IRS Urges Tax Court to Deny Reconsideration in Coca-Cola Case

THE COCA-COLA COMPANY AND SUBSIDIARIES,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

 

Judge Albert G. Lauber

RESPONDENT'S RESPONSE TO PETITIONER'S MOTION FOR LEAVE TO FILE OUT OF TIME MOTION FOR RECONSIDERATION OF FINDINGS OR OPINION PURSUANT TO RULE 161

RESPONDENT, pursuant to the Court's Order dated June 8, 2021 (“Order”), files this response to petitioner's Motion for Leave to File Out of Time Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161, at docket entry #747 (“Motion for Leave”).¹ Petitioner concurrently lodged a Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161, at docket entry #748 (“Motion for Reconsideration”). For the reasons stated below, petitioner's Motion for Leave should be denied.

I. INTRODUCTION AND SUMMARY OF ARGUMENT

Under Tax Court Rule 161, petitioner has not shown good cause for filing its Motion for Leave 196 days after the Court issued its opinion. Even if petitioner's new legal theories were first brought to its attention after the Court issued its November 18, 2020 Opinion (“Opinion”),² a motion for reconsideration is inappropriate to introduce new theories that the moving party could have raised earlier.

If the Court were to grant petitioner's Motion for Leave, petitioner does not make a prima facie case that satisfies the Rule 161 reconsideration standards. Petitioner has not identified substantial errors of fact or law or unusual circumstances that would justify reconsideration. Further, granting the Motion for Leave would prejudice respondent and undercut the importance of finality in litigation. In its Motion for Reconsideration, petitioner seeks to rehash arguments that the Court rejected and raise new, meritless legal theories that it could have raised before the Opinion. Because the underlying Motion for Reconsideration fails to establish sufficient grounds to be granted, granting petitioner's Motion for Leave would be futile.

A. Petitioner has not presented valid reasons for filing its Motion for Leave out of time; respondent would be prejudiced; and the principles of finality in litigation would be damaged if the Motion for Leave is granted.

This Court considers a number of factors when determining whether to grant a motion for leave to file pleadings and motions out of time, including the lateness of the filing, the reasons for the delay, the previous availability of the issue, and the potential prejudice or irreparable harm to the non-moving party. See Dixon v. Commissioner, 60 T.C. 802, 806 (1973); Watkins v. Commissioner, T.C. Memo. 2014-197; Rinehart v. Commissioner, T.C. Memo. 2003-109; Davenport Recycling Assocs. v. Commissioner, T.C. Memo. 1998-347.

Petitioner cites two reasons for not timely filing its Motion for Reconsideration: (1) the case's complexity, and (2) the new legal arguments from petitioner's new counsel. Petitioner claims that respondent would not be prejudiced or harmed if the Court grants petitioner's Motion for Leave because the final decision in this case awaits the Court's decision in 3M Co. & Subs, v. Commissioner, No. 5816-13 (filed Mar. 11, 2013) to resolve the Brazilian foreign legal restriction issue (the “Blocked Income Issue”).

As discussed more fully below, the fact that petitioner's new counsel came up with different legal arguments is not a valid reason for its untimely Motion for Reconsideration. See infra Part II.A., D. Additionally, although the pending Blocked Income Issue prevents entry of the final decision, permitting the petitioner to raise new facts and legal arguments long after the Court's Opinion would prejudice respondent. See infra Part II.B., F.

B. Granting petitioner's Motion for Leave would be futile since petitioner does not even make a prima facie case that the standards for reconsideration under Rule 161 have been satisfied.

When deciding a motion for leave, the Court may evaluate the underlying motion to determine whether the moving party has established a prima facie case for granting the underlying motion. Byers v. Commissioner, T.C. Memo. 2019-76, at *3 (denying a motion for leave to file a motion to vacate where petitioner failed to establish a prima facie case for fraud upon the court in the underlying motion). To justify a motion for reconsideration, the moving party must show unusual circumstances, substantial errors of fact or law, or newly discovered information, not discoverable with reasonable due diligence. Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998). Petitioner's Motion for Reconsideration fails to make a prima facie case for reconsideration; instead, it rehashes previously rejected factual and legal arguments and introduces new findings and legal theories that it could have previously proposed and raised.

1. Petitioner rehashes its argument that the Supply Points owned intangibles worth billions of dollars.

In its Motions, petitioner argues that the Court erred in not recognizing the value of the Supply Points' valuable intangibles and marketing contributions. Pet'r Mot. Recons. § II. Petitioner bases its claim on the same faulty arguments and misconstrued facts presented in its pretrial memorandum and post-trial briefs.³ Petitioner also introduces new factual findings it could have proposed earlier. See discussion infra Part II.C., F.

2. Petitioner rehashes its argument that petitioner relied on the continuing application of the 10-50-50 formula and raises new, meritless theories to support that previously rejected argument.

Petitioner raises the same argument it previously made, but this time, characterizes it as a constitutional argument to protect petitioner's “reliance interests.” In its Motions, petitioner argues that it had so-called “reliance interests” on the continuing application of the “10-50-50” formula contained in the parties' 1996 closing agreement, which settled the parties' transfer pricing disputes for the 1987-1995 tax years (“Closing Agreement”), and on the Closing Agreement “whereas” language. Petitioner claims that respondent was bound to that formula in determining the transfer pricing method for petitioner's 2007-2009 tax years. Petitioner then erroneously argues that respondent was “arbitrary and capricious” under the Administrative Procedure Act (“APA”) — because, as upheld by the Court, he applied the comparable profits method (“CPM”), instead of the 10-50-50 formula — and this results in “unconstitutional action,” purportedly based on the Fifth Amendment Due Process Clause.

In its Opinion, the Court considered and rejected the premise of petitioner's argument and legal theory and found that (1) the Closing Agreement had no control over the appropriate transfer pricing method for tax years after 1995, including petitioner's 2007-2009 tax years, and (2) for post-1995 tax years, the Closing Agreement made clear that respondent might make future transfer pricing adjustments. As the Court concluded, “petitioner cannot estop the Government on the basis of a promise that the Government did not make.” Coca-Cola Co. & Subs, v. Commissioner, 155 T.C. No. 10, slip op. at 98 (Nov. 18, 2020).

Based on the same premise, petitioner concurrently raises new legal theories — the APA and the Due Process Clause of the Fifth Amendment — to argue that respondent's section 482 notice adjustments were unlawful. Petitioner could have raised these theories at any time since 2015, when it filed its petition. In addition to making late arguments, petitioner wholly misconstrues the agency-specific statutory framework applicable to respondent. Petitioner fails to recognize that section 7121 and its regulations control the Commissioner's authority to enter into binding agreements concerning the liability of a taxpayer for any internal revenue tax in any period. I.R.C. § 7121(a). Thus, section 7121 limits the Closing Agreement's scope to the matters agreed upon. Based on its plain language, the Closing Agreement does not bind the parties to the 10-50-50 formula as the best method for post-1995 tax years.

Furthermore, the APA review procedures in 5 U.S.C. §§ 701-706 apply to agency rules, regulations, and similar items — but they do not supplant existing statutory procedures for reviewing respondent's notice of deficiency determinations, which are derived from section 6212. The Tax Court conducts a de novo review when respondent determines a section 482 allocation and will uphold such allocation unless petitioner proves that respondent's determinations are arbitrary, capricious, or unreasonable. I.R.C. § 6214; Guidant LLC v. Commissioner, 146 T.C. 60, 73 (2016). The APA provisions play no role in reviewing respondent's section 482 allocation determinations.

Petitioner's constitutional argument likewise fails. Appellate and Supreme Court authority addressing tax law retroactivity does not apply to respondent's exercise of his discretion under section 482 for petitioner's 2007-2009 tax years. Respondent did not apply a new ruling or regulation, or revoke a ruling to find that the 10-50-50 formula did not accurately reflect petitioner's income for the 20072009 tax years. Accordingly, petitioner's reliance arguments, grounded in new theories based on APA and constitutional law, are meritless. See discussion infra Part II.E.

