)). And that discretion plainly warrants reconsidering “its ruling for the 'obviously valid reason' of correcting an error of law.” Colvin, 900 F.3d at 69 (citation omitted).

1. Finality poses no obstacle to reconsideration for the simple reason that this litigation is not final. “A 'final decision' generally is one which ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Budinich v. Becton Dickinson & Co., 486 U.S. 196, 199 (1988) (citation omitted). But here, as the Court observed and the IRS acknowledges, the Court has not yet decided the blocked-income-regulation issue, which remains under advisement pending a decision in 3M Co. v. Commissioner, No. 5816-13. Order 3; Resp. 3-4. Moreover, the parties have not engaged in Tax Court Rule 155 computations. Consequently, there has been no final decision.

Because no final decision has been entered (and, indeed, will not be entered for at least several months), the proper analogue here for Tax Court Rule 161 is Federal Rule of Civil Procedure 54(b). See Tax Ct. R. 1(b) (Court may look to the Federal Rules of Civil Procedure that are “suitably adaptable to govern the matter at hand”). Under Rule 54(b), in turn, “any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of the claims or parties,” and so it “may be revised at any time before the entry of ajudgment adjudicating all the claims and all the parties' rights and liabilities.” Fed. R. Civ. P. 54(b). Federal Rules of Civil Procedure 59 and 60, in contrast, apply by their terms “only when the court has already entered a final judgment.” Kolawole v. Sellers, 863 F.3d 1361, 1368 (11th Cir. 2017); accord, e.g., Cobell v. Jewell, 802 F.3d 12, 25-26 (D.C. Cir. 2015) (“at the time the motion for reconsideration was filed, no judgment had yet been entered,” so “the reconsideration motion should have been treated as filed under Rule 54(b)” rather than Rule 59(e)). The Rules' drafters left no doubt on this score, adding that “interlocutory judgments are not brought within the restrictions of [Rule 60(b)],” but are instead “left subject to the complete power of the court rendering them to afford such relief from them as justice requires.” Fed. R. Civ. P. 60(b) advisory committee's note to 1946 amendment. Rule 54(b) remains the correct standard regardless “of the length of time that has already elapsed in th[e] proceeding.” Cobell, 802 F.3d at 26; see id. at 15 (holding, in “eleventh appeal . . . in nearly two decades of litigation,” that district court should have used Rule 54(b)).

Given the lack of a final decision and the posture of this case, the only limitation on reconsideration is the Court's discretion. See, e.g., Colvin, 900 F.3d at 67-72. Indeed, the IRS acknowledges as much, conceding that “the pending Blocked Income Issue prevents entry of the final decision,” Resp. 3, and that the Court has “broad discretion” to grant a motion for reconsideration, Resp. 8; see also, e.g., Louisville & Nashville R.R. Co. v. Commissioner, 641 F.2d 435, 443-44 (6th Cir. 1981) (“[T]he court, confronted with an out of time motion for revision, may either grant or deny leave to file on the basis of its sound discretion.”). The IRS's complaint that Coca-Cola's challenge to the blocked-income regulation is “wholly separate” from the issues in Coca-Cola's reconsideration papers is irrelevant, because neither Tax Court Rule 161, Federal Rule of Civil Procedure 54(b), nor caselaw require any relationship between issues on reconsideration and still pending issues. To the contrary, the D.C. Circuit instructed a district court to apply Rule 54(b) even where the issues still pending were “entirely independent of and ha[d] no bearing on” the subject of the reconsideration motion. Cobell, 802 F.3d at 22; see id. (“separate and distinct legal matter”).

2. The IRS's “prejudice” arguments are likewise unfounded. Other than vague references to the “principles of finality,” the only “prejudice” that the IRS identifies is that “[r]ebriefing” the issues raised by Coca-Cola's Motion for Reconsideration “would entail considerable time and cost.” Resp. 11, 14-15. But the IRS has already filed a 65-page brief addressing the merits.

Moreover, “prejudice” means '“ a lack of sufficiency of notice and an opportunity to prepare armed with the knowledge' that the prior ruling does not control.” Colvin, 900 F.3d at 70 (citation omitted); accord, e.g., United States v. Johnson, 12 F.3d 1540, 1544 (10th Cir. 1993). Thus, for example, prejudice might result where a party has made further litigation choices “in reliance on the rule [an opinion] established.” Colvin, 900 F.3d at 74. By definition, “prejudice” does not mean being “punished,” Resp. 16, by being offered the opportunity to respond to a request for reconsideration. Here, the Court gave the IRS the opportunity to respond to Coca-Cola's arguments — and 82 days to do so — and the IRS did just that, producing a detailed, 65-page Response doing all the work it insists it would be “prejudiced” by having to do. Moreover, the IRS's repeated complaint (as noted below) that Coca-Cola's “Motion for Reconsideration rehashes the same previously rejected legal arguments,” Resp. 17, contradicts its suggestion that the need to respond to new arguments has caused it prejudice. And absent prejudice, it is “sufficient for the [trial] court to conclude, notwithstanding [its] prior ruling,” that it erred, requiring a different result, Colvin, 900 F.3d at 74 — or, as the IRS puts it, that there is “substantial error or unusual circumstances,” Resp. 8. The possible need to re-brief issues is no reason to perpetuate an incorrect decision. Indeed, ensuring the correct result now will only enhance the overall efficiency of this litigation.

3. Finally, the IRS repeatedly protests that Coca-Cola continues to “raise[ ] the same argument[s] it previously made,” Resp. 5, and the Court “fully considered,” Resp. 20, only now buttressed with additional “legal authorities,” Resp. 19. See also Resp. 2 (“petitioner seeks to rehash arguments that the Court rejected”); Resp. 5 (“Petitioner rehashes its argument that petitioner relied on the continuing application of the 10-50-50 formula”); Resp. 17 (“Petitioner's Motion for Reconsideration rehashes the same previously rejected legal arguments.”); Resp. 22, 24, 27-29. But that complaint is no argument against reconsideration. To be sure, the law-of-the-case doctrine “expresses the practice of courts generally to refuse to reopen what has been decided” — but it is “not a limit to their power.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817 (1988) (quoting Messinger v. Anderson, 225 U.S. 436, 444 (1912) (Holmes, J.)). Before final judgment, a court retains “the power to revisit prior decisions of its own . . . in any circumstance,” id., subject, as Judges Learned Hand and Friendly phrased it, only to “its good sense.” Colvin, 900 F.3d at 68 (quoting Zdanok v. Glidden Co., 327 F.2d 944, 952-53 (2d Cir. 1964) (Friendly, J.) (quoting Higgins v. California Prune & Apricot Grower, Inc., 3 F.2d 896, 898 (2d Cir. 1924) (Learned Hand, J.))). Indeed, “errors of law warrant reconsideration.” Law Off. of John H. Eggertsen, 800 F.3d at 765. And, of course, a trial “court's adherence to law of the case cannot insulate an issue from appellate review.” Christianson, 486 U.S. at 817.

Consequently, the question before this Court is whether it should “change[ ] its ruling for the 'obviously valid reason' of correcting an error of law.” Colvin, 900 F.3d at 69 (citation omitted); see also, e.g., Christianson, 486 U.S. at 817 (the lower court “did not exceed its power in revisiting” an earlier ruling and finding that it “was 'clearly wrong'”). As noted, “[t]he only limitation” on reconsideration when the Court finds such an error “is that prejudice not ensue” to the IRS if the Court revisits its ruling. Colvin, 900 F.3d at 70 (citation omitted). And absent such prejudice, as here, it is “sufficient for the [trial] court to conclude, notwithstanding [its] prior ruling,” that it erred, requiring a different result. Id. at 74. Coca-Cola's point is that its longstanding arguments and the additional authorities it has cited demonstrate the Court's error in its earlier Opinion, and thus provide ample reason to reconsider.

This case presents precisely the sort of situation where this Court has previously granted reconsideration. See, e.g., Frank Sawyer Tr., T.C. Memo. 2014-128, at *5 (granting reconsideration to enable Court to more fully consider “the possible ramifications of its opinion”); Bank of N.Y. Mellon Corp. v. Commissioner, T.C. Memo. 2013-225, at *8 (granting reconsideration “to allow the Court to more fully consider” petitioner's arguments). Even authority cited by the IRS supports that point. CWT Farms, 79 T.C. at 1057 (cited at Resp. 9) (granting reconsideration). Other courts too have routinely granted or upheld reconsideration, such as where the party “cite[d] additional authority,” Shrader v. CSX Transp., No. 94-cv-34S, 1994 WL 721364, at *1 (W.D.N.Y. Dec. 7, 1994), aff'd, 70 F.3d 255 (2d Cir. 1995); the court “jumped to [a] conclusion” without “applying the correct analysis,” Garcia v. Casey, 440 F. Supp. 3d 1282, 1286 (N.D. Ala. 2020), or “blended two lines of [appellate] case law that are consistent but distinct,” Kovarikova v. WellSpan Good Samaritan Hosp., No. 1:15-cv-2218,2018 WL 2095700, at *2 (M.D. Pa. May 7,2018); or a party “connected] the dots” for the first time in its reconsideration papers, American Transit Ins. Co. v. Bilyk, 514 F. Supp. 3d 463, 474 (E.D.N.Y. 2021), appeal docketed, No. 21-1860 (2d Cir. July 30, 2021).¹

* * *

The touchstone in deciding whether to grant reconsideration is whether the Court erred and whether changing the erroneous ruling would prejudice the party that previously prevailed. To adhere to the wrong result just because it was the first result “would be a foolish rule.” Colvin, 900 F.3d at 68. As Coca-Cola explained in its reconsideration papers, the IRS acted arbitrarily, capriciously, and unconstitutionally in disregarding Coca-Cola's reasonable reliance interests, and the method it convinced the Court to adopt violated the Treasury Regulations. Accordingly, Coca-Cola submits that, for the reasons set forth below and its reconsideration papers, the Court should reconsider its November 18, 2020, opinion.

