Eaton Corp. Failed to Show Need to Reconsider Tax Court Decision

IN SUPPORT THEREOF, respondent respectfully states as follows:

On August 1, 2012, respondent filed an Objection to Eaton's Motion for Partial Summary Judgment (index no. 16), along with a Cross Motion for Partial Summary Judgment, supporting memoranda of law, and a declaration of counsel (index nos. 17 - 20). Respondent argued that the Court has jurisdiction to review the Service's cancellation decision for an abuse of discretion, and that Eaton, under long-standing precedent, must prove that the Service's administrative determination was arbitrary and capricious.

On August 31, 2012, Eaton filed an Objection to Respondent's Cross Motion for Partial Summary Judgment, along with a supporting memorandum of law (index nos. 30 and 31), in which Eaton argued that the cancellations were not administrative determinations because, in its view, the Service did not have the discretion to cancel the APAs. Pet. Mem. In Opp. To Resp.'s Cross-Mot. For Partial Sum. Judg. (index no. 31) at 3.

Both parties sought leave to file responses. On September 6, 2012, the Court filed Eaton's Response to Respondent's Objection to Petitioner's Motion for Partial Summary Judgment (index no. 34), and on October 2, 2012, the Court filed Respondent's Reply to Petitioner's Notice of Objection to Respondent's Cross-Motion for Partial Summary Judgment (index no. 39). The issues addressed in the responses again centered on the legal nature of the APAs and the standard of review that the Court should apply in reviewing the cancellations.

On October 22, 2012, the Court held a 2-hour hearing on the parties' cross-motions for partial summary judgment, during which the Court heard 45 minutes of oral argument plus 15 minutes of rebuttal oral argument from each party. On June 26, 2013, the Court issued its opinion in Eaton Corp. v. Commissioner, 140 T.C. 410 (2013), holding that the Service's cancellation of the APAs was an administrative determination reviewable for abuse of discretion. This case was tried during a special session of the Court, beginning on August, 24, 2015, and ending on September 30, 2015. Each party filed an opening brief on February 8, 2016, and an answering brief on May 9, 2016. The case is now awaiting an opinion from the Court.

After the briefs were submitted, in a conference call held on May 12, 2016, Eaton notified the Court that it would be seeking reconsideration of the Court's opinion in Eaton Corp. and requested guidance from the Court regarding the manner in which such a motion should be filed. The Court advised Eaton that it should file a motion requesting leave to file its Motion for Reconsideration out of time (which the Court advised that it would grant), and that respondent would be given an opportunity to file a response to Eaton's Motion for Reconsideration.¹

On June 9, 2016, Eaton filed a Motion for Leave to File Out of Time Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161 ("Motion for Leave to File Out of Time"), and lodged its Motion for Reconsideration (index no. 654) and a supporting memorandum ("Motion for Reconsideration Memo") (index no. 656). Eaton noted respondent's objection to both motions. On June 29, 2016, the Court entered an Order granting Eaton's Motion for Leave to File Out of Time, directing that Eaton's motion and supporting memorandum be considered filed as of that date. The Court further ordered respondent to file a response to the Motion for Reconsideration by July 26, 2016, which date, upon unopposed motion by respondent, was extended to July 29, 2016.

Reconsideration under Tax Court Rule 161 "serves the limited purpose of correcting substantial errors of fact or law and allows the introduction of newly discovered evidence that the moving party could not have introduced, by the exercise of due diligence, in the prior proceeding." Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998); see Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110. This Court has repeatedly held that "reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party." Id. at 441-442; Estate of Turner v. Commissioner, 138 T.C. 306, 307-08 (2012); Knudsen v. Commissioner, 131 T.C. 185, 186 (2008). The Court will not exercise its discretion to reconsider a prior ruling unless the moving party can establish unusual circumstances or substantial error. Estate of Quick at 441. Eaton, however, establishes neither.

Eaton does not establish that the Court's ruling was in error. Eaton vaguely claims that the opinion in Eaton Corp. was "wrong as a matter of law." Motion for Reconsideration at 1. But in the motion, Eaton merely rehashes its original argument, that the common law of contracts governs the cancellation of the APAs because the APAs were "binding agreements."⁴ Rehashed arguments are not grounds for reconsideration and neither is a new gloss on old arguments. See Roger Miller Music. Inc. v. SONY/ATV Publ'g, LLC, 477 F.3d 383, 395 (6th Cir. 2007) (holding that parties cannot use a motion for reconsideration to raise new legal arguments that could have been raised before); Stoody v. Commissioner, 67 T.C. 643, 644 (1977) (same). Eaton fails to establish any unusual circumstances or substantial error that would justify reconsideration. Estate of Quick at 441. Moreover, Eaton fails to establish that the Court's initial ruling was "inconsistent with substantial justice." T.C. Rule 160 (grounds for vacating a decision or order).