II. ARGUMENT

In its Order, the Court requests that respondent address five questions and any other matters related to petitioner's Motions that respondent deems important. Respondent responds to the Court's five questions and addresses other matters below.

A. The fact that petitioner retained new attorneys who allegedly brought the “unconstitutional retroactivity” argument to petitioner's attention after the Opinion was issued is irrelevant.

The Court's Order presents the following question:

In assessing the significance of petitioner's failure to file its Rule 161 motion within the expected 30 days, is it relevant that the “unconstitutional retroactivity” argument petitioner seeks to present was apparently brought to its attention by new attorneys it engaged after the Opinion was issued?

The fact that petitioner hired new counsel does not impact whether the Court should grant leave to file a motion for reconsideration out of time.

Under Tax Court Rule 161, a party must file a motion for reconsideration of an opinion or findings of fact within 30 days after the opinion is served “unless the Court shall otherwise permit.” While the Court has broad discretion to grant a motion for leave to file a motion for reconsideration, as well as a motion for reconsideration, this Court has cautioned against granting a motion for reconsideration unless the moving party shows substantial error or unusual circumstances. Bedrosian v. Commissioner, 144 T.C. 152, 156 (2015); Estate of Quick, 110 T.C. at 441 (stating that “[r]econsideration under Rule 161 serves the limited purpose of correcting substantial errors of fact or law”); CWT Farms, Inc, v. Commissioner, 79 T.C. 1054, 1057 (1982), supplementing 79 T.C. 86 (1982), aff'd, 755 F.2d 790 (11th Cir. 1985) (citing Robin Haft Trust v. Commissioner, 62 T.C. 145 (1974), aff'd on this issue, 510 F.2d 43,45 n.l (1st Cir. 1975)) (stating that “[reconsideration of proceedings already concluded is generally denied in the absence of substantial error or unusual circumstances”). This Court has also stated that a motion for reconsideration is an inappropriate forum for “tendering new legal theories to reach the end desired by the moving party.” Estate of Quick, 110 T.C. at 441-42 (citing Estate of Scanlan v. Commissioner, T.C. Memo.1996-414).

Respondent could find no authority supporting the proposition that new counsel is grounds for granting an untimely motion for reconsideration. Although not directly on point, the Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) in United States v. Adams, 486 F. App'x 861 (11th Cir. 2012), upheld a district court's denial of a motion to suppress filed out of time. In Adams, the criminal defendant alleged that he had good cause for filing the motion — which raised a new legal issue on Fourth Amendment grounds — out of time because substitute counsel had only recently taken over his representation. The defendant's new counsel, however, had previously attended a hearing on evidentiary matters and had already filed a timely motion to suppress on different grounds. The Eleventh Circuit held that the district court did not abuse its discretion by denying the defendant's motion. It found that the defendant's new counsel had four weeks after he became involved in the case to file the out-of-time motion to suppress, and the court thought that was sufficient time. Additionally, the Eleventh Circuit noted that the defendant did not explain why he could not have raised the Fourth Amendment challenge in his first, timely motion.

Petitioner claims that its Motion for Leave should be granted because the case presents numerous issues of exceptional complexity and has a massive record. Pet'r Mot. Leave 4 (¶ 2.c.). Petitioner further states that it worked diligently to examine the issues raised in the Court's Opinion with the help of new counsel. Id.

Two highly regarded law firms represented petitioner throughout the litigation. Petitioner never explains when it retained new counsel or why it was not able to raise these new arguments before the Court entered the Opinion. Petitioner had 30 days after the Opinion was served to file a motion for reconsideration. Petitioner waited 196 days to file its motion. Petitioner issued a press release on January 6, 2021, outlining the same arguments it makes here, but still waited another four months to file its motion.⁴ As the courts did in Adams, this Court should deny petitioner's Motions.

B. The risk of prejudice and damage to principles of finality exist, regardless of whether this case remains pending due to the outstanding Brazilian “blocked income” issue, because respondent already addressed all factual and legal issues in this case.

The Court's Order presents the following question:

In assessing the risk of prejudice to respondent and damage to principles of finality, is it relevant that this case remains pending, that the Court will likely have to issue a future opinion addressing the Brazilian “blocked income” issue, and that consideration of that issue has been deferred until the Court issues its opinion in 3M Co. & Subs, v. Commissioner, T.C. Dkt. No. 5816-13 (filed Mar. 11, 2013)?

Granting petitioner's Motion for Leave and allowing petitioner to file its Motion for Reconsideration would prejudice respondent and damage principles of finality in litigation. It is not relevant that (1) this case remains pending, (2) the Court may issue a future opinion addressing the Blocked Income Issue, and (3) the Court will not consider the Blocked Income Issue until it issues its opinion in 3M Co. & Subs. Petitioner's claim that granting its Motions would not prejudice respondent based on the pending nature of the Blocked Income Issue is incorrect. Pet'r Mot. Leave 4 2.d.); Pet'r Mot. Recons. 3.

Petitioner's Motions address two issues: (1) whether petitioner's Supply Points owned billions of dollars' worth of intangible property (“IP Ownership Issue”) and (2) whether respondent was precluded from applying the CPM to petitioner's 2007-2009 tax years because petitioner purportedly relied on the continuing application of the Closing Agreement's 10-50-50 formula (“Estoppel Issue”). These issues are wholly separate from petitioner's pending challenge to the validity of Treas. Reg. § 1.482-1(h)(2) (foreign legal restriction regulation). Pet'r Mot. Leave 2-3 (¶2.a.); Pet'r Mot. Recons. 3-4. To support the Estoppel Issue, petitioner also introduces a new legal theory that it could have raised before the Court issued its Opinion. Under this theory, petitioner argues that respondent violated existing (although inapplicable) legal authorities — the APA and Due Process Clause of the Fifth Amendment — when he applied the CPM to petitioner's 2007-2009 tax years. Pet'r Mot. Leave 2 Q 2.a.); Pet'r Mot. Recons. 16-48. Whether the Court decides the Blocked Income Issue today or in a year has no bearing on circumstances that would justify a reconsideration. Either way, reconsideration would force respondent to address the same issues he has already addressed at length in the prior proceeding, motions, and post-trial briefs. And respondent would need to address a new legal theory — one that petitioner could have raised earlier. Under these circumstances, reconsideration is not justified. Estate of Quick, 100 T.C. at 441-42.

In evaluating a motion for leave to file a motion for reconsideration, the Court may consider whether it would be in the “interest of justice” to grant such motion (see Pet'r. Mot. Recons, (citing Rinehart v. Commissioner, T.C. Memo. 2003-109)), but in determining what best serves the interests of justice, the Court considers the following factors: (1) whether the moving party previously had an opportunity to raise the matter; (2) whether the nonmoving party would be prejudiced or incur irreparable harm by granting the motion; (3) the amount of the delay; and (4) whether the underlying motion merits such consideration. Waterman v. Commissioner, 91 T.C. 344, 349 (1988) (finding no prejudice where taxpayer claimed delays with respect to the issuance of the notice of deficiency and not after the petition was filed); Dixon v. Commissioner, 60 T.C. 802, 804-06 (1973) (granting motion for leave to file answer out of time when allowing such would not prejudice the opposing party); Watkins v. Commissioner, T.C. Memo. 2014-197; Davenport Recycling Assocs., T.C. Memo. 1998-347 (denying motion for special leave to file motion for reconsideration of decision or vacate decision filed almost two years after entry of decision where court found it had jurisdiction and no fraud had been committed on the Court); Thompson v. Commissioner, T.C. Memo. 1989-303 (denying leave to file a motion for reconsideration filed 69 days after the opinion was served when the Court would not grant the underlying motion in any event); see also Corsello v. Lincare, Inc., 428 F.3d 1008, 1014 (11th Cir. 2005) (stating that courts need not give leave to amend “(1) where there has been undue delay, bad faith, dilatory motive, or repeated failure to cure deficiencies by amendments previously allowed; (2) where allowing amendment would cause undue prejudice to the opposing party; or (3) where amendment would be futile”).