II. The Court should grant leave to seek reconsideration because applying the IRS's new transfer-pricing method retroactively to Coca-Cola's 2007 to 2009 tax years would be arbitrary, capricious, and unconstitutional.

The Court should grant Coca-Cola leave to file its Motion for Reconsideration, reconsider its November 18, 2020, opinion, and hold that the IRS's retroactive imposition of the IRS's new transfer-pricing method, Dr. Newlon's CPM, to the 2007 to 2009 tax years at issue in this case would be arbitrary, capricious, and, indeed, unconstitutional.

As Coca-Cola has explained, this case involves a highly unusual — if not entirely unique — set of circumstances that induced Coca-Cola to rely on the 10-50-50 method during the tax years at issue. The IRS agreed to the 10-50-50 method in its 1996 Closing Agreement with Coca-Cola. The IRS stated in that agreement, with no temporal or other qualification, that the 10-50-50 method produced “arm's length” results. Ex. 242-J, at 3. The IRS encouraged Coca-Cola to rely on that method by taking the extraordinary step of granting forward-looking penalty protection in the Closing Agreement. The IRS even extended that penalty protection not only to the then-existing Supply Points, but also to Coca-Cola's “future” Supply Points, underscoring that the parties intended their agreement to govern their mutual tax positions into the future, absent material changes in the facts and circumstances or changes in the law.For the next 11 tax years, the IRS continued to adhere to the 10-50-50 method and extensively audited Coca-Cola solely for compliance with that method. Because of this unique combination of circumstances — encompassing atypical contractual provisions and uninterrupted consistent and long-term conduct by the IRS — Coca-Cola developed reasonable reliance interests in the continued application of the 10-50-50 method for the 2007 to 2009 tax years that the IRS was not free simply to disregard. See Mot. for Reconsideration 16-48. Notably, the IRS never denies that this combination of circumstances was highly unusual.

Instead, the IRS props up a strawman argument by claiming that Coca-Cola is arguing that it is entitled to use the 10-50-50 method in perpetuity. But Coca-Cola has never made that argument. If the IRS wanted to change Coca-Cola's transfer-pricing method, it had a straightforward way of doing so while still respecting the reliance interests that were created on this unusual set of facts: The IRS could have notified Coca-Cola — before Coca-Cola filed its tax returns for 2007 to 2009 — that the IRS no longer believed the 10-50-50 method was proper. That kind of advance warning would have given Coca-Cola a chance to adjust by, for example, taking advantage of available tax-planning opportunities or conducting a transfer-pricing study. Yet it is undisputed that the IRS did not give Coca-Cola notice that it had any misgivings about the 10-50-50 method until after Coca-Cola filed its tax returns for those years.

The result is stunning. After the IRS had approved the 10-50-50 method as producing “arm's length” results and Coca-Cola had reasonably ordered its affairs to comply with that approval; after the IRS had granted Coca-Cola forward-looking penalty protection for applying that method; and after the IRS repeatedly audited Coca-Cola for compliance with that agreed-upon method, the IRS saddled Coca-Cola with billions of dollars of additional retroactive tax liability under an entirely new method of which Coca-Cola had no fair notice and that Coca-Cola could not have reasonably predicted. This bait and switch is the epitome of a retroactive change in position that disregards reasonable reliance interests and violates the arbitrary-and-capricious standard — as well as the United States Constitution.

In response, the IRS completely ignores the unique set of circumstances giving rise to Coca-Cola's reliance argument, repeatedly mischaracterizes Coca-Cola's reliance argument as a much more narrow “estoppel” claim, disregards settled law underlying the arbitrary-and-capricious standard, and essentially ignores Coca-Cola's constitutional arguments altogether. The IRS's response underscores the fundamental problems with its bait and switch and, ultimately, argues for a system in which there is no practical check on this abusive action. In short, the IRS has provided no sound basis on which to deny the relief Coca-Cola seeks and has given the Court every reason to grant that relief.

A. The IRS is wrong to focus narrowly on whether it is estopped from changing positions by the Closing Agreement.

1. The doctrine of estoppel does not displace other limits on an agency's interference with reasonable reliance interests.

Instead of confronting Coca-Cola's reliance argument, the IRS mischaracterizes it, suggesting that Coca-Cola is arguing that the Closing Agreement “bind[s] [the IRS's] hand in perpetuity” through traditional equitable estoppel principles. Resp. 45 (quoting Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 793 (11th Cir. 1984)); see Resp. 34-49. But that distorts Coca-Cola's argument in two fundamental ways, which is why the IRS refuses even to respond to Coca-Cola's discussion of Knight-Ridder in its Motion for Reconsideration at 36-37 n.8.

First, Coca-Cola has never argued that the IRS must be bound by the 10-50-50 method “in perpetuity.” Coca-Cola agrees that the IRS “may have been allowed to require Coca-Cola to use a different transfer-pricing method prospectively” as long as it did not engage in a bait and switch. Mot. for Reconsideration 17. The question in this case (which concerns tax years 2007-2009) is whether the IRS was free to retroactively change the 10-50-50 method as to past tax years — before the IRS gave Coca-Cola any notice that it had changed its position on the 10-50-50 method. Second, Coca-Cola's reliance argument is not in any way limited to the narrow concept of traditional governmental estoppel but instead rests on a broader set of bedrock legal and constitutional principles prohibiting arbitrary government action.

Traditional equitable estoppel is one constraint on agency conduct, but as has been clear for decades, it is not the only one. Government agencies have an affirmative obligation to respect and account for the reasonable reliance interests they engender even where they may not be “estopped” from changing positions. As longstanding principles of administrative and constitutional law make clear, the government may not change a position on which it has engendered reliance without warning and an opportunity for the relying party to adjust to the new position. This is, and has been, Coca-Cola's argument from the beginning of the case. See Mot. for Reconsideration 21-48. Yet that is precisely what the IRS did in this case: It ran roughshod over the reliance interests that it engendered in Coca-Cola that the 10-50-50 method was the appropriate method to use in calculating the Company's taxes.

a. The Supreme Court has long held that, regardless of whether equitable estoppel applies in a given situation, that principle does not preempt other principles under which regulated parties may hold government agencies to their words and promises of conduct. In Lyng v. Payne, 476 U.S. 926 (1986), for example, the district court and the Eleventh Circuit held that the Department of Agriculture had failed to give adequate notice of the availability of loans for farmers under a disaster-relief program and thus ordered the Department to reopen the loan program to allow new applications after the original deadline had passed. Id. at 933. Before the Supreme Court, the Agriculture Department argued that the remedy the lower courts granted, which effectively precluded the Department from enforcing the original application deadline, “shares all of the essential characteristics of an equitable estoppel against the Government and, accordingly, should be analyzed on those terms.” Id. at 935.

The Court firmly “reject[ed]” that argument and the government's “suggestion that any remedy that can be analogized to an equitable estoppel is necessarily invalid, regardless of the source of the cause of action, unless the plaintiff succeeds in proving all the elements of common-law estoppel.” Id. at 936. The Court instructed instead that other sources of authority may make estoppel-like remedies available. Id. Since the farmers had proceeded under the Administrative Procedure Act, the Court reasoned, the right question was “not whether the [Department] should be estopped from applying the deadline, but whether the relief afforded by the District Court was appropriate under the APA.” Id. at 937; cf., e.g., Kaiser Aetna v. United States, 444 U.S. 164, 179 (1979) (“While the consent of individual officials representing the United States cannot 'estop' the United States, it can lead to the fruition of a number of expectancies embodied in the concept of 'property.'” (citations omitted)).

Elsewhere, too, the Supreme Court has made clear that although equitable estoppel may be related to the notion that agencies must respect reasonable reliance interests, it is not the only lens through which reliance arguments must be viewed. To the contrary, the Court has explained that legal principles other than traditional estoppel often provide estoppel-like relief, including “the doctrine that an administrative agency may not apply a new rule retroactively when to do so would unduly intrude upon reasonable reliance interests." Heckler v. Community Health Servs. of Crawford Cnty., Inc., 461 U.S. 51, 60 n. 12 (1984) (emphasis added). That doctrine is longstanding, well-established, and entirely independent of estoppel.

b. The very same reasoning applies here: Just as in Payne, the issue is not the narrow question whether the IRS was estopped from changing its position as to the appropriate transfer-pricing method, but rather whether that retroactive change was arbitrary, capricious, or unconstitutional. And it was exactly that, as explained below and in Coca-Cola's Motion for Reconsideration. Coca-Cola's reliance interest in the 10-50-50 method created by the Closing Agreement and the IRS's consistent course of conduct approving that method for over a decade prevented the IRS from imposing a different methodology retroactively without prior notice or explanation. To put it another way, the IRS “may not apply a new rule retroactively when to do so would unduly intrude upon reasonable reliance interests.” Community Health Servs., 467 U.S. at 60 n. 12. But that is just what it did.

Nor is the IRS somehow immune from this longstanding reliance doctrine. Courts have repeatedly required the IRS itself to take specific actions to protect taxpayers' reasonable reliance interests without so much as mentioning estoppel. See, e.g., Estate of McLendon v. Commissioner, 135 F.3d 1017, 1024-25 (5th Cir. 1998) (precluding the IRS from “retroactively abrogating] a ruling in an unclear area with respect to any taxpayer who has relied on it”); Silco, Inc. v. United States, 779 F.2d 282, 286 (5th Cir. 1986) (same); Rauenhorst v. Commissioner, 119 T.C. 157, 171-73 (2002) (applying McLendon and Silco to conclude that IRS could not change a ruling on which taxpayers relied); Mot. for Reconsideration 18-19, 34-36 (collecting authorities). The Supreme Court and courts of appeals have likewise restricted other agencies from infringing on regulated parties' reliance interests, without ever invoking the equitable principle of estoppel. See, e.g., Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2127 (2016) (requiring agency to rely solely on statute, and not on a regulation that failed to account for the “serious reliance interests” the agency had engendered in its prior interpretation of the statute); PHH Corp. v. CFPB, 839 F.3d 1, 49 (D.C. Cir. 2016) (Kavanaugh, J.) (precluding agency from retroactively enforcing its new interpretation of the statute when entity “acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which [it] engaged”), reinstated in pertinentpart on reh'g en banc, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc); De Niz Robles v. Lynch, 803 F.3d 1165, 1176 (10th Cir. 2015) (Gorsuch, J.) (forbidding agency from applying new rule announced in adjudication retroactively to avoid “upsetting settled expectations”).

c. In its November 18, 2020, opinion, this Court correctly recognized that Coca-Cola's argument is that “it relied to its detriment on a belief that the IRS would adhere to the 10-50-50 method,” Op. 98, and that “the IRS ha[d] pulled the rug out from under it,” Op. 97. Yet, likely misled by the IRS's mischaracterization of Coca-Cola's argument, the Court rejected this argument solely by invoking estoppel, looking only to the terms of the Closing Agreement and reasoning that Coca-Cola “cannot estop the Government on the basis of a promise that the Government did not make.” Op. 98 (emphasis added). But neither estoppel principles nor the Closing Agreement alone can dispose of Coca-Cola's reliance argument.