In Eaton Corp., the Court analyzed the applicable revenue procedures, and addressed and explicitly rejected Eaton's arguments that contract law governs the burden of proof and standard of review on the cancellation issue. Eaton's repeated assertion that respondent is disavowing the "binding" nature of APAs is not a new argument; it was addressed in the Court opinion after detailed presentation on the papers and at oral argument. See, e.g., Resp.'s Reply to Pet.'s Not. of Obj. to Resp.'s Cross-Mot. for Partial Sum. Judg. (index no. 39) at 4.

Furthermore, Eaton does not offer any unusual circumstances that would justify reconsideration at this late stage of the litigation. Eaton provides no factual or legal grounds for collateral attack on the Court's initial ruling, such as evidence of any recently-discovered injustice that it has suffered in the conduct of the litigation. Eaton has not shown and cannot show a causal relationship between any alleged injustice and the Court's original consideration of the motions for summary judgment. As detailed above, the motions process was deliberate and thorough. The Court's analysis was sound in granting respondent partial summary judgment and denying Eaton partial summary judgment. The Court was correct to reject Eaton's arguments then and should reject them now.

Because Eaton offers no newly-discovered evidence or unusual circumstances that would justify the Court reconsidering the same legal arguments that Eaton advanced in support of its initial motion, Eaton's Motion for Reconsideration should be denied.

Eaton's new assertions of fact, which are denied and genuinely disputed, include the following:

• New Assertion of Fact:

• "Respondent agreed to use a transfer pricing method that utilized a CUP approach to which an adjustment was made to provide a return for Eaton's U.S. distribution function. In exchange, Eaton agreed that it would use only sales to OEMs (and not sales to distributors) to determine the CUP price for sales from the Islands to Eaton distribution. Memorandum in Support of Motion for Reconsideration at 14, citing Trial Tr. (Andrus) at 2285:2-25.

  Respondent's Response:

  This assertion is denied as incorrect. The APA TPM was neither the CUP method under the regulations nor an adjusted CUP method. See Respondent's Opening Brief, RF at 65. Moreover, Eaton previously represented to the Court that the APA TPM was an "unspecified method," not the CUP method. See Pet.'s Motion for Reconsideration (filed Apr. 21, 2015) (index no. 299) at 12, n. 7. Further, Eaton's assertion is disingenuous. Eaton offered expert testimony at trial that distributor sales are "not suitable CUPs because distributors are at a different level of the market as compared to Eaton Electrical U.S., because Eaton Electrical U.S. functions as a manufacturer rather than a distributor" for such sales. Ex. 5409-PC at 36, n. 50 (report of Dr. Clark). Moreover, although the APA TPM was premised on Eaton's so-called U.S. distribution function earning a guaranteed return, Eaton incurred and reported significant losses (not profits) on its 2005 or 2006 Forms 1120. See, e.g., Respondent's Opening Brief, RF 124 and 131.

• New Assertion of Fact:

• "Additionally, Eaton agreed to guarantee that its U.S. distribution function would earn a return high enough to generate a Berry Ratio of at least 1.2, a concession made to secure Respondent's agreement to Eaton's proposed transfer pricing method." Pet's Memorandum in Support of Motion for Reconsideration at 14, citing T2319:24-2320:10, 2321:2-19 (Andrus); Ex. 70-P.

  Respondent's Response:

  This assertion is not supported by the record. Eaton withdrew the claim in its Petition that it made concessions in good faith during the APA negotiations, given that such a claim would result in a waiver of privilege. Eaton cannot renew assertions regarding its "concession" after withdrawing them. Moreover, as explained above, Eaton did not report any profits from its purchase of breaker components. Lastly, portions of the transcript that Eaton cites on this point were stricken from the record at trial. See T2320:18.

Eaton's state of mind would likely be placed at issue if breach of contract and its accompanying defenses were the governing standards, necessitating discovery of documents withheld as privileged, drastically changing the posture of the case on that matter alone. For example, with respect to Eaton's repeated assertion that the APAs were "binding contracts," the Court, in its April 6, 2015 and May 11, 2015 Orders found that the documents that Eaton was ordered (but refused) to produce in discovery "may be the only probative evidence of the state of mind or knowledge of the persons who acted on its behalf and those communications may tend to show, among other material facts, whether those persons in fact considered the APAs to be binding and valid" under the applicable revenue procedures. See April 6, 2015 Order at 10; May 11, 2015 Order at 4 (emphasis added). Eaton's Motion for Reconsideration reopens these issues, and a new trial and additional discovery would be required to cure the undue prejudice to respondent.