This Court has denied motions for leave to file out of time when granting them “would be nothing more than an act of futility.” Cinema '84 v. Commissioner, 122 T.C. 264, 272 (2004); Cowan v. Commissioner, T.C. Memo. 2006-255 (denying taxpayer's motion for leave to file a motion to vacate an order of dismissal where taxpayer's new filing fails to present any new evidence that would confer jurisdiction upon the Court); Thompson, T.C. Memo. 1989-303.

This Court and the appellate courts have cautioned against granting motions for reconsideration, relying on finality-in-litigation principles. As this Court has held, “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.” Estate of Quick, 110 T.C. at 441-42; CWT Farms, 79 T.C. at 1057 (stating that “[i]t is the policy of this Court to try all the issues raised in a case in one proceeding to avoid piecemeal and protracted litigation” and that the Court “will generally not grant reconsideration to resolve issues which could have been raised during the prior proceeding”); Long v. Commissioner, 71 T.C. 724, 727 (1979), remanded on other grounds, 660 F.2d416 (10th Cir. 1981) (stating that “neither party is entitled to have more than one fair, reasonable opportunity to establish his claim or defense” and to “allow more would be to protract litigation to the extent which would preclude the administration of justice”); Robin Haft Trust, 62 T.C. at 147 (stating that “[i]n the interest of efficient performance of the judicial work, a second trial is not ordinarily granted to consider a new theory which could have been presented in the first trial”); see also Patterson v. Commissioner, 740 F.2d 927, 930 (11th Cir. 1984) (affirming the Court's denial of a motion for reconsideration where the taxpayer argued that he had existing evidence that was not previously referenced in the trial record); Louisville & Nashville R.R. Co. v. Commissioner, 641 F.2d 435, 443-44 (6th Cir. 1981) (stating that, while it would not impose arbitrary restrictions upon the Court's exercise of its discretion under Rule 161, the court of appeals “cannot condone the Commissioner's unexplained failure to observe [the] 30-day limit,” nor did it “wish to minimize the fundamental importance of finality in litigation”).

Regardless of the Blocked Income Issue, allowing petitioner a second chance to reargue the IP Ownership and Estoppel Issues prejudices the respondent and damages principles of finality. Rebriefing the issues would entail considerable time and cost. The parties already have introduced the testimony of 32 fact and 25 expert witnesses, filed 24 stipulations of facts, and submitted hundreds of pages of opening, answering, and reply briefs to support their respective positions on these issues. Respondent already has filed motions for partial summary judgment and in limine about the Closing Agreement — and these motions address the Estoppel Issue. Resp't Mot. Partial Summ. J. (Aug. 28, 2017) (docket entry #68) (denied by Order dated Sept. 7, 2017, docket entry #80); Resp't Mot. in Lim. (Feb. 20, 2018) (docket entry #125) (denied by Order dated Feb. 23, 2018, docket entry #144). As evidenced by the Court's Opinion, the Court addressed and decided the IP Ownership and Estoppel Issues apart from the wholly independent Blocked Income Issue. Petitioner also had every opportunity to raise its new “reasonable reliance” theory based on APA and constitutional law, but it did not. Petitioner should not be rewarded, and respondent should not be punished, for petitioner's failure to timely raise all its legal theories. Accordingly, this Court has multiple grounds within its broad discretion to deny petitioner's Motion for Leave. Huminski v. Commissioner, 679 F. App'x 926, 927 (11th Cir. 2017) (stating that the Court's denial of a motion for reconsideration is reviewed for an abuse of discretion) (citing Byrd's Estate v. Commissioner, 388 F.2d 223, 234 (5th Cir. 1967))⁵; Long v. Commissioner, 772 F.3d 670, 675 (11th Cir. 2014) (stating that the Eleventh Circuit may affirm “on any ground that finds support in the record”); Davenport Recycling Assocs. v. Commissioner, 220 F.3d 1255, 1258-59, 1262 (11th Cir. 2000) (reviewing the Court's denial of motion for leave to file a motion to vacate for abuse of discretion and upholding such denial); Patterson, 740 F.2d at 930 (holding that the Court did not abuse its discretion in denying the taxpayer's motion for reconsideration); Louisville & Nashville R.R. Co., 641 F.2d 435,44344 (stating that the Court may either deny or grant leave to file an out of time motion on the basis of its sound discretion).

C. Petitioner's Motion for Reconsideration rehashes the same previously rejected legal arguments.

The Court's Order presents the following question:

To what extent may the Motion for Reconsideration fairly be regarded as “rehashing previously rejected legal arguments”? Estate of Quick, 110 T.C. at 441.

Petitioner's Motion for Reconsideration is inappropriate because it rehashes previously rejected legal arguments. Estate of Quick, 110 T.C. at 441; Estate of Halder v. Commissioner, T.C. Memo. 2003-284 (denying motion for reconsideration where the estate “merely restated the proposed facts and arguments set forth in the opening brief and reply brief that we rejected”).

In its Motion for Reconsideration, petitioner claims that the Court erred in: (1) not properly considering petitioner's reliance interest — protected by the arbitrary and capricious standard, the Fifth Amendment Due Process Clause, and other constitutional guarantees — in the continued application of the 10-50-50 formula during the tax years at issue, and (2) endorsing respondent's use of Dr. Scott Newlon's CPM to adjust petitioner's tax returns. Pet'r Mot. Recons. 3-4. The parties' pretrial memoranda, the post-trial briefs, and the Court's Opinion extensively addressed both topics.

1. The Court fully considered — and rejected — petitioner's erroneous argument that the Closing Agreement and respondent's course of conduct created reliance interests for petitioner.

In its opening brief, petitioner proposed almost 50 factual findings about the Closing Agreement's existence, its importance to petitioner, and the audit history under the Closing Agreement. See Pet'r Opening Br. PFF ¶¶596-643. Throughout this litigation, petitioner repeatedly made the following unsupported statements: (1) the Closing Agreement discouraged the Company from making changes to its contractual and legal entity structure; (2) respondent abruptly and retroactively discontinued accepting the 10-50-50 formula after a long historical understanding and course of dealing; (3) respondent's departure from the formula was inexplicable and inequitable; (4) petitioner relied on the parties' consistent application of the Closing Agreement in the post-1995 tax years, including in forgoing a dividend offset election; and (5) respondent's departure from the Closing Agreement formula resulted in respondent taking inconsistent positions. Pet'r Pretrial Mem. 11-15; Pet'r Opening Br. 5-6.

Respondent has consistently maintained that the Closing Agreement and respondent's course of conduct created no reliance interests for petitioner. Resp't Opening Br. 530-32.

The Court extensively addressed the parties' reliance arguments in its Opinion. Coca-Cola Co., 155 T.C. No. 10, slip op. at 93-98. As the Court stated, “[a]t the outset petitioner urges that the IRS acted arbitrarily by deviating from the 10-50-50 method, to which the parties had agreed when executing the closing agreement in 1996.” Id. at 93. The Court explained that “[p]etitioner seeks to frame this issue as if the IRS has pulled the rug out from under it” (id. at 97) and “[i]n essence . . . urges that it relied to its detriment on a belief that the IRS would adhere to the 10-50-50 method indefinitely.” Id. at 98. The Court, upon examining the Closing Agreement and surrounding facts, correctly determined that petitioner had no valid “reliance interests” based on the Closing Agreement's plain language. Id. at 95-98 (“There is nothing within the four comers of the closing agreement to suggest that the Commissioner regarded the 10-50-50 method as the Platonic ideal of arm's length pricing for petitioner and its supply points. The 10-50-50 method was simply a formula to which the parties agreed in settling the dispute before them at that moment.”)

The only difference between petitioner's argument now and its earlier argument is the legal authorities relied upon. As discussed above, motions for reconsideration are not the appropriate mechanism for raising new legal theories to reach the end result desired by the moving party. Estate of Quick, 110 T.C. at 44142; Stoody v. Commissioner, 67 T.C. 643, 644 (1977); Robin Haft Trust, 62 T.C. at 147.