Whether the IRS could change its position on the applicability of the 10-50-50 method and apply that new position retroactively to past tax years presents issues beyond the narrow concept of estoppel. Whereas a traditional estoppel argument might rest on a contract-like interpretation of the Closing Agreement, Cola-Cola's reliance argument is based on the IRS's entire course of conduct, from agreeing that the 10-50-50 method was “arm's length,” to auditing Coca-Cola for compliance with the 10-50-50 method for the next 11 years, to changing its mind as to the appropriate method without ever telling Coca-Cola it was doing so until after the tax years in question. See Mot. for Reconsideration 23-31; infra pp. 30-38. Regardless of whether the Closing Agreement estopped the IRS from changing methods, the IRS's course of conduct implicates key pillars of administrative and constitutional law that have long prohibited government officials from disregarding the reasonable reliance interests their words and conduct have created. See, e.g., De Niz Robles, 803 F.3d at 1172 (citing “constitutional protections sounding in due process and equal protection”). It is imperative that the Court reevaluate the IRS's conduct under these principles in order to ensure that this important case is correctly and justly decided under law. See Mot. for Reconsideration 21-48. “[E]rrors of law warrant reconsideration,” Law Office of John H. Eggertsen, 800 F.3d at 765, and “the best course of action is to correct them,” Colvin, 900 F.3d at 68.

2. Estoppel principles reinforce Coca-Cola's reliance argument.

Properly understood, traditional principles of equitable estoppel support Coca-Cola's reliance argument. Contrary to the IRS's wooden and cramped view of governmental estoppel, estoppel is inherently equitable and “flexible.” Community Health Servs., 467 U.S. at 59. In citing only decisions taking a generally restrictive view of the circumstances in which estoppel may lie against the government, Resp. 35-36, the IRS glosses over a critical distinction. In the usual estoppel case, the government seeks to change positions to correct a mistake of law or fact. But it is axiomatic that different principles apply where, as here, the government seeks to change its position on an issue as to which the law is unclear or the government has discretionary authority. In this latter circumstance, the caselaw is clear that the government may not retroactively change a discretionary position on which a party has relied. And here, the IRS has never identified any mistake of law or fact that it made in agreeing to and approving the 10-50-50 method for a decade and a half. Instead, the IRS seeks to change the applicable transfer-pricing method retroactively solely as a matter of its discretionary authority under section 482. In such circumstances, estoppel principles work hand in hand with the reliance principles discussed above to prevent agencies from arbitrarily changing positions retroactively.

The IRS cites several cases to support its claim that equitable estoppel must be applied against the government with “caution and restraint.” Resp. 35. To the extent those cases are relevant, they stand for a relatively narrow proposition: The government generally cannot be equitably estopped from changing positions to correct a mistake of law or fact. See, e.g., Bokum v. Commissioner, 992 F.2d 1136, 1138, 1141-42 (11th Cir. 1993) (IRS was not estopped from pursuing deficiency claim by letter erroneously stating that statute of limitations had expired); Estate of Emerson v. Commissioner, 67 T.C. 612, 618 (1977) (“We do not believe the instant case to be one of those rare instances where the Commissioner should not be allowed to correct a mistake of law.” (emphasis added)). These decisions do not address the situation where, as here, the government changes positions on a discretionary issue — for reasons other than to correct a mistake of law or fact.²

The Supreme Court has actually drawn this very distinction in a tax case. In Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 182-83 (1957), the IRS had ruled that the petitioner was a tax-exempt “club,” but had later revoked that ruling because it was concededly “grounded upon an erroneous interpretation of the term 'club' in § 101(9)” of the Internal Revenue Code. The Court held that the IRS was not “equitably estopped from applying the revocation retroactively” because it could correct a mistake of law. Id. But the Court also distinguished two prior cases as inapplicable because they “did not involve correction of an erroneous ruling of law.” Id. at 184 (emphasis added) (citing H.S.D. Co. v. Kavanagh, 191 F.2d 831 (6th Cir. 1951), and Woodworth v. Kales, 26 F.2d 178 (6th Cir. 1928)).³

A different rule obtains, however, when the IRS or another agency changes its position in the exercise of its discretionary authority. In McLendon, for example, the Fifth Circuit distinguished “the Automobile Club rule” as “applying] only where the Commissioner revokes a prior ruling that [was] contrary to the Internal Revenue Code.” 135 F.3d at 1024 n.15. Automobile Club does not apply where “the Code does not provide a clear answer.” Id.

This distinction makes perfect sense. Courts generally allow the government to correct mistakes of law or fact to avoid requiring the executive branch “to do or cause to be done what the law does not sanction or permit.” David K. Thompson, Note, Equitable Estoppel of the Government, 79 Colum. L. Rev. 551, 551 (1979) (quoting Utah Power & Light Co. v. United States, 243 U.S. 389, 409 (1917)). The IRS's power “retroactively to correct mistakes of law . . . is no more than a reflection of the fact that Congress, not the Commissioner, prescribes the tax laws.” Dixon v. United States, 381 U.S. 68, 72-73 (1965). But where the law is unclear or confers discretion on an agency, the separation-of-powers concern about the judiciary's requiring the executive branch to enforce a mistaken position of law or fact does not exist, and the availability of judicial review as a check on arbitrary agency action is correspondingly more important.

The Supreme Court's decision in United States v. Pennsylvania Industrial Chemical Corp. ("PICCO”), 411 U.S. 655 (1973), which Coca-Cola discussed in its Motion for Reconsideration, illustrates this point. See Mot. for Reconsideration 41. “In PICCO, the courts were asked to prevent the Government from exercising its lawful discretionary authority” to prosecute the defendant for discharging waste without a permit when the defendant had been misled by a government agency into believing that it did not need one. Office of Pers. Mgmt. v. Richmond, 496 U.S. 414, 434 (1990) (White, J., concurring) (emphasis added). “[T]here is a world of difference” between that situation, however, and one in which “the courts have been asked to require the Executive Branch to violate a congressional statute.” Id. at 434-35.

This case is exactly like PICCO and other cases involving exercises of discretionary authority rather than mistakes of law or fact. Section 482 does not provide clear legal rules. Instead, it expressly confers discretion on the IRS to reallocate income and deductions. In fact, the IRS repeatedly invokes that discretion here to justify its switch from the 10-50-50 method to Dr. Newlon's CPM. See Resp. 7, 33-35, 37, 39, 42-45, 49, 55-57, 59, 62. Nor has the IRS ever claimed that its adjustments in this case were meant to fix a mistake of law or fact. For example, it has never argued that it lacked the authority to approve the 10-50-50 method under the discretion granted by section 482, or that its acceptance of that method was based on some mistake of fact. Rather, the IRS invoked its “broad discretion” under section 482, Hamburgers York Road, Inc. v. Commissioner, 41 T.C. 821, 833 (1964), to reexamine the same law and the same facts and decided to retroactively require for past tax years a new and vastly different transfer-pricing method from the one it had long approved. None of the estoppel decisions the IRS cites addresses this circumstance.

Courts have had little trouble holding the IRS and other government agencies to the discretionary decisions they make. The cases that the Supreme Court distinguished in Automobile Club are themselves cases in point. See H.S.D. Co., 191 F.2d at 844-46 (binding the Commissioner of Internal Revenue to his predecessor's tax-exemption ruling when the Commissioner was given “the unusual power by Congress to approve” the exemption, the prior Commissioner granted such approval, and the new Commissioner's attempted revocation of such approval “involved no new facts and no mistake of law, but only different inferences from the same facts”); Kales, 26 F.2d at 180 (precluding the Commissioner from revising a stock valuation “flowing not from the discovery of any fraud or mistake, clerical or otherwise, in any fundamental fact or matter of law, but resulting only from a 'more matured judgment'”).

By focusing on cases in which the government would be required to violate the law, to the exclusion of the body of law where it would not, the IRS glosses over the critical distinction and applies the wrong legal standard. Decisions allowing the government to fix errors of law or fact may be correct but do not even address — much less govern — the issue here: whether, having induced reliance, the IRS can retroactively change its discretionary decision to apply a particular transfer-pricing method and apply that new method to past tax years. If anything, the cases relied upon by the IRS highlight the impermissibility of the IRS's conduct here: Absent any mistake of, or change in, law or facts that would justify its switch, the IRS simply changed its mind about the applicability of the 10-50-50 method. Indeed, to this day, the IRS has steadfastly refused to explain the reasons for its abrupt change. Properly understood, the cases that both the IRS and Coca-Cola cite show that the IRS's retroactive reversal in position in this case is impermissible.

3. The IRS's attempt to shift the focus away from its conduct and to the Closing Agreement alone is both misplaced and unavailing.