Summary judgment may be granted only if "there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." T.C. Rule 121(b). By making additional assertions of fact based on the trial record that are genuinely disputed and that did not exist at the time of the initial ruling, Eaton creates additional reasons to deny its Motion for Reconsideration. If Eaton's additional assertions had been made in the original motion for summary judgment, they would have been in dispute and would have precluded granting Eaton summary judgment. Under either scenario, Eaton's Motion for Reconsideration should be denied.

A. The Court Correctly Held that Service's Decision to Cancel the APAs was an Administrative Determination not Subject to the Common Law of Contracts.

Whether the cancellation of an APA is subject to the common law of contracts or is an administrative determination governed by the applicable revenue procedures and deficiency procedures depends upon whether the Service is authorized to enter into such purported contracts or agreements. The power of the Service is limited by statute. Under section 7803(a)(2)(A), the Commissioner may only "administer, manage, conduct, direct, and supervise" the internal revenue laws, to the extent the Secretary so authorizes. The Secretary has only authorized the Commissioner to enter into binding agreements relating to a person's pre-petition tax liability in specified cases that do not include APAs. See, e.g., I.R.C. § 7121 (closing agreements); Treas. Reg. § 301.7121-1(d)(1) (Second sentence) (closing agreements must be executed on prescribed forms).⁷ No settlement agreement is authorized by any mode other than that prescribed by statute. Botany Worsted Mills v. United States, 278 U.S. 282, 289 (1929). Those procedures are the exclusive means by which pre-petition tax liability can be settled. Broz v. Commissioner, 137 T.C. 46, 55 - 56 (2011).

A closing agreement is an agreement entered into pursuant to statute, not a contract. Because a closing agreement is not a contract, its enforceability does not depend on mutual consideration. Rink v. Commissioner, 100 T.C. 319, 325 n.4 (1993) (citing Perry v. Page, 67 F.2d 635 (1st Cir. 1933)). Although a closing agreement is not a contract, certain principles of contract law may be relevant in dealing with closing agreements, e.g., principles related to offer and acceptance. See Rev. Rul. 73-514, 1973-2 C.B. 416. Even so, for the reasons stated in the initial summary judgment filings (and at oral argument), an APA is not a closing agreement and cannot be enforced in the manner posited by Eaton. See Resp'.s Mem. of Law in Sup. of Resp.'s Not. of Obj. to Pet.'s Mot. for Partial Sum. Judg. (index no. 17) at 3-7; Resp.'s Reply to Pet.'s Not. of Obj. to Resp.'s Cross-Mot. for Partial Sum. Judg. (index no. 39) at 3-11. The APA program was founded under the procedural rule that covers rulings and determination letters (Treas. Reg. § 601.201), which is compelling evidence that canceling an APA is an administrative determination. See Rev. Proc. 91-22, 1991-1 C.B. 526; Treas. Reg. § 601.201, 32 Fed. Reg. 15990 (Statement of Procedural Rules, Internal Revenue Practice); see I.R.C. § 7805(a) (the Secretary is authorized to prescribe all rules and regulations for enforcement of the Internal Revenue Code).

APAs are administered pursuant to administrative rules and regulations and are not subject to the burden of proof and standard of review rules under the common law of contracts.

B. Eaton's Description of the APA Process is Unsound and Incorrect.

Eaton misunderstands two fundamental aspects of the APA program: the extent of the Service's authority to cancel APAs and the elements of bilateral APAs. Eaton's flawed analysis of these points demonstrates that Eaton does not understand the APA program in general and undermines Eaton's position on the issues at hand in this motion, the burden of proof and standard of review on cancellation.

In addition to the authorities cited by respondent in the summary judgment proceedings establishing that the Service has discretion to cancel an APA, the APA Revenue Procedures explicitly grant the Service that discretion:

A foreign government is never a party to a bilateral APA. A foreign government will enter into a "mutual agreement" with the U.S. government competent authority. The terms of that "mutual agreement" (to which the taxpayer is not a party) are then reflected in an APA -- which is always executed between the Service and a taxpayer. Rev. Proc. 2004-40 §§ 2.08-.09. "If the U.S. Competent Authority and the relevant foreign competent authority or authorities reach a mutual agreement, the taxpayer and the Service may execute one or more APAs consistent with that mutual agreement." Rev. Proc. 2004-40 § 2.10.