2. The Court fully considered — and rejected — petitioner's erroneous argument that Dr. Newlon's CPM “violates the Treasury Regulations by failing to credit the Supply Points' valuable intangibles and marketing contributions.”

Petitioner contends that the Court erred by not recognizing the value of the Supply Points' valuable intangibles and marketing contributions. Pet'r Mot. Recons. § II. Petitioner bases its claim on the same faulty arguments and misconstrued facts presented in its pretrial memorandum and briefs.

Petitioner argues that the Court erroneously concluded the Supply Points owned no intangibles and were not otherwise entitled to any compensation for contributing to the value of TCCC's brands. Petitioner bases its argument on the erroneous conclusion that the Court failed to account for the Supply Points' intangibles and other contributions because it determined TCCC was the registered legal owner of virtually all trademarks and other intangible assets. Pet'r Mot. Recons. 51. Petitioner further claims the Supply Points are entitled to keep premium profits when their marketing efforts result in increased sales. Pet'r Mot. Recons. 53. Petitioner argues that Dr. Willig and Dr. Cragg's analyses appropriately considered and accounted for the Supply Points' investments. Pet'r Mot. Recons. 53.

Petitioner presented extensive arguments on the Supply Points' alleged marketing intangibles in its previous filings. See Pet'r Opening Br. 517-23; Pet'r Answering Br. 63-66. Here, petitioner once again ignores the Company's legal structure when making this argument. Petitioner conflates Supply Points with business units (“BU”) and inappropriately imputes terms, such as long-term rights, that are not present in the intercompany licenses at issue. Petitioner also fails to acknowledge that by using independent Bottlers as comparables, Dr. Newlon's CPM compensates the Supply Points for any intangibles they may have owned. Bottlers owned more intangibles than the Supply Points, and based on the CPM, Supply Points were allocated — and indeed compensated with — a return comparable to that of the Bottlers. Resp't Opening Br. 326-27; Resp't Answering Br. 648-50, 674-79; Resp't Resp. to Pet'r Reply Br. 5-9; Coca-Cola Co., 155 T.C. No. 10, slip op. at 186-90.

The Court thoroughly considered and rejected petitioner's claim that the Supply Points held intangibles producing a return exceeding the CPM's results. Coca-Cola Co., 155 T.C. No. 10, slip op. at 150-75. The Court determined that the Supply Points did not own valuable marketing intangibles because “TCCC was the registered legal owner of virtually all of the trademarks and other intangibles,” and“the supply points played no role in arranging consumer marketing and had no voice in selecting or evaluating the services for which they were thus financially made. In essence, they were passive recipients of charges that HQ and BU leadership put on their books.” Id. at 152. The Court scrutinized the rights given to the Supply Points under their various licensing agreements in reaching its conclusion. Id. at 152-75. The Court found that “TCCC exercised its freedom to adopt contract terms that furthered a central element of its corporate strategy — to centralize ownership of its 'crown jewels' in the U.S. parent and to ensure their protection under U.S law” and that “[t]he supply points enjoyed none of the privileges and protections that a genuine long-term licensee enjoys.” Coca-Cola Co., 155 T.C. No. 10, slip op. at 165, 173.

3. The Court fully considered — and rejected — petitioner's erroneous argument that the Supply Points' goodwill created an intangible asset.

Petitioner argues that the Court failed to account for the Supply Points' ownership of goodwill. Pet'r Mot. Recons. 58-60. This is another rehashed argument. Petitioner previously argued that Dr. Newlon's CPM did not consider a variety of intangibles owned by the Supply Points, including goodwill. Pet'r Opening Br. 441-42; Pet'r Answering Br. 41 n.32, 117. Petitioner offered expert testimony based on the theory that the Supply Points owned and created valuable goodwill. Tr. 7614 (Reams). Respondent disputed petitioner's claims. Resp't Opening Br. 474-76; Resp't Answering Br. 177, 209-10, 455, 654, 675-77.

The Court previously considered and rejected petitioner's claim that the Supply Points owned valuable goodwill. The Court found that TCCC, not the Supply Points, owned “virtually all” the intangible property including the trademarks and any goodwill generated by the Bottlers' use of the trademarks. Coca-Cola Co., 155 T.C. No. 10, slip op. at 59, 107, 116. As to petitioner's remaining arguments, the Court rejected petitioner's expert's opinion — which was based on the theory that the Supply Points owned and created valuable goodwill — as not persuasive. Id. at 191, 208. It further noted that petitioner cited “no authority for the proposition that ordinary corporate goodwill should be treated as an 'intangible asset' for purposes of analysis under section 1.482-4(b).” Id. at 159 n.47.

Petitioner's arguments on reconsideration assume the Supply Points owned valuable goodwill — a fact the Court did not accept. And, as stated, motions for reconsideration are not the place to raise new legal theories or arguments that could have been previously raised.

4. The Court did not err in relying on the Danielson rule.

Petitioner argues that the Court erred in relying on the Danielson rule to determine that the Supply Points did not have any valuable marketing intangibles because no written contracts recognized those intangibles. Petitioner claims that the Danielson rule does not apply here because: (1) it only applies where the taxpayer argues against the form of its contracts, not where respondent argues against the form of the contract; (2) it does not stand in the way of contract interpretation; and (3) it does not apply to contracts between related parties. Pet'r Mot. Recons. 61-63. Petitioner's claims are based on unsupported facts and rehashed legal arguments.

First, petitioner asserts that respondent is arguing against the form of the intercompany agreements. But it is petitioner, not respondent, that is attempting to rewrite its agreements by imputing terms that combine the activities of Supply Points and BUs and create ownership rights in marketing intangibles for the Supply Points. In contrast, respondent respected the terms of the Supply Point agreements as written and proved that petitioner's conduct matched the agreements by regularly shifting production without compensating the Supply Points for any lost profits. Resp't Opening Br. 377-86. The Court has previously rejected petitioner's argument that the Supply Points and BUs should be viewed together as “the Field.” Coca-Cola Co., 155 T.C. No. 10, slip op. at 100.

Second, petitioner repeats its old argument that Danielson does not apply in the section 482 context. Petitioner argued extensively in its answering brief that the Danielson rule was inapplicable in the context of a controlled section 482transaction. Pet'r Answering Br. 44-46. The Court found that petitioner did not cite to any Tax Court or appellate authority that stands for the proposition. Coca-Cola Co., 155 T.C. No. 10, slip op. at 164. The Court further stated that nothing in the transfer pricing regulations supports the notion that a taxpayer can set aside unambiguous terms of a related party agreement. Id.

Finally, petitioner's argument that the Danielson rule does not stand in the way of contract interpretation is a new legal argument and is inapplicable to the facts in this case. Contract interpretation only comes into play with an ambiguous contract, otherwise the plain language controls. See Simpson v. Simpson, 68 So. 3d 958, 961 (Fla. 4th D.C. 2011); Johnson v. Cervera, 508 So. 2d 257, 258-59 (Ala. 1987). Here, petitioner neither alleged, nor did the Court find that petitioner's contracts were ambiguous. Pet'r Mot. Recons. 62; Coca-Cola Co., 155 T.C. No. 10, slip op. at 164. Thus, petitioner's latest argument fails for two reasons: (1) it is a new legal argument that could have been raised previously and thus, it is not appropriate for a motion for reconsideration; and (2) it is inapplicable to the facts of the case.

5. The Court did not err in its reasoning regarding the Supply Points' marketing activities.

Petitioner argues that the Court erred when reasoning that Supply Points did not bear risk for their marketing expenses and should not be credited with them because they had no legal obligation to make them. Pet'r Mot. Recons. 63-66. In support, petitioner contends the Court ignored agreements that required Supply Points to pay marketing expenses and that the regulations support an inference that when a party spends money without legal obligation it does so for its own benefit. Pet'r Mot. Recons. 63-64. Petitioner further contends that the Court erred in concluding that the Supply Points' marketing expenses had no grounding in operational reality. Pet'r Mot. Recons. 64-65.