Just as the IRS's understanding of the legal principles underlying Coca-Cola's reliance argument is incorrect, so too is its understanding of its own conduct that gave rise to Coca-Cola's reasonable reliance interests.

a. In responding to Coca-Cola's reliance argument, the IRS focuses almost exclusively on the Closing Agreement. See, e.g., Resp. 33-49. Indeed, it devotes several pages of its brief to section 7121, which governs closing agreements. See Resp. 37-41. But as discussed, the Closing Agreement was just the starting point for Coca-Cola's reasonable reliance interests. Coca-Cola's reliance argument does not end there. It is based on the IRS's entire course of conduct over two decades — of which the Closing Agreement is just one part. See Mot. for Reconsideration 29-31. The IRS largely ignores this entire course of conduct, which reinforced Coca-Cola's reasonable belief that the IRS had acknowledged that the 10-50-50 method produced “arm's length” results, and therefore was an appropriate — and lawful — method that Coca-Cola could use. Indeed, the IRS repeatedly audited Coca-Cola for compliance with the 10-50-50 method, not once suggesting that the method was improper.

During the course of those audits, the IRS's agents had countless interactions with Coca-Cola's employees. Yet, as the IRS itself has stipulated:

At no time prior to [Coca-Cola]'s filing its 2009 Federal income tax return on September 1, 2010, did any IRS employee advise any of [Coca-Cola]'s employees, in writing or otherwise, that the IRS would no longer accept [Coca-Cola]'s application of the methodology set forth in the Closing Agreement relating to the Foreign Affiliates that are covered by the Closing Agreement and are subject to the notice of deficiency. . . .

Third Stip. of Facts 338. Not until 2011 — long after the tax years at issue in this case — did the IRS inform Coca-Cola that it was thinking of changing methods and applying its new method retroactively.

This is a classic situation in which a regulated party is permitted to rely on an agency's course of conduct. Indeed, as Coca-Cola explained in its motion, it is just like the commonsense example that then-Judge Kavanaugh gave in PHH Corp, of a police officer who allows a pedestrian to cross a street at a particular place, only to give him a ticket for jaywalking when he gets to the other side. As then-Judge Kavanaugh aptly put it, “[n]o one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation.” 839 F.3d at 49. Here, the IRS effectively told Coca-Cola it could walk to the other side of the street (in the Closing Agreement), carefully audited it for decades to ensure that it continually crossed in this place, and then — out of the blue and with no explanation whatsoever — gave Coca-Cola a multi-billion-dollar jaywalking ticket for doing just what the IRS told it to do. The IRS unsuccessfully attempts to distinguish PHH Corp, on its facts, see Resp. 60, and notably never responds to this basic analogy.

b. As Coca-Cola explained in its Motion for Reconsideration, these facts created a “highly unusual combination of circumstances.” Mot. for Reconsideration 7. The IRS never disputes that point. Nor could it. Instead, the IRS tries to restrict the focus to the terms of the Closing Agreement. But, even then, the IRS's interpretation of the Closing Agreement is seriously flawed.

For example, the IRS claims that “the recital clause containing the 'arm's length' language limits the clause to tax years 1987 to 1995.” Resp. 40. It does no such thing. The relevant sentence contains two independent clauses. The first states that Coca-Cola and the IRS “have agreed on a method for computing the arm's length amount of the Product Royalties allocable to the Taxpayer.” Ex. 242-J, at 3. The second states that Coca-Cola and the IRS “have agreed to resulting adjustments [for the] taxable years ending December 31, 1987 through December 31, 1995.” Only the second clause contains a time limitation. The first clause — which contains the critical “arm's length” language — does not. Coca-Cola reasonably understood that clause as a general statement that the 10-50-50 method produces arm's-length results, as obviously the IRS did as well, and Coca-Cola's belief was repeatedly reinforced by the IRS by its careful application of that same method over numerous successive audit cycles.

The IRS contends that “recitals are distinct from determinations contained within a closing agreement and are not binding upon the parties,” Resp. 39, but it fails to acknowledge that courts do rely on recitals in construing agreements where — as here — they provide evidence of the parties' intent. In American National Bank of Jacksonville v. FDIC, 710 F.2d 1528, 1534-35 (11th Cir. 1983), for example, the Eleventh Circuit relied upon a “Whereas” clause in its decision and explained that “[t]hough such recitals are not an operative part of a contract, courts have noted that such 'whereas' clauses may provide definitive evidence of the intent of the parties, particularly where there is no language in the operative portion of the contract which conflicts with the intent expressed in the recitals.” In fact, a decision cited by the IRS, Analog Devices, Inc. v. Commissioner, 147 T.C. 429, 447-48 (2016), likewise relied in part on a recital in interpreting a closing agreement. See Resp. 40. Here, the recital was particularly significant because it expressly addressed the key point on which Coca-Cola relied — whether the 10-50-50 method produces arm's-length results.⁴

In addition to outright misreading the Closing Agreement, the IRS fails to engage fully with its terms. The IRS does not contest that the Closing Agreement's forward-looking provisions — including the “arm's length” statement quoted above and its provision granting Coca-Cola prospective penalty protection — are unusual. Ex. 242-J, at 3; see id. at 20 (¶ 10). Yet it persists in ignoring the effect of these provisions.Regardless of whether these unusual provisions could be enforced in some contractual sense, these features of the Closing Agreement encouraged Coca-Cola's reliance on the 10-50-50 method in future years and effectively prevented it from changing its transfer-pricing method.See Mot. for Reconsideration 27-29. Given the billions of dollars at stake, no reasonable company would have applied any other method, especially when, year after year after year, the IRS approvingly audited Coca-Cola's compliance with that agreed-upon method. Under the Closing Agreement, application of the 10-50-50 method entitled Coca-Cola to a safe harbor from penalty protection. Coca-Cola could ill afford risking penalties by applying a different method. Yet the IRS's unannounced change in position retroactively imposed billions of dollars for continuing to apply the 10-50-50 method.

c. Moreover, the IRS cannot dispute that Coca-Cola relied on the 10-50-50 method, as the record shows. As Steve Whaley and William Hawkins, Coca-Cola's former general tax counsels, testified, the 10-50-50 method roughly “doubl[ed]” the royalty rate from 11% to 22%, Tr. (Whaley) 1633:5, a rate that Coca-Cola believed was “too high,” Tr. (Hawkins) 9289:19-20. Coca-Cola was “willing to accept such a large increase,” Tr. (Whaley) 1640:5-6, as a “compromise because of the certainty that [Coca-Cola] thought” the 10-50-50 method “brought [it] in [its] tax planning,” Tr. (Hawkins) 9289:21-23; see Tr. (Whaley) 1640:11-16 (agreeing to the 10-50-50 method was “critical” because it allowed Coca-Cola to resolve “the most contentious issue that [it] had”). Since the IRS had long accepted the 10-50-50 method and had not expressed any concerns about Coca-Cola's continued use of that method, Coca-Cola filed its 2007 to 2009 tax returns — and computed its tax liability — in reliance on that method. And because Coca-Cola relied on the 10-50-50 method, it forwent valuable tax-planning opportunities that were available to it, such as cost sharing or outbound transfers of intellectual property. Tr. (Hawkins) 9281:14-16; see id. at 9281:8-21 (noting that Coca-Cola followed the 10-50-50 method because it was protected from penalties as long as it did so, and it avoided taking “any steps” that could have put that protection “at risk”). Coca-Cola also relinquished the opportunity to undertake a transfer-pricing study that could have resulted in a lower reported tax bill while still providing protection against penalties. See Tr. (Whaley) 1632:10-13, 1728:9-12 (noting that Coca-Cola relied on the 10-50-50 method and did not prepare transfer-pricing reports as a result).

Without citing any contrary evidence in the record as to Coca-Cola's actual reliance on the IRS's conduct, the IRS argues only in general terms that “each tax year stands on its own.” Resp. 45. Thus, the IRS contends, the Closing Agreement for 1987 to 1995 and the IRS's audit conduct for 1996 to 2006 “have no bearing on the correctness of the returns for [Coca-Cola's] 2007-2009 tax years.” Id. But that merely assumes the answer the IRS wants the Court to reach. As explained above, there is no dispute that the IRS could prospectively change its method (if the method to which it changed was lawful). But the question here is whether Coca-Cola could reasonably rely on the 10-50-50 method for tax years 2007 to 2009 because the IRS had agreed to that method in the Closing Agreement, had consistently adhered to it for over a decade thereafter, and had given Coca-Cola no fair notice — before Coca-Cola filed its tax returns for those years — that it might change positions. Indeed, the IRS acknowledges that it was bound by the Closing Agreement not to assess penalties for use of the 10-50-50 method for the tax years in question, see Resp. 39, belying its attempt to invoke the abstract proposition that “each tax year stands on its own,” Resp. 45.

The IRS relatedly argues that its “audit procedures” do not require notice before making a deficiency determination. Resp. 47. But that argument misses the point. The question here is not whether the IRS complied with its audit procedures, which in any event cannot insulate the IRS's actions if they are arbitrary, capricious, or unconstitutional. Whatever may be true in a routine audit, the unusual combination of circumstances here engendered reasonable reliance interests in the 10-50-50 method on Coca-Cola's part. The IRS had to respect those reliance interests. It could have done so — and avoided acting arbitrarily, capriciously, or unconstitutionally — simply by giving Coca-Cola notice that it would no longer accept the 10-50-50 method in the future, which would have given Coca-Cola a fair opportunity to take appropriate measures such as adopting a different transfer-pricing method or conducting a transfer-pricing study. The fact that the IRS's “audit procedures” do not always require such notice does not mean that notice is not required when the IRS's conduct engenders reasonable reliance interests, as it did here. Nor do the IRS's “audit procedures” permit the agency to engage in arbitrary-and-capricious action, such as the bait and switch here, or to violate Coca-Cola's constitutional rights.

No matter how much the IRS might insinuate otherwise, this case is far different from an ordinary transfer-pricing case and is not about a transfer-pricing method that the IRS agreed to use one time only and then discarded. And the fact that the IRS does not deny that the circumstances giving rise to Coca-Cola's reliance interests here were “highly unusual” underscores this point. The IRS resists this Court's reconsideration because it has no defense to how its course of conduct misled Coca-Cola here.