APAs are limited instruments of administrative determination subject to strict guidelines governing cancellation and the consequences of cancellation, including Tax Court jurisdiction to review deficiency determinations. The Service's cancellation of the APAs is subject to the applicable revenue procedures and is not subject to review under the common law.

E. Eaton Reverses its Position About APAs and Closing Agreements.

Eaton has changed its position regarding whether APAs are "binding agreements" similar to closing agreements pursuant to section 7121. In Eaton's motion for summary judgment, it argued that APAs and closing agreements are not alike because unlike closing agreements, APAs "do not resolve a case; the IRS is free to audit and adjust the taxpayer's application of the transfer pricing method set forth in the APA. APAs are, in fact, fundamentally different than Closing Agreements." Pet.'s Resp. to Resp.'s Obj. to Pet.'s Mot. for Partial Sum. Judg. (index no. 31) at 12 (emphasis added).

Now, on reconsideration, Eaton argues the opposite, i.e., that APAs are so similar to closing agreements that APAs "cannot be distinguished from section 7121 closing agreements" and should be treated the same way, not fundamentally differently as Eaton previously asserted. Motion for Reconsideration Memo at 19-23 (emphasis added). Eaton's diametrically-opposed argument is at the core of Eaton's position on reconsideration and is an example of "tendering new legal theories to reach the end result desired by the moving party" that cannot support vacating the Court's ruling on reconsideration. See Estate of Quick, 110 T.C. at 441-42; Estate of Turner, 138 T.C. at 306, 307-08; Knudsen, 131 T.C. at 186. Eaton's reversal of its position further undermines Eaton's position analogizing APAs to contracts, and provides further grounds to deny Eaton's Motion for Reconsideration.

Respectfully Submitted.

² Eaton stated that "neither of the legal determinations requested by Eaton in the Motion will require the Court, at this time, to make any finding concerning the merits of Respondent's cancellation of the APAs. The issues addressed in the Motion [for Summary Judgment] relate only to which party has the burden of proof on the cancellation of the APAs." Memorandum of Law in Support of Petitioner's Motion for Partial Summary Judgment and attached Exhibits at 2. (index no. 12) (emphasis added).

³ Nevertheless, Eaton's second request is improper. Review of the full trial record and briefs, and consideration of the credibility of the witnesses and the weight of the disputed evidence, is the appropriate vehicle for deciding the cancellation issue in this case. Eaton's Motion for Reconsideration is not the appropriate vehicle for making that ultimate determination.

⁴ Given that Eaton's Motion for Reconsideration rehashes arguments that it made in the original filings, respondent incorporates herein the arguments that he made in response to Eaton's filings, including in his Memorandum of Law in Support of Respondent's Notice of Objection to Petitioner's Motion For Partial Summary Judgment (index no. 17); Memorandum of Law in Support of Respondent's Cross-Motion for Partial Summary Judgment (index no. 19); and Respondent's Reply to Petitioner's Notice of Objection to Respondent's Cross-Motion for Partial Summary Judgment (index no. 39); and at oral argument, including whether the APAs are binding agreements subject to the common law of contracts.

⁵ The factual record was limited to the pleadings, the APAs, the Service's cancellation letter (dated December 16, 2011), and the notice of deficiency. See Exs. 1-J through 4-J.

⁶ Rev. Proc. 96-53, 1996-2 C.B. 375 and Rev. Proc. 2004-40, 2004-2 C.B. 50.

⁷ Other specified cases are found in I.R.C. §§ 7122 (DOJ cases and offers in compromise), 6159 (installment plans), and 6224(c) (TEFRA partnership cases).

⁸ Rev. Proc. 2004-40 § 10.06(1) also vests the Service with discretion to cancel, providing that the "[ACCI] or designee may cancel an APA due to the failure of a critical assumption, or due to the taxpayer's misrepresentation, mistake as to a material fact, failure to state a material fact, failure to file a timely annual report, or lack of good faith compliance with the terms and conditions of the APA." See also Rev. Proc. 96-53 ("may cancel"). Furthermore, Rev. Proc. 2004-40 § 10.06(2) states the "[ACCI] may waive cancellation if the taxpayer can satisfactorily show good faith and reasonable cause and agrees to make any adjustment proposed to correct. . . ." See Rev. Proc. 96-53 § 11.06(2) (similar "may waive" language). Put simply, the applicable revenue procedures explicitly vest the Service with the very discretion Eaton asserts does not exist