These arguments repeat petitioner's contentions in its briefs. Petitioner previously argued that the Supply Points bore risk for the success and failure of the consumer marketing they reimbursed. Pet'r Opening Br. 501-02; Pet'r Answering Br. pp. 63-65. Petitioner also requested findings of fact that the service agreement between Atlantic Industries and The Coca-Cola Export Corporation and the intercompany charge mechanism obligated the Supply Points to reimburse the Service Company marketing charges. Pet'r Opening Br. PFF ¶¶ 554-58. Respondent refuted these arguments. Resp't Opening Br. 389-95.

The Court previously rejected petitioner's findings and arguments. Coca-Cola Co., 155 T.C. No. 10, slip op. at 55, 131-32, 151-52. The Court noted that petitioner pointed to no document in the record where any Supply Point (except perhaps the Ireland Supply Point) explicitly agreed to bear financial responsibility for those charges. The Court also found that “[t]he supply points played no role in arranging consumer marketing and had no voice in selecting or evaluating the services for which they were thus made financially responsible. In essence they were passive recipients of the charges that [TCCC] and BU leadership put on their books.” Coca-Cola Co., 155 T.C. No. 10, slip op. at 152. Additionally, Dr. Newlon gave the Supply Points full credit for their consumer marketing expense when calculating their net operating profit. Coca-Cola Co., 155 T.C. No. 10, slip op. at 168.

6. The Court did not err in its reasoning regarding the intercompany contracts.

Petitioner contends the Court erred when it concluded the Supply Point agreements were terminable at will and conferred no territorial exclusivity. Additionally, petitioner contends the Court erred by ignoring risk and course of conduct in its comparability analysis. Pet'r Mot. Recons. 66-67.

Once again petitioner rehashes previous arguments. In its briefs, petitioner argued that the licenses were effectively exclusive and long term. Pet'r Opening Br. 16, 484-95; Pet'r Answering Br. 50-52. Petitioner also alleged that course of dealing was important to understanding the Supply Points' rights under their agreements and that the Supply Points bore essentially all risk. Pet'r Opening Br. 366, 486-92. Respondent countered petitioner's claims. Resp't Opening Br. 38385, 389-92; RF¶¶ 357, 359.

The Court considered petitioner's argument and found the Supply Point agreements were non-exclusive and short-term. Coca-Cola Co., 155 T.C. at No. 10, slip op. at 46-47, 123, 193-94. In finding that no Supply Point was granted exclusive territorial rights, the Court looked to petitioner's conduct showing “dozens of production shifts among supply points between 1980 and 2011” that were largely uncompensated. Id. at 47. It also evaluated the risks borne by the Supply Points and found that they faced similar risks as the Bottlers — the comparable companies used in Dr. Newlon's CPM. Coca-Cola Co., 155 T.C. No. 10, slip op. at 121-33.

7. The Court did not err in denying the Supply Points ownership of marketing intangibles worth billions of dollars.

Petitioner argues that the Treasury Regulations entitle the party who bears the marketing activities' cost with the resulting increase in the intangibles' value — even if it pays another party to provide some of those activities. Pet'r Mot. Recons. 69. Petitioner claims the Court ignored the Supply Points' marketing expenditures. Id.

Petitioner rehashes its previously proposed factual findings and arguments. In its opening brief, petitioner asserted that outsourcing business functions to Service Companies does not change the fact that the Supply Points funded these activities and bore the associated risks. Pet'r Opening Br. PFF ¶ 719. Petitioner also mischaracterizes the Court's Opinion. The Court held that petitioner had not met its burden to prove that the Supply Points owned marketing intangibles worth billions of dollars or that money spent on consumer advertising, without more, gives rise to freestanding intangible assets. Coca-Cola Co., 155 T.C. No. 10, slip op. at 167-68. The Court found that Dr. Newlon gave the Supply Points full credit for the consumer marketing expense when he calculated their net operating profit. Id. Thus, petitioner's claim that the Court dismissed the Supply Points' marketing expenditures is erroneous.

8. Petitioner rehashes its argument that Dr. Newlon's CPM is the wrong method as a matter of law.

Petitioner argues the Court erred in affirming respondent's use of Dr. Newlon's CPM because the Court ignored the Supply Points' valuable intangibles and that the Supply Points and Bottlers were not comparable. Pet'r Mot. Recons. 69-73. These were petitioner's primary arguments in its previous filings. Pet'r Opening Br. 409-41; Pet'r Answering Br. 63-74. Respondent has disputed, and the Court rejected, petitioner's arguments. Resp't Opening Br. 306-41, 386-409; Resp't Answering Br. 654-93; Coca-Cola Co., 155 T.C. No. 10, slip op. at 109-43, 150-71.

Because petitioner's Motion for Reconsideration arguments are either rehashed arguments from its earlier filings or new, previously available arguments, the Court should deny petitioner's Motion for Leave. Even if the Court were to consider petitioner's new arguments, it would find that petitioner has produced meritless claims based on faulty facts.

D. The fact that new attorneys allegedly brought “new legal theories” to petitioner after the Opinion was issued is not good cause for filing the motion for reconsideration out of time and demonstrates that petitioner is “tendering new legal theories to reach the end result desired by the moving party,” for which reconsideration is not the appropriate forum.

The Court's Order presents the following question:

To the extent the Motion for Reconsideration is regarded as “tendering new legal theories to reach the end result desired by the moving party,” id. at 441-442, is it relevant that these theories were apparently brought to petitioner's attention by new attorneys it engaged after the Opinion was issued?

To the extent the petitioner's Motion for Reconsideration tenders new legal theories to reach petitioner's desired end result, the fact that new attorneys brought these arguments does not impact the decision whether to grant the Motion for Reconsideration. If new counsel operates as an exception to principles of finality in litigation, they would lose meaning because taxpayers — at least wealthy ones — could always hire new counsel for purposes of obtaining a “re-do.”

In Finnegan v. Commissioner, 926 F.3d 1261 (11th Cir. 2019), aff'g T.C. Memo. 2016-188, the taxpayer's new attorneys filed a motion for reconsideration making new legal arguments. The taxpayer's new counsel argued that a case relied upon by the Court was incorrectly decided based on a Federal Circuit opinion that had criticized the cited case. Thus, taxpayer's counsel alleged the Court made an error of law. Order, Finnegan v. Commissioner, No. 8637-13 (Oct. 3, 2016) (Docket Entry #56). The Court denied taxpayer's motion for reconsideration on the following grounds: (1) the Federal Circuit opinion was not binding authority and was distinguishable from the case currently before the court; (2) a motion for reconsideration is not the proper mechanism to raise new legal theories; and (3) taxpayers had multiple chances to challenge the case relied upon but chose not to. Id.

The Eleventh Circuit upheld the Tax Court's denial of taxpayer's motion on the basis that taxpayer waived the potential new argument by not raising it in the lower court. The Eleventh Circuit stated that it “cannot allow [taxpayers] to argue a different case from the case [they] presented to the [lower] court.” Finnegan, 926 F.3d at 1270-73.

If petitioner is viewed as making new legal arguments, the fact that petitioner retained new counsel for that purpose is irrelevant. Petitioner never alleges that these new legal theories were unavailable during this case's lengthy briefing process.⁶ Thus, this case would fall squarely within the Eleventh Circuit's holding in Finnegan. Petitioner waived its new legal arguments by not raising them before the Opinion was issued, and petitioner should not be allowed to blindside the respondent by raising new, never-before-presented legal theories in a motion for reconsideration.