B. The arbitrary-and-capricious standard prohibits the IRS from disregarding Coca-Cola's reasonable reliance interests.

The IRS's gymnastics to dodge application of the “arbitrary and capricious” standard to its actions fall flat. Indeed, if the IRS's arguments were correct, it would be able to engage in any “bait and switch,” regardless of the degree of reasonable reliance interests it fostered on the part of a taxpayer. No agency has ever had that authority under our Constitution and laws, nor given the Constitution will it ever.

1. The IRS's attempt to avoid scrutiny under the APA misses the point, because — all agree — the arbitrary-and-capricious standard applies regardless.

The IRS's main reason for thinking it can disregard Coca-Cola's reasonable reliance interests in the 10-50-50 method is its belief that it is not bound by the Administrative Procedure Act and that Act's arbitrary-and-capricious standard. See Resp. 49. The IRS is wrong, as explained below, see infra pp. 42-50, but in any event here, too, it attacks yet another strawman. The IRS itself admits that, regardless of whether the APA applies, this Court reviews the IRS's discretionary section 482 determinations to ensure that they are not “arbitrary, capricious, or unreasonable.” Op. 89 (citation omitted); see Resp. 49-50, 55. Presumably the IRS's gambit is to avoid application of the clear principles articulated in Coca-Cola's brief on the ground that it is governed by some different arbitrary-and-capricious standard. See Resp. 49. But there is only one standard, and the IRS cites no authority saying otherwise. “Arbitrary and capricious” means “arbitrary and capricious.” Indeed, the APA merely codified the then-existing arbitrary-and-capricious standard, which had long served, and continues to serve, as a general limitation on all agency action — including that of the IRS. Under that standard, a government agency may not disregard regulated parties' reasonable reliance interests — again, regardless of whether the APA itself applies.

The arbitrary-and-capricious standard pre-dates and is not confined to the APA. The standard derives, most fundamentally, from constitutional protections against arbitrary and capricious action by government actors, like the bait and switch the IRS engaged in here. See Mot. for Reconsideration 40-48; see also, e.g., Community Health Servs., 467 U.S. at 60 n. 12 (the government “may not enforce the law if to do so would harm a private party as a result of governmental deception,” and agencies may not “apply a new rule retroactively when to do so would unduly intrude upon reasonable reliance interests”). The arbitrary-and-capricious standard is so engrained in the law that courts have held that it constitutes a background common-law principle governing agency action that applies regardless of whether the APA applies. See U.S. Capitol Police v. Office of Compliance, 908 F.3d 748, 756-57 (Fed. Cir. 2018) (adopting the arbitrary-and-capricious standard for review of action of legislative-branch agency Congress exempted from the APA); Texas Rural Legal Aid, Inc. v. Legal Servs. Corp., 940 F.2d 685, 697 (D.C. Cir. 1991) (“We therefore conclude, along with every other court that has addressed the issue, that [the Legal Services Corporation's] substantive policy decisions, although exempt from the APA, are subject to the pre-APA requirement that administrative decisions be rationally based — a standard that courts have held is equivalent to the APA's requirement that agency action not be arbitrary or capricious.”). As the Supreme Court has explained, the APA's standard merely reflects the “ordinary sense” of what it means for agency action to be arbitrary or capricious. FCC v. Fox Television Stations, Inc., 556 U.S. 502, 516 (2009).

History — including the history of section 482 — confirms that the arbitrary-and-capricious standard governing agency action has the single meaning that the APA codified. As this Court correctly noted, the arbitrary-and-capricious standard that limits the IRS's discretion to make section 482 adjustments dates to at least the 1930s. See Op. 86-89. The Board of Tax Appeals adopted that standard based on the general principle, which courts had at the time already applied to other government agencies, that “[w]here a statute commits to an executive department of the government a duty requiring the exercise of administrative discretion, the decision of the executive department, as to such questions, is final and conclusive, unless it is clearly proven arbitrary or capricious.” Asiatic Petroleum Co. (Del.) Ltd. v. Commissioner, 31 B.T.A. 1152, 1157 (1935) (citation omitted), aff'd, 79 F.2d 234 (2d Cir. 1935); see, e.g., Shields v. Utah Idaho Cent. R.R. Co., 305 U.S. 177, 185 (1938) (applying the arbitrary-and-capricious standard to a decision of the Interstate Commerce Commission). Courts of appeals also articulated the same standard. See, e.g., National Sec. Corp. v. Commissioner, 137 F.2d 600, 602 (3d Cir. 1943); G.U.R. Co. v. Commissioner, 117 F.2d 187, 189 (7th Cir. 1941).

The APA simply codified this pre-existing arbitrary-and-capricious standard. As the Attorney General's vaunted Manual on the Administrative Procedure Act explains, the APA “restate[s] the scope of the judicial function in reviewing final agency action,” and courts “have always exercised the power in appropriate cases to set aside agency action which they found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Dep't of Justice, Manual on the Administrative Procedure Act 108 (1947). The arbitrary-and-capricious standard resides within the statute's judicial-review provisions, 5 U.S.C. § 706(2)(A), which merely “declare[d] the existing law concerning the scope of judicial review.” S. Rep. No. 79-752, at 44 (1945) (Attorney General's statement); see, e.g., U.S. Capitol Police, 908 F.3d at 756 (“[T]he APA essentially adopted the common law standard for review of agency action.”); Olin Indus. v. NLRB, 72 F. Supp. 225, 228 (D. Mass. 1947) (“Both the terms of this section, and its legislative history, make it clear that section 10 [now § 706] is merely declaratory of the existing law of judicial review.”).

In short, the basic prohibition on arbitrary and capricious agency action does not depend on whether the APA technically does or doesn't apply to a particular agency. Contra Resp. 49. That standard, as Coca-Cola has explained, precludes agencies from disregarding regulated parties' reasonable reliance interests as the IRS did here. See Mot. for Reconsideration 16-40; see supra pp. 21-38. That is true whether the “arbitrary and capricious” standard stems from section 482, the Constitution, other background principles of law, or the APA. And, as explained next, the IRS is by no means immune from this time-honored limit on government action.

2. In any event, the APA's arbitrary-and-capricious standard governs the IRS's conduct here.

Although the Court does not need to reach the issue given that the arbitrary-and-capricious standard applies either way, the APA does indeed apply to this case. The IRS is not exempt from the APA, the arbitrary-and-capricious standard embedded in it, or that standard's prohibition against disregarding reasonable reliance interests. The IRS's attempt to carve out a singular exception for itself, see Resp. 50-55, reeks of impermissible tax exceptionalism. See Mayo Found, for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 55 (2011). Indeed, the IRS's actions in this case prove why Congress will never exempt the IRS from the APA.

a. The APA applies generally to all executive-branch agencies, see 5 U.S.C. § 551(1), except those as to which Congress from time to time has granted exemption. And Congress has occasionally granted agencies — such as the U.S. Postal Service — a broad exemption from the APA. See 39 U.S.C. § 410(a) (“[N]o Federal law dealing with public or Federal contracts, property, works, officers, employees, budgets, or funds, including the provisions of chapters 5 and 7 of title 5 [the APA], shall apply to the exercise of the powers of the Postal Service.” (emphasis added)). But Congress has not so exempted the IRS. And the Supreme Court has emphatically rejected the notions that tax law is somehow different and that the IRS should be treated differently from other agencies in its administration of the tax laws. See Mayo Found., 562 U.S. at 53-58.

b. The IRS's blanket claim of exemption rests on two patently incorrect arguments. First, the IRS argues that “the Tax Court is not subject to the Administrative Procedure Act.” Resp. 50 (quoting Ax v. Commissioner, 146 T.C. 153, 163 (2016)). To be sure, this Article I Court, like other “courts of the United States,” may not be an “agency” subject to the APA. 5 U.S.C. § 551(a)(1)(B); see section 7441. But the question is not whether this Court is subject to the APA. Rather, the question is whether this Court — as a “reviewing court” under the APA — must apply the APA and its arbitrary-and-capricious standard to the IRS. 5 U.S.C. § 706; cf., e.g., Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 190-91 (2020), appeal docketed, No. 20-2117 (6th Cir. Nov. 12, 2020). The IRS, unlike this Court, is indisputably an “agency” within the meaning of the APA. See 5 U.S.C. § 701(b)(1) (“'agency' means each authority of the Government of the United States, whether or not it is within or subject to review by another agency”).

Second, the IRS also contends that the APA does not apply because this Court's review of a deficiency is a taxpayer's “prior, adequate, and exclusive opportunity for judicial review.” Resp. 50 (quoting 5 U.S.C. § 703, but citing § 704). Here again, the IRS's argument misses the mark. Section 703 merely recognizes that other statutes may create specific proceedings in which to challenge agency actions, see, e.g., 28 U.S.C. § 2342 (granting the courts of appeals exclusive jurisdiction over enumerated agency orders); 47 U.S.C. § 402(a) (judicial review of Federal Communications Commission orders); 49 U.S.C. § 46110 (judicial review of Federal Aviation Administration action), and provides a cause of action if no other statute does. But even where a statute — like the Internal Revenue Code — creates a specific proceeding, the APA still provides the substantive standards by which the agency action is judged. See Robinette v. Commissioner, 439 F.3d 455, 460 n.4 (8th Cir. 2006) (“The availability of an adequate remedy in the Tax Court . . . does not mean that the judicial review provisions of § 706 of the APA are inapplicable in the Tax Court, just as they are not inapplicable when Congress provides for judicial review in the court of appeals rather than the district court.”); ACA Int'l v. FCC, 885 F.3d 687, 705 (D.C. Cir. 2018) (setting aside Federal Communications Commission action as arbitrary and capricious); Spirit Airlines, Inc. v. U.S. Department of Transp., 997 F.3d 1247, 1255 (D.C. Cir. 2021) (setting aside Federal Aviation Administration action as arbitrary and capricious). The fact that pre-payment review of deficiencies is channeled to this Court does not shield the IRS from the APA or its arbitrary-and-capricious standard.

c. The real question is not whether the APA applies to the IRS (it does) but how it applies to the IRS. The IRS cites a few cases holding that judicial review of tax deficiencies is different from judicial review of other agency actions. For example, it cites cases holding that this Court's review is not limited to the administrative record developed before the IRS and that a notice of deficiency may not need to comply with the usual reasoned decision-making requirement. See Resp. 50-51, 53-54 (citing QinetiQ US Holdings, Inc. v. Commissioner, 845 F.3d 555, 561 (4th Cir. 2017)). These decisions are readily explained as an outgrowth of specific features of the APA and are easily distinguished as inapplicable in this case.

In these cases, courts have commonly emphasized that judicial review of tax deficiencies is subject to trial de novo, which is supposedly incompatible with, for example, review based solely on the administrative record. See, e.g., QinetiQ, 845 F.3d at 560-61. But the APA expressly recognizes that certain agency actions will be subject to de novo judicial review. See 5 U.S.C. § 554(a)(1) (exempting agency adjudication from § 554's requirements for formal adjudication “to the extent that there is involved . . . a matter subject to a subsequent trial of the law and facts de novo in a court”); id. § 706(2)(F) (allowing court to “hold unlawful and set aside agency action, findings, and conclusions found to be . . . unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court”). Indeed, these APA provisions were apparently crafted with the Tax Court, in particular, in mind. See S. Rep. No. 79-752, at 28. These provisions confirm that the APA applies equally in the deficiency context.

The fact that deficiency determinations are subject to trial de novo — which, again, is entirely consistent with the APA — does not somehow confer on the IRS a blanket exemption from the APA and its prohibition against arbitrary-and-capricious decision-making in 5 U.S.C. § 706. See Robinette, 439 F.3d at 460 n.4. Nor would it make any sense to ignore the IRS's sudden, impermissibly retroactive change in position on the applicability of the 10-50-50 method simply because this Court exercises de novo review. Generally speaking, the arbitrary-and-capricious standard applicable to agency action is the standard most deferential to the agency — yet it still prohibits the IRS's change in position here. De novo review, on the other hand, is far less deferential to the IRS — and more generous to Coca-Cola, because, as the IRS concedes, it requires this Court to decide on a de novo basis (without any deference to the IRS) whether the IRS's reallocations under section 482 are arbitrary, capricious, or unreasonable. See Resp. 55. It would defy common sense to say that the IRS should be given more leeway through de novo review to disregard Coca-Cola's reasonable reliance interests than it is afforded under the deferential arbitrary-and-capricious standard.⁵

Indeed, this Court's November 18, 2020, opinion recognizes that its review in this proceeding includes review for arbitrary and capricious action. Op. 89. And in applying that standard, this Court correctly considered Coca-Cola's reliance argument. As discussed, likely misled by the IRS, it erroneously rejected that argument based on estoppel principles. Op. 98. But all that matters here is that the Court correctly considered that argument — and thus appreciated that it falls within the Court's scope of review in this proceeding. The IRS's argument that “de novo review” of the IRS's method somehow displaces this fundamental check on agency abuse is seriously misguided.

d. Remarkably, the IRS also contends that the APA and fundamental administrative-law principles do not apply because a notice of deficiency is not an “agency action.” Resp. 51. While the IRS correctly comprehends that the term “agency action” includes an agency “order” — the category a notice of deficiency most naturally falls into, 5 U.S.C. § 551(13) — it misunderstands what an order is. The IRS says that an “order” under the APA “generally arises out of . . . formal adjudications.” Resp. 52. But here again, the IRS seems to be operating in an alternative universe. It has been firmly settled for decades that “[t]he APA specifically contemplates judicial review on the basis of the agency record compiled in the course of informal agency action in which a hearing has not occurred." Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985) (emphasis added). There is a “vast category of 'informal adjudications' in which agencies routinely engage,” and they too are subject to the APA's arbitrary-and-capricious standard. Safe Extensions, Inc. v. FAA, 509 F.3d 593, 604 (D.C. Cir. 2007). “[I]t does not matter whether it is a formal or informal adjudication or a formal or informal rulemaking proceeding — all are subject to arbitrary and capricious review under Section 706(2)(A).” U.S. Postal Serv. v. Postal Regal. Comm'n, 785 F.3d 740, 755 (D.C. Cir. 2015).

Moreover, the IRS suggests that a notice of deficiency is not an agency action because it “applies current law in an individual determination without the intent of impacting law or policy in the future.” Resp. 52. Here, again, the IRS is wrong. Indeed, by designating this case for litigation, the IRS made it particularly clear that it did indeed view the notice of deficiency in this case as a means to effect policy goals “beyond the immediate case or taxpayer.” B. John Williams, Jr., Remarks of IRS Chief Counsel, in United States Tax Court 2003 Judicial Conference Reports Parti, at 13, 21 (2003), https://www.google.com/books/edition/United_States_Tax_Court_2003_Judicial_Co/24HiwgEACAAJ; see IRM 33.3.6.1(1), (2) (Aug. 11, 2004). In any event, the most common forms of agency action — such as benefits determinations — often are individualized and do not necessarily move the law or government policy. Indeed, “[i]nformal adjudications may be used in highly fact-specific contexts and lack 'the hallmarks of legislative rulemaking,'” but they “still must comply with the familiar APA standard banning arbitrary and capricious actions.” Neustar, Inc. v. FCC, 857 F.3d 886, 893 (D.C. Cir. 2017) (citations omitted); see also, e.g., McKinney v. Wormuth, 5 F.4th 42, 46 (D.C. Cir. 2021) (reviewing “informal adjudication” denying a Purple Heart award “under the arbitrary and capricious standard”); Perez v. U.S. Bureau of Citizenship & Immigr. Servs., 774 F.3d 960, 966 (11th Cir. 2014) (eligibility for immigration relief under the Cuban Adjustment Act); Muratore v. U.S. Office of Pers. Mgmt., 222 F.3d 918, 922 (11th Cir. 2000) (benefits determinations under health insurance policies for government employees).

Finally, although the IRS contends that a notice of deficiency is not an agency action, even it must concede that certain subsidiary determinations that are part of a notice of deficiency are reviewed under the APA. Nobody questions, for example, that the validity of a regulation bearing on a deficiency is reviewed under the APA and its arbitrary-and-capricious standard. See, e.g., Oakbrook Land Holdings, 154 T.C. at 189, 195-96. The subsidiary determination at issue here — the IRS's section 482 adjustments — is little different. Section 482 determinations are expressly reviewed under the same arbitrary-and-capricious standard. See, e.g., Hamburgers York Rd., 41 T.C. at 833 (Section 482 determinations “will be overturned only where the taxpayer proves that they are arbitrary, capricious, or unreasonable.”). They fall within the heartland of arbitrary-and-capricious review.

C. The IRS's change in positions was retroactive.

The IRS also defends its change in transfer-pricing methods for the 2007 to 2009 tax years on the ground that it was not “'retroactive' in a relevant constitutional sense.” Resp. 56. Here again, the IRS is clearly wrong.

A retroactive determination is one that “impair[s] rights a party possessed when he acted, increase[s] a party's liability for past conduct, or impose[s] new duties with respect to transactions already completed.” Landgraf v. USI Film Prods., 511 U.S. 244, 280 (1994); see also, e.g., Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 219 (1988) (Scalia, J., concurring) (a rule is indisputably retroactive when it “alter[s] the past legal consequences of past actions”). “[F]amiliar considerations of fair notice, reasonable reliance, and settled expectations offer sound guidance” in determining whether a rule of law is being applied retroactively. Landgraf, 511 U.S. at 270. And, not surprisingly, an increase in monetary liability for past events is a prototypical example of retroactive action. See, e.g., Rivers v. Roadway Express, Inc., 511 U.S. 298, 303 (1994) (holding that an increase in monetary liability constituted retroactive change even though the “normative scope of Title VII's prohibition on workplace discrimination” was not altered); Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 948 (1997) (elimination of defense which led to increase in potential liability constituted retroactive change); Landgraf, 511 U.S. at 281-82 (declining to give retroactive effect to statutory provisions authorizing compensatory and punitive damages for certain types of intentional employment discrimination); National Mining Ass'n v. U.S. Department of Interior, 177 F.3d 1, 8 (D.C. Cir. 1999) (“Applying the rule's specific interpretation to impose liability based on pre-rule acts therefore gives it retroactive effect. . . .”).

That is exactly what the IRS has done here. For the only tax years at issue in this case (2007-2009), Coca-Cola undisputedly had no notice of the IRS's change in position regarding the 10-50-50 method until long after those tax years had passed. This is clear. The IRS itself stipulated that it did not provide notice to Coca-Cola that it would no longer accept application of the 10-50-50 method until after Coca-Cola filed its tax returns for the years at issue. Third Stip. of Facts 338 (“At no time prior to petitioner's filing its 2009 Federal income tax return on September 1, 2010, did any IRS employee advise any of [Coca-Cola's] employees, in writing or otherwise, that the IRS would no longer accept [Coca-Cola's] application of the methodology set forth in the Closing Agreement. . . .”).

Instead, Coca-Cola completed its tax returns for 2007 to 2009 in reliance on the longstanding understanding engendered by the IRS that the Company could continue to use the 10-50-50 method, at least until there was a change in the facts or the law or the IRS notified Coca-Cola that it would no longer accept that method. After those years had passed, Coca-Cola could no longer change any of the conduct, contracts, or arrangements on which its tax liability would be based. Nor could it engage in transactions that would have reduced its tax liability for those years in the past.

The IRS did not even question the 10-50-50 method until after Coca-Cola had already filed its tax returns for the tax years in question. And the IRS did not affirmatively disavow the 10-50-50 method in favor of Dr. Newlon's CPM until years after that. At that point, the IRS then applied its new method to past tax years and past conduct that Coca-Cola had no power to change. That new method increased Coca-Cola's liability (by billions of dollars) with respect to transactions long since completed. In short, the IRS's change in positions greatly altered the past legal consequences of prior events, treating Dr. Newlon's CPM (rather than the 10-50-50 method) as though it had always been the proper and agreed-upon transfer-pricing method for Coca-Cola to use. This fits the definition of “retroactivity” to a T. Cf. B. John Williams, Jr., supra p. 49, at 16 (“[U]sing litigation as a tax policy tool to shape the law achieves, in my view, about the most retroactive rule making possible.”).