E. Granting petitioner's Motion for Leave would be futile because its new legal theories are meritless.

The Court's Order presents the following question:

Would granting petitioner's Motion for Leave be futile because its new legal theories are meritless? In making that assessment the following may be relevant:

(a) Petitioner relies on the 1996 closing agreement and IRS forbearance in subsequent audit activity in contending that the 20072009 examination resulted in impermissible retroactivity. As noted above, our Opinion concluded that petitioner, in advancing this argument, was attempting to “estop the Government on the basis of a promise that the Government did not make.” 155 T.C. at (slip op. at 98). The term “estoppel” does not appear anywhere in petitioner's Motion for Leave or in its Motion for Reconsideration. We would appreciate hearing respondent's view as to whether petitioner's argument is in essence an estoppel argument and (if so) how that argument should be evaluated under Eleventh Circuit and Supreme Court case law.

(b) Petitioner contends that respondent's change of position is “arbitrary and capricious” under the APA, relying on case law governing judicial review of agency action. In this case the Court is not reviewing agency action, but rather is redetermining petitioner's tax liability by conducting a trial de novo. We welcome respondent's views as to what relevance (if any) APA “arbitrary and capricious” principles have in a deficiency case such as this.

(c) Petitioner argues that the outcome of the 2007-2009 examination was unconstitutionally “retroactive.” However, we find in petitioner's Motion for Reconsideration very little discussion of appellate and Supreme Court authority addressing retroactivity in the tax law. We would appreciate hearing respondent's views on this point.

Granting petitioner's Motion for Leave would be futile because its new legal theories are meritless and merely serve to support previously spumed arguments. The Court rejected petitioner's argument that the Closing Agreement caused petitioner to believe respondent would continue to limit his discretion under section 482 for post-1995 tax years, and would adhere to the 10-50-50 formula indefinitely, and that respondent was somehow precluded from applying the CPM for petitioner's 2007-2009 tax years. See discussion supra Part II.C.l. In support of these rejected arguments, petitioner's new legal theories — based on the APA and the Due Process Clause of the Fifth Amendment — do not apply to closing agreements or respondent's proper exercise of his section 482 discretion. Petitioner wrongly asserts that the Court should have applied the APA's arbitrary-and-capricious standard to review the Commissioner's section 482 notice of deficiency determination and treat it as an agency action under administrative law. Petitioner erroneously conflates the Closing Agreement with a binding ruling or regulation when it argues that respondent's section 482 allocations were unconstitutionally “retroactive.” Petitioner, therefore, has not identified any error in respondent's section 482 determination for petitioner's 2007-2009 tax years.

1. Even if equitable estoppel could be asserted against the government, petitioner has not established that respondent engaged in affirmative misconduct and that it satisfied the traditional elements for equitable estoppel — the minimum required under Eleventh Circuit and Supreme Court case law.

In its Motions, petitioner argues that it had so-called “reliance interests” on the continuing application of the Closing Agreement's 10-50-50 formula, and on the language in the Closing Agreement itself. Petitioner therefore contends it was unlawful for respondent to apply the CPM to petitioner's 2007-2009 years because it is a different transfer pricing method. While petitioner never used the term “estoppel” in its post-trial briefs or in its Motions to support this position,⁷ it essentially makes the same argument that the Court previously rejected when it concluded that “petitioner cannot estop the Government on the basis of a promise that the Government did not make.” Coca-Cola, 155 T.C. No. 10, slip op. at 98. In its post-trial briefs, petitioner tried to establish the elements of estoppel. Petitioner proposed findings asserting that the existence of the Closing Agreement and the non-exercise of respondent's section 482 discretion for the 1996-2006 tax years caused petitioner to believe that respondent would continue to limit his discretion. And petitioner specifically asserted that it had relied on respondent's continued non-exercise of his section 482 discretion. Pet'r Opening Br. 6, 17,494-95, PFF 608, 628, 631-32; see also discussion supra Part II.C.1.

As respondent stated in his post-trial briefs,⁸ equitable principles such as estoppel do not apply against the government on the same terms as private litigants. U.S. Commodity Futures Trading Comm'n v. S. Trust Metals, Inc., 894 F. 3d 1313, 1323 (11th Cir. 2018) (citing Heckler v. Cmty. Health Servs., 467 U.S. 51, 60 (1984)); Bokumv, Commissioner, 992 F.2d 1136, 1141 (11th Cir. 1993). Courts seldom apply equitable doctrines against the government, and where such doctrines are applied, the courts must use caution and restraint. Office of Pers. Mgmt, v. Richmond, 496 U.S. 414, 419-23 (1990); Estate of Emerson v. Commissioner, 67 T.C. 612, 617 (1977).

The Supreme Court has never held that equitable estoppel could be applied against the government and it has implied that it cannot be.⁹ Tolvar-Alvarez v. U.S. Attorney General, 427 F.3d 1350, 1353 (11th Cir. 2005); Tefel v. Reno, 180 F.3d 1286, 1302 (11th Cir. 1999); Office of Pers. Mgmt., 496 U.S. at 411. But, if estoppel could be applied against the government, the Eleventh Circuit has held that a showing of affirmative misconduct is required, in addition to demonstrating the traditional elements of estoppel. Tolvar-Alvarez, 427 F.3d at 1354; United States v. McCorkle, 321 F.3d 1292, 1297 (11th Cir. 2003); Tefel, 180 F.3d at 1303. Indeed, the Eleventh Circuit has stated that the “Supreme Court's decisions indicate that even if estoppel is available against the Government, it is warranted only if affirmative and egregious misconduct by government agents exists.” Sanz v. U.S. Sec. Ins. Co., 328 F.3d 1314, 1319-20 (11th Cir. 2003) (emphasis added).

As stated in respondent's post-trial briefs and the Court's Opinion, petitioner recycles a meritless argument because, even if estoppel could be applied against the government: (1) the Closing Agreement did not bind the parties to a particular transfer pricing method for post-1995 tax years; (2) respondent did not engage in any misconduct when he applied the CPM to petitioner's 2007-2009 tax years; and (3) petitioner cannot demonstrate that the traditional elements of estoppel apply. Even petitioner acknowledges that respondent was entitled to prospectively change his position on the appropriate transfer pricing method for petitioner's 2007-2009 tax years and that the Closing Agreement did not prevent respondent from making section 482 adjustments for those tax years. Pet'r Mot. Recons. 6; Resp't Mot. Partial. Summ. J., exh. B. (Response to Request No. 1).

a. The Closing Agreement did not bind the parties to a particular transfer pricing method for tax years after 1995.

As a preliminary matter, the terms of the Closing Agreement did not provide for the prospective application of the 10-50-50 formula as the best method under Treas. Reg. § 1.482-1(c). Third Stip. ¶ 309.h.; Ex. 242-J at 9191, 9207-9 (¶¶1, 10). Therefore, the terms of the Closing Agreement did not bind the parties to a particular transfer pricing method in tax years after 1995, and respondent was free to exercise — or not exercise — his discretion under section 482.

Closing agreements are derived from section 7121 and Treas. Reg. § 301.7121-1, and the scope of a closing agreement is limited by the matters agreed upon in the closing agreement itself. Analog Devices, Inc, v. Commissioner, 147 T.C. 429, 446-47 (2016) (stating that the “scope of a closing agreement is therefore strictly construed to encompass only the issues enumerated in the closing agreement itself'); Ellinger v. United States, 470 F.3d 1325, 1336 (11th Cir. 2006) (citing Klein v. Commissioner, 899 F.2d 1149, 1152 (11th Cir. 1990)) (“[C]losing agreements are exclusive and are to be strictly construed”). “Only matters specifically spelled out in a closing agreement as being resolved will be treated as settled.” Geringer v. Commissioner, T.C. Memo. 1991-32 (citing Zaentz v. Commissioner, 90 T.C. 753 at 766 (1988)); see also Coca-Cola, 155 T.C. No. 10, slip op. at 94 (“Under section 7121 a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing agreement”) (internal citations omitted); Estate of Duncan v. Commissioner, T.C. Memo 2016-204 (refusing to read into the agreement an alleged implicit representation); Janow v. Commissioner, T.C. Memo. 1998-94, aff'd, 172 F.3d 38 (2d Cir. 1999) (finding that if the Service and the taxpayer intended to settle an item, they would have included specific language to that effect).