The IRS does not engage with this commonsense, textbook definition of retroactivity. Instead, it returns to focusing on the Closing Agreement and contends that Coca-Cola could not rely on that agreement as it could, for example, a published revenue ruling. See Resp. 57-61. But that approach conflates the question whether the IRS acted retroactively with the question whether, given the Closing Agreement and the IRS's subsequent course of conduct, Coca-Cola had reasonable reliance interests in the 10-50-50 method. As Coca-Cola has explained, it did. See Mot. for Reconsideration 23-31; supra pp. 15-17, 30-38.

In any event, the IRS's argument fails on its own terms. The IRS seems to think that taxpayers are more justified in relying on generalized guidance (like revenue rulings) that are provided to all taxpayers than Coca-Cola was in relying on a Closing Agreement and course of conduct that were specific to it. See Resp. 57-61. But the IRS has it backwards. Published guidance presents a less powerful case for creating reliance interests than what Coca-Cola presents here — a Closing Agreement that was “final and conclusive” and over a decade of audit history and IRS conduct directed specifically at Coca-Cola's individualized circumstances. Section 7121(b). Published guidance does not enjoy the same degree of binding conclusive effect; as the IRS notes, it is simply “written in a way to provide guidance to other taxpayers on the issue raised,” Resp. 58, and there is specific statutory authority for the IRS to determine the retroactive effect of such guidance, section 7805(b). Moreover, the reason taxpayers may rely on published guidance cuts more strongly in favor of allowing Coca-Cola to rely on the IRS's conduct here. As the Fifth Circuit recognized in Silco, “[t]he facts behind” published guidance may not be “identical to those in the case at bar,” but even so the taxpayer can “rely on” them given that they may “provide the only insight available to a taxpayer at the time” of the transactions in question. 779 F.2d at 287. The argument for reliance is all the more powerful when a taxpayer relies on something the IRS has tailored to the taxpayer's circumstances and transactions. Indeed, courts have recognized how the IRS's individualized determinations can induce reliance on the part of the specific taxpayers to which they are directed — and have bound the IRS to such determinations. See, e.g., H.S.D. Co., 191 F.2d at 845-46; Kales, 26 F.2d at 180; Lesavoy Found, v. Commissioner, 238 F.2d 589, 591, 594 (3d Cir. 1956).

The IRS ignores all of this authority, instead citing Dickman v. Commissioner, 465 U.S. 330 (1984), which the IRS deems “[t]he most analogous Supreme Court authority.” Resp. 62. But Dickman does not help the IRS. There, the Supreme Court questioned whether the IRS had in fact changed positions on the relevant legal issue — whether no-interest intrafamily loans were subject to gift tax — and, regardless, found that the taxpayers could not have detrimentally relied on the IRS's supposed prior position because of the timing of the transactions at issue. See 465 U.S. 330, 343 & nn.11, 13. And, in the end, the Court merely concluded that the IRS could enforce its ostensibly new position because it was correct as a matter of law. See id. at 342-43; see also id. at 334-39 (agreeing with the IRS's understanding of the gift tax statutes). That conclusion is fully in accord with — and indeed draws on — caselaw holding that the government cannot be estopped from correcting a mistake of law. See id. at 342-43 (citing Automobile Club and Dixon). As explained above, that principle does not apply to discretionary determinations like those under section 482. See supra pp. 24-30. Dickman lends no support to the IRS's position.

D. The IRS ignores Coca-Cola's constitutional arguments.

Notably, aside from its meritless retroactivity argument, see supra pp. 51-56, the IRS almost entirely ignores Coca-Cola's constitutional arguments, Mot. for Reconsideration 40-48. To be sure, this Court need not reach the constitutional arguments to adopt Coca-Cola's reliance argument. But if the Court has any doubt about the application of administrative law to this case, the Constitution itself mandates that the IRS cannot retroactively impose billions of dollars of liability on Coca-Cola based on its new method. And the most telling aspect of the IRS's response on this point is that the IRS basically has nothing to offer to counter Coca-Cola's constitutional argument.

The IRS does not respond to the principle that just as “[m]en must turn square comers when they deal with the Government,” “the Government should turn square comers in dealing with the people,” the vitality of which the Court recently reaffirmed in DHS v. Regents of the Univ. of Cal., 140 S. Ct. 1891, 1909 (2020) (citations omitted). See Mot. for Reconsideration 48. It also offers no answer to — and does not even attempt to distinguish — numerous cases Coca-Cola cited that give teeth to that principle and show how the Constitution protects reasonable reliance interests like those the IRS engendered in the 10-50-50 method. See, e.g., Maine Cmty. Health Options v. United States, 140 S. Ct. 1308, 1324 (2020); Cherokee Nation of Okla. v. Leavitt, 543 U.S. 631, 646 (2005); Eastern Enters, v. Apfel, 524 U.S. 498, 533-34 (1998) (plurality opinion); United States v. Winstar Corp., 518 U.S. 839, 875-76 (1996) (plurality opinion). And the IRS studiously avoids any serious discussion of the due process limits on arbitrary agency action.

The IRS's sole rejoinder is that the authorities cited by Coca-Cola, such as PHH Corp., 839 F.3d 1 (Kavanaugh, J.), supposedly are distinguishable because they involve “official government interpretations” “intended to provide guidance” to the public. Resp. 60 (cleaned up). But the IRS fails to appreciate that the Closing Agreement and the IRS's longstanding course of conduct were similarly “official government interpretations” that “provide[d] guidance” to Coca-Cola and not merely to some undefined “public” — indeed, they provided much more guidance and created deeper and stronger reliance interests than a mere revenue ruling. See supra pp. 15-17, 30-38.

In any event, the IRS misunderstands basic constitutional law. Constitutionally protected entitlements arise not merely from official promulgations but can also be based on the government's “words and conduct in the light of the surrounding circumstances” and “the usage of the past.” Perry v. Sindermann, 408 U.S. 593, 602 (1972) (cleaned up). Kaiser Aetna, 444 U.S. 164, for example, involved statements by individual officials of the Army Corps of Engineers. Id. at 167, 179. And then-Judge Kavanaugh's opinion in PHH Corp, relied on Raley v. Ohio, 360 U.S. 423, 438-49 (1959), and Cox v. Louisiana, 379 U.S. 559, 571 (1965), see PHH Corp., 839 F.3d at 47, 49, neither of which involved official government pronouncements, but rather informal assurances of government officials tailored to the particular parties before the court. In Raley, for example, the Supreme Court looked to assurances the defendants had received from a state commission (even though they arguably were contradicted by a preexisting state statute). See 360 U.S. at 438-39 (“The State Supreme Court dismissed the statements of the Commission as legally erroneous, but the fact remains that at the inquiry they were the voice of the State most presently speaking to the appellants.”). And in Cox, the Court held that due process prevented the state from applying a statute punishing picketing “near” a courthouse where demonstrators had been told by police officials that they could protest across the street from the building. 379 U.S. at 571. In other words, both Raley and Cox involved situations where parties were entitled to rely on assurances by governmental officials targeted to those specific parties rather than official pronouncements intended to provide guidance to the public at large. Due process prevented the government from imposing liability on those parties pursuant to a bait and switch.

Ultimately, the constitutional arguments reinforce the conclusion that follows from a straightforward application of the arbitrary-and-capricious standard. But the fact that the IRS essentially ignores the blatant constitutional problems with its position just underscores that it is more interested in sweeping the reliance issue under the mg than answering for the fundamental problems with its bait and switch.

III. The Court should grant leave to seek reconsideration because applying the IRS's new transfer-pricing method violates the Treasury Regulations by failing to credit the Supply Points' valuable intangibles and marketing contributions.

Even assuming the IRS's bait and switch was somehow lawful, which it was clearly not, the Court should reconsider its ruling that the IRS's new method to be used in calculating Coca-Cola's taxes, Dr. Newlon's CPM, is permissible on its own terms. As Coca-Cola explained in its Motion for Reconsideration, Dr. Newlon's CPM and the Court's endorsement of it contravene the governing Treasury Regulations and disregard the economic substance of Coca-Cola's relationship with its Supply Points. The IRS largely ignores Coca-Cola's arguments as to the CPM as well, instead claiming only that the Court already ruled on the Supply Points' ownership of intangibles.

A. Applying Dr. Newlon's CPM contravenes the Treasury Regulations.

As Coca-Cola explained, applying Dr. Newlon's CPM to Coca-Cola's relationship with the Supply Points violates the Treasury Regulations. All agree that Dr. Newlon's CPM applies only if no intangible assets contribute to a company's revenue and profits. But the Supply Points own significant intangible assets, and they used those significant intangible assets during the 2007-2009 tax years to drive the sales of Coca-Cola's products, adding tremendous value not only to the Supply Points' licenses but also to Coca-Cola's brands. The Supply Points play a critical role in Coca-Cola's continued success not only by manufacturing the Coca-Cola concentrate but also by undertaking the responsibility, under their licenses to use Coca-Cola's trademarks, to fund the extensive local marketing necessary to maintain Coca-Cola's sales and brand. The governing Treasury Regulations required the IRS — and the Court — to account for the intangible assets generated by those marketing efforts in the transfer-pricing analysis.

1. The Court first ran afoul of the Treasury Regulations by failing to account for the Supply Points' licenses to use Coca-Cola's trademarks. The regulations explicitly “contemplate[ ] the identification of a single owner for each discrete set of rights that constitutes an intangible” — including “a license or other right to use an intangible” as a separate “item of intangible property.” T.D. 9278, 71 Fed. Reg. 44,466, 44,476 (Aug. 4, 2006) (emphasis added); see Temp. Treas. Reg. § 1.482-4T(f)(3)(i)(A), 71 Fed. Reg. at 44,484 (“The legal owner of an intangible . . ., or the holder of rights constituting an intangible pursuant to contractual terms (such as the terms of a license) . . ., will be considered the sole owner of the respective intangible . . . unless such ownership is inconsistent with the economic substance of the underlying transactions.”). Consequently, determining that Coca-Cola owns its “crown jewel” trademarks does not resolve the question whether the Supply Points are entitled to realize income from exploiting their licenses to use those trademarks and investing in marketing efforts to increase the value of their licenses and those trademarks. Mot. for Reconsideration 51-53. The Court's failure to assess the value of the Supply Points' licenses and marketing investments was legal error.