Nowhere in the Closing Agreement does it state that the parties agreed to the 10-50-50 formula for years after 1995. The Closing Agreement specifically limits such determination to tax years 1987 through 1995. To find that the Closing Agreement contained provisions relating to the 10-50-50 formula for years after 1995 would be to read terms into the Closing Agreement that simply do not exist and would contradict existing case law. See Analog Devices, 147 T.C. at 445.

Furthermore, under general contract principles, a court will only look within the “four comers” of a closing agreement when interpreting it. Vail Resorts Inc, v. United States, 108 A.F.T.R.2d 2011-5133 (D. Colo. 2011) (citing Rink v. Commissioner, 47 F.3d 168 (6th Cir. 1995)). Therefore, if nothing within the Closing Agreement's “four comers” says anything about the transfer pricing method that was to apply for post-1995 tax years, then the Closing Agreement has no bearing on the best method for those years.

Here, the Closing Agreement's terms reflected the settlement of petitioner's 1987-1995 tax years through the agreed-upon 10-50-50 formula — which determined petitioner's “Product Royalty” for those years, not for tax years after 1995. Third Stip. ¶¶ 307, 308, 309.b.; Ex. 242-J at 9191-93. As noted previously, the fact that respondent did not exercise his discretion under section 482 and did not challenge petitioner's use of the 10-50-50 formula for the 1996-2006 tax years did not create new terms in the Closing Agreement or bind respondent to that formula for tax years after 1995. Petitioner chose to base its reporting position for years following 1995 on the terms of the Closing Agreement, but neither respondent nor petitioner was bound to follow the Closing Agreement for those years. The Closing Agreement limited respondent's ability to assert penalties, not respondent's ability to challenge the pricing under section 482 for years after 1995.

In its Motion for Reconsideration, petitioner argues that the Court's failure to consider the “arm's length” recital was erroneous. Petitioner argues that a natural place for such a determination is in the recitals and that the recitals provide “definitive evidence of intent of the parties” citing to Am. Nat'l Bank of Jacksonville v. FDIC, 710 F.2d 1528,1534 (11th Cir. 1983). Pet's Mot. for Recons. 27. But recitals are distinct from determinations contained within a closing agreement and are not binding upon the parties. See Estate of Magarian, 97 T.C. 1, 5 (1991) (“[a]lthough the premises in a closing agreement are helpful for interpreting the agreement, section 7121 does not bind the parties as to those premises”); Analog Devices, 147 T.C. at 445 (“[a]ny recitals in a closing agreement are not binding on the parties”); Rev. Proc. 68-16, § 6.05, 1968-1 C.B. 770 at *26 (noting the importance of distinguishing between matters which are merely informative and explanatory and matters which are being agreed upon by including introductory recitals as “WHEREAS” clauses and matters being agreed upon as determination clauses). As the Court stated in its Opinion, “[t]he only mention of 'arm's length' in the closing agreement appears in a preliminary recital, which is not binding on the parties.” Coca-Cola, 155 T.C. No. 10, slip op. at 95. Further, the recital clause containing the “arm's length” language limits the clause to tax years 1987 to 1995. This is consistent with the determination clauses in the Closing Agreement. These things, taken together, all show the parties' intention: that the 10-50-50 formula only applied for tax years 1987 through 1995. The terms of the Closing Agreement did not provide for the prospective application of the 10-50-50 method.

This Court properly found that there is no evidence in the Closing Agreement that respondent agreed to implement an indefinite future application of the 10-50-50 formula.¹⁰ Coca-Cola, 155 T.C. No. 10, slip op. at 94. And as the Court correctly stated in its Opinion, “the agreement specifically recognizes the possibility that the IRS might make transfer pricing adjustments for years after 1995.” Id. at 97. Petitioner admitted this in its Motion for Reconsideration, stating “[o]f course, the Closing Agreement did not expressly require Coca-Cola to use the 10-50-50 method. . . .” Pet'r Mot. Recons. 28 n.7. Yet, in its argument, petitioner continually focuses on the Closing Agreement's application to years after 1995, arguing that the acceptance of the 10-50-50 method in the past and the prospective penalty relief contained within the Closing Agreement somehow indicate that the 10-50-50 formula could apply indefinitely. But, as this Court specifically noted in its Opinion, the provisions of the Closing Agreement demonstrate that “the parties knew how to make the closing agreement conclusive for future years when they wished to do so.” Id. at 97. Here, however, the parties did not decide whether the application of the 10-50-50 formula for years after 1995 was appropriate. Because the Court must limit its interpretation of the Closing Agreement to the matters specifically agreed upon, petitioner's argument that the application of 10-50-50 should apply indefinitely must fail.

b. Respondent engaged in no misconduct by applying the CPM to petitioner's 2007-2009 tax years because the Closing Agreement does not state the transfer pricing method that was to apply for tax years after 1995.

Petitioner cannot evidence that respondent engaged in any misconduct, much less affirmative and egregious misconduct. Petitioner purports that it was unlawful for respondent to “retroactively” impose the CPM because of petitioner's “reliance interests” in the continued application of the 10-50-50 formula. Petitioner claims its reliance interests were created by the Closing Agreement and reinforced by respondent's course of conduct, i.e., respondent's non-exercise of its discretion under section 482 for the 1996-2006 tax years.

The Closing Agreement does not specify the transfer pricing method to be applied in post-1995 tax years, or require respondent to apply or accept the the 1050-50 method for petitioner's 2007-2009 tax years. Because the Closing Agreement's formula is not binding on the parties for post-1995 tax years, including petitioner's 2007-2009 tax years, respondent cannot have engaged in misconduct when he exercised his discretion under section 482.

Indeed, petitioner has acknowledged that respondent was entitled to prospectively change his position on the appropriate transfer pricing method for petitioner's 2007-2009 tax years (Pet'r Mot. Recons. 6) and that the Closing Agreement did not prevent respondent from making section 482 adjustments for these years. Resp't Mot. Partial. Summ. J., exh. B. (Response to Request No. 1); see also Order dated Sept. 7, 2017, denying Resp't Mot. Partial Summ. J. (docket entry #80) (“Petitioner does not contend that the 1996 closing agreement prevented the IRS from making the $3.3 billion transfer-pricing adjustment at issue”).¹¹

Accordingly, petitioner has no plausible argument that respondent's application of the CPM to petitioner's 2007-2009 tax years — based on the exercise of his discretion under section 482 and his determination of the best method in accordance with Treas. Reg. § 1.482-1(c) — constitutes misconduct of any kind.

c. Petitioner cannot establish the traditional elements of estoppel.

To demonstrate the traditional elements of estoppel, in the Eleventh Circuit, a party must prove “(1) words, acts, conduct or acquiescence causing another to believe in the existence of a certain state of things, (2) willfulness or negligence with regard to the acts, conduct or acquiescence; and (3) detrimental reliance by the other party upon the state of things so indicated.” Sidman v. Travelers Cas. & Sur„ 841 F.3d 1197,1204 n.10 (11th Cir. 2016).

In addition to failing to demonstrate that respondent engaged in misconduct, petitioner cannot demonstrate the traditional elements for equitable estoppel. As stated above, the terms of the Closing Agreement did not bind the parties to the 1050-50 formula in post-1995 tax years; therefore, no words or conduct — or willfulness or negligence with regard to such conduct — would have caused petitioner to believe that the Closing Agreement limited respondent's discretion. Petitioner had no legitimate “reliance interests” in believing that the IRS would adhere to the 10-50-50 method indefinitely because the Closing Agreement made clear that future transfer pricing adjustments were possible. Coca-Cola, 155 T.C. No. 10, slip op. at 97. Further, there can be no detrimental reliance because each tax year stands on its own: respondent's position in one year does not bind respondent in a subsequent tax year and IRS audit procedures do not require respondent to provide notice of any purported change in position.

i. Each tax year stands on its own such that respondent's position in one year cannot bind respondent in subsequent tax years.