2. Even if all the Supply Points did was add value to Coca-Cola's trade-marks, the Treasury Regulations would still require compensation. The regulations recognize that marketing activities may “increase the value” not only of “the [underlying] trademark” itself, but also of the “license to use the . . . trademark.” Temp. Treas. Reg. § 1.482-4T(f)(4)(ii), Example 4, 71 Fed. Reg. at 44,485; see also id. § 1.482-4T(f)(4)(i) & (ii), 71 Fed. Reg. at 44,485. Thus, even if a licensee's marketing expenditures do not increase the value of its own license, it is entitled to compensation for its efforts to increase the value of the licensor's trademark. Id. § 1.482-4T(f)(4)(ii), Example 4, 71 Fed. Reg. at 44,485. After all, what “uncontrolled taxpayer operating at arm's length would engage in the incremental marketing activities to develop or enhance an intangible owned by another party unless it received contemporaneous compensation or otherwise had a reasonable anticipation of a future benefit”? Id. § 1.482-1T(d)(3)(ii)(C), Example 4, 71 Fed. Reg. at 44,482.

Despite acknowledging these principles in another matter involving Coca-Cola, Mot. for Reconsideration 56, the IRS resists their application here. But the regulations are clear. To the extent the Supply Points enhanced the value of Coca-Cola's trademarks, they are entitled to compensation for those investments (and, of course, to the extent they enhanced the value of their own licenses, the Supply Points are entitled to the resulting income). Mot. for Reconsideration 54-58.

3. The Court further contravened the Treasury Regulations by failing to account for the Supply Points' valuable goodwill. As Coca-Cola explained in its Motion for Reconsideration, and contrary to the November 18, 2020, opinion, the Internal Revenue Code and Treasury Regulations make clear that goodwill is a valuable intangible, and no provision of the Code or regulations permitted the Court to disregard the Supply Points' goodwill here. See, e.g., section 197(d)(1)(A); Treas. Reg. § 1.197-2. The Court's failure to take the Supply Points' goodwill into account (in mistaken reliance on Treasury Regulation section 1.482-4(b)) requires reconsideration. Mot. for Reconsideration 58-61.

4. Because the Court erred in concluding that the Supply Points had no valuable intangible assets, it also erred in affirming the IRS's use of Dr. Newlon's CPM. Dr. Newlon's CPM cannot possibly be “the most reliable measure of an arm's length result,” as required by the Treasury Regulations, Treas. Reg. § 1.482-1(c)(1), because it does not account for the Supply Points' significant intangible assets. Dr. Newlon's CPM ignores the Supply Points' critical role in funding locally customized marketing efforts that drive the profitability of the Coca-Cola brand. And the Bottlers are not remotely comparable to the Supply Points — among other things, that comparison ignores the crucial differences between the Bottlers' real-asset-intensive business and the Supply Points' intangible-intensive model. Dr. Newlon's CPM also fails to “measure relationships between profits and costs incurred or resources employed.” Treas. Reg. § 1.482-5(b)(4). In short, the Court erred in endorsing the IRS's use of Dr. Newlon's CPM. Mot. for Reconsideration 69-73.

B. The IRS's Response fails to engage with Coca-Cola's arguments.

Rather than engaging with Coca-Cola's arguments or the Treasury Regulations at the center of this case, the IRS's responds merely by summarizing Coca-Cola's arguments and claiming that “[t]he Court thoroughly considered and rejected” them. Resp. 21. The IRS's approach fails to explain how the Court's ruling is compatible with the Treasury Regulations, which “are binding” on both the IRS and this Court. See U.S. Steel Corp. v. Commissioner, 617 F.2d 942, 947 (2d Cir. 1980); Pine Mountain Pres. LLLP v. Commissioner, 978 F.3d 1200, 1210-12 (11th Cir. 2020). The regulations provide the detailed requirements that are absent from section 482's broad terms, and the Court must explain its application of each of the relevant regulatory factors. Medtronic, Inc. v. Commissioner, 900 F.3d 610, 613-15 (8th Cir. 2018).

As Coca-Cola explained, the Court misconstrued the Treasury Regulations in three ways in holding that the Supply Points should not be credited at all for their valuable intangibles and contributions to the Coca-Cola brand. Coca-Cola also rebutted the IRS's and the Court's counterarguments, explaining, for example, that the Treasury Regulations do not require a legal obligation to make marketing expenses and do not permit the Court either to ignore numerous factors when evaluating a controlled party's rights just because an agreement is supposedly terminable at will and does not confer territorial exclusivity or to disregard marketing investments just because another entity performed the marketing it was paid to perform. Mot. for Reconsideration 63-69. These errors require reconsideration, yet the IRS has not so much as explained how its or the Court's approach can be squared with the regulations.

The one potential exception to the IRS's head-in-the-sand approach is its response regarding the Danielson rule. See Resp. 23-25. But the IRS's Danielson arguments are meritless. First, the IRS is indeed the party arguing against the form of the Supply Points' contracts: Coca-Cola is adhering to the form of its contracts — that form is a license requiring royalty payments based on a combination of sales and operating income, and the Court's error was in failing to recognize the value of those licenses. See supra pp. 60-62; Mot. for Reconsideration 51-53, 61. Second, the IRS claims that the Danielson rule applies in this context but fails to so much as engage with Coca-Cola's point that none of the policy considerations underlying the Danielson rule is relevant here. Mot. for Reconsideration 62-63. Finally, the IRS misunderstands Coca-Cola's simple point about contract silence or ambiguity: To the extent the Supply Points' contracts with Coca-Cola do not address who bears the cost of local marketing, there is no work for Danielson to do. Indeed, the caselaw is clear that Danielson does not apply to an issue on which “there was no agreement . . . between the parties.” Campbell v. United States, 661 F.2d 209, 216-18 (Ct. Cl. 1981); see, e.g., Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 228 (1998); Smith v. Commissioner, 82 T.C. 705, 713-14 (1984) (Danielson does not apply to ambiguous agreement); cf. Commissioner v. Danielson, 378 F.2d 771, 778 (3d Cir. 1967) (“Of course, it would be unfair to assess taxes on the basis of an agreement the taxpayer did not make.”). Thus, per the Treasury Regulations, the IRS and the Court must look to the parties' conduct and the economic substance of their relationship. See Treas. Reg. § 1.482-1(d)(3)(ii)(B)(2); see also T.D. 9278, 71 Fed. Reg. at 44, 478; Mot. for Reconsideration 62.

* * *

The IRS's Response only underscores the substantial error and unusual circumstances warranting reconsideration. The IRS does not dispute that the combination of its agreement that the 10-50-50 method was an “arm's length” method that would protect Coca-Cola from penalties and its repeated audits for compliance with that method is highly unusual. Instead, it ignores decades of conduct and tries to pretend that this is an estoppel or breach-of-contract case. And when the IRS finally does engage (here and there) with Coca-Cola's arguments, it either props up straw men or advances arguments that are patently incorrect. The arbitrary-and-capricious standard applies to the IRS's conduct. So does the Constitution. Both prohibit the IRS from imposing liability based on retroactively changing (without any notice) a rule on which it has engendered reliance. Beyond that, the Treasury Regulations independently prohibit the IRS's new method. In sum, Coca-Cola has shown both substantial error and unusual circumstances warranting reconsideration (and thus leave to seek reconsideration).

Perhaps the most stunning aspect of the IRS's Response is the agency's evident belief that the law and Constitution do not apply to what it does, at least not the way they apply to actions by the rest of the government. As Coca-Cola has explained, that breathtaking view lacks any foundation. Absent some “justification,” the rules that apply to the IRS are the same as those that apply to “any other agency.” Mayo Found., 562 U.S. at 55. The Supreme Court is “not inclined to carve out an approach to administrative review good for tax law only.” Id. The Constitution does not contain an exception for tax collection, either. We fought a revolution over the principle of “no taxation without representation.” The principle of “no taxation beyond the rule of law” is at least as basic. In this case, the need to respond to the IRS's tax exceptionalism is itself an exceptional circumstance warranting reconsideration.

The IRS's responses to Coca-Cola's Motion for Reconsideration — and to this Court's questions asked of the IRS — are tantamount to an admission that the IRS's deficiency case against Coca-Cola is indefensible. The Court should take advantage of the delay in this litigation pending the 3M decision, as well as the additional briefing on these important questions, and reconsider its November 18, 2020, opinion to correct the substantial errors of law discussed above and in the Motion for Reconsideration.

CONCLUSION

For the foregoing reasons, the Court should grant leave to reconsider, and reconsider and set aside, its November 18, 2020, opinion.

Dated: September 22, 2021

Respectfully submitted,

 

Laurence H. Tribe (Bar # TL21319)
Constitutional Counsel
The Coca-Cola Company
One Coca-Cola Plaza NW
Atlanta, GA 30313
617-512-7018
tribe@law.harvard.edu
*Admitted in California and Massachusetts

J. Michael Luttig (Bar # LJ0835)
Counselor and Special Advisor
The Coca-Cola Company
One Coca-Cola Plaza NW
Atlanta, GA 30313
847-770-5618 jluttig@coca-cola.com
*Admitted in Virginia and the District of Columbia

Jonathan Massey (Bar # MJ21314)
Massey & Gail LLP
The Wharf
1000 Maine Ave. SW, Ste. 450
Washington, DC 20024
202-650-5452
jmassey@masseygail.com

Shay Dvoretzky (Bar # DS21303)
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Ave. NW
Washington, DC 20005
202-371-7370
shay.dvoretzky@skadden.com

Gregory G. Garre (Bar # GG21304)
Latham & Watkins LLP
555 Eleventh St. NW, Ste. 1000
Washington, DC 20004
202-637-2207
gregory. garre@lw. com

Counsel for Petitioner The Coca-Cola Company and Subsidiaries