It is black-letter-tax law that each tax year stands on its own, and that respondent, in his discretion, may reallocate income under section 482. See Knight-Ridder Newspapers, Inc, v. United States, 743 F.2d 781, 793 (11th Cir. 1984) (holding that the Commissioner's consent to a reporting position in an earlier year “cannot bind his hand in perpetuity” or waive the discretionary power given to the Commissioner by Congress).

The provisions of the Closing Agreement and the Commissioner's position during the audits of petitioner's returns for past tax years have no bearing on the correctness of the returns for petitioner's 2007-2009 tax years. The simple reason for this is that the Commissioner's mistakes or failures in adjusting prior tax returns should not bind the Commissioner by preventing him from correcting subsequent tax returns. “[N]either the duty of consistency, nor the principles of equitable estoppel . . . preclude [the Commissioner] from correcting mistakes of law in the imposition and computation of tax liability[.]” Massaglia v. Commissioner, 286 F.2d 258, 262 (10th Cir. 1961).¹²

The Tax Court, like the IRS, examines each taxable period, and each return separately, and only considers other taxable periods as may be necessary to redetermine the deficiency for the taxable period in question. I.R.C. § 6214(a). Therefore, whether respondent applied the CPM in earlier years has no bearing on the correctness of applying the CPM in petitioner's 2007-2009 tax years. See Dickman v. Commissioner, 465 U.S. 330, 343 (1984) (“it is well established that the Commissioner may change an earlier interpretation of the law”).

ii. Respondent had no requirement to provide notice of any purported change in position, and petitioner's argument that any such notice was required mischaracterizes IRS audit procedures.

Petitioner asserts that respondent failed to notify petitioner of any change in transfer pricing method. Pet'r Mot. Recons. 2, 6, 17. But respondent was not required to notify petitioner that respondent might apply a different transfer pricing method for post-1995 tax years because the terms of the Closing Agreement did not contain any notice requirement. Third Stip. ¶ 309.h. Furthermore, petitioner disregards IRS audit procedures by contending that respondent “switched its position without any notice or change in the facts or law” and therefore respondent could not apply the CPM to tax years 2007-2009. Pet'r Mot. Recons. 2. Standard IRS audit procedures, as codified and established in case law, do not require such notice.

The Commissioner has no duty to respond to a taxpayer's return positions until he completes the audit. See, e.g„ Dixon v. United States, 381 U.S. 68, 76 (1965) (finding “[t]he absence of notice does not prove an abuse” when the IRS has determined a need for a “correction of the underlying mistake of law”); Rocovich v. United States, 18 Cl. Ct. 418,425 (1989), aff'd, 933 F.2d 991 (Fed. Cir. 1991) (holding that the IRS had no duty to respond to the taxpayer's return position until after an audit); Allred v. Commissioner, T.C. Memo. 2014-54, at *4 (finding that the taxpayer's estoppel argument failed because the Commissioner had no duty to notify taxpayers of noncompliance with statutory requirements).

Because each tax year stands on its own, nothing in the Code requires the Commissioner to find a change in facts or law to determine that a return is incorrect, even if the Commissioner did not make adjustments to a prior, similar return. See Pekar v. Commissioner, 113 T.C. 158, 166 (1999) (stating that “[ taxpayers have no right to continue a prior tax treatment that was wrong either on the law or under the facts” because each year stands on its own). Returning to basics, the system of self-assessment largely forms the basis of the American scheme of income tax. Commissioner v. Lane-Wells Co., 321 U.S. 219, 223 (1944). The IRS is authorized by statute to perform its examination function “for the purpose of ascertaining the correctness of any return . . ., [and] determining the liability of any person for any internal revenue tax.” I.R.C. § 7602(a) (describing the Commissioner's summons authority). If the IRS determines a deficiency — in general, the amount of liability that exceeds “the amount shown as the tax by the taxpayer upon his return,” (I.R.C. § 6211(a)) — the Commissioner is authorized to send a notice of such deficiency to the taxpayer within the relevant period of limitations. I.R.C. §§ 6212(a), 6501(a). Nothing in the Code requires any other notice or a finding of any change in facts or law to make a deficiency determination.

Accordingly, petitioner's estoppel argument fails in every respect. The Closing Agreement says nothing about the transfer pricing method to apply for post-1995 tax years, and therefore respondent was free to exercise — or not exercise — its discretion under section 482 for post-1995 tax years; petitioner failed to establish that respondent engaged in any misconduct, much less affirmative and egregious misconduct; and petitioner did not prove the traditional elements of estoppel. Because petitioner's estoppel argument in the underlying Motion for Reconsideration is meritless, granting petitioner's Motion for Leave would be futile.

2. The APA does not apply to Tax Court deficiency cases.

In arguing that petitioner had “reliance interests” on the continuing application of the 10-50-50 formula, petitioner asks the Court to apply the APA's arbitrary-and-capricious standard to review the Commissioner's section 482 notice of deficiency determination as an agency action under administrative law. But petitioner ignores the precedent that the Court is not subject to the APA, the issuance of a notice of deficiency is not an agency action, and the arbitrary-and-capricious standard related to respondent's section 482 determinations is not the same as that under the APA.

Petitioner argues that respondent's actions are “arbitrary and capricious . . . in the way that section 482, the Administrative Procedure Act, other statutes, and the Constitution itself prohibit.” Pet'r Mot. Recons. 21. But the Tax Court is not subject to the APA in a deficiency case, either in applying the APA's arbitrary-and-capricious standard to its review of respondent's notice determinations, or in otherwise reviewing a notice of deficiency as an agency action that must satisfy APA requirements. This includes providing a “reasoned explanation for departing from precedent or treating similar situations differently.” Pet'r Mot. Recons. 37. In addition, petitioner conflates the APA's arbitrary-and-capricious standard with the standard used to review the Commissioner's section 482 determinations.

a. The Court is not subject to the APA, and the notice of deficiency is not an agency action.

This Court in Ax v. Commissioner made clear that in deficiency cases, “the Tax Court is not subject to the Administrative Procedure Act.” 146 T.C. 153, 163 (2016) (citing O'Dwyer v. Commissioner, 266 F.2d 575, 580 (4th Cir.1959), aff'g 28 T.C. 698 (1957)).

The APA states:

Except to the extent that prior, adequate, and exclusive opportunity for judicial review is provided by law, agency action is subject to judicial review in civil or criminal proceedings for judicial enforcement.

5 U.S.C. § 704 (emphasis added).

This Court explained in Ax that such '“prior, adequate, and exclusive opportunity for judicial review' of a notice of deficiency was provided in the predecessor statutes to section 6213(a) — i.e., in section 272(a)(1) of the Internal Revenue Code of 1939, as in effect when the APA was enacted in 1946. By its terms, then, 5 U.S.C, sec. 704 thus left undisturbed the deficiency case regime.” 146 T.C. at 162. See also Chrobak v. United States, No. 17-CV-5189, 2 (E.D.N.Y. May 15, 2018) (“to the extent petitioner is seeking to challenge the assessment that the IRS has made against him pursuant to the Administrative Procedure Act, 5 U.S.C. § 702, 704, that Act does not apply to IRS assessments because the Internal Revenue Code has its own procedure for reviewing tax assessments”) (citing QinetiQ US Holdings, Inc. & Subs, v. Commissioner, 845 F.3d 555, 561 (4th Cir. 2017)). Proceedings in the Tax Court take place in “the unique system of judicial review provided by the Internal Revenue Code for adjudication of the merits of a Notice of Deficiency.” QinetiQ, 845 F.3d at 559; see I.R.C. § 6214; Eren v. Commissioner, 180 F.3d 594, 597 (4th Cir. 1999). Therefore, the APA does not apply to the Court's review of the notice of deficiency in this case, and the Court should disregard petitioner's argument.

Petitioner seeks to graft administrative case law onto this unique system of judicial review by treating the notice of deficiency as an agency action. The APA, however, defines “agency action” as “the whole or part of an agency rule, order, license, sanction relief, or the equivalent or denial thereof, or failure to act.” 5 U.S.C. § 551(13). A notice of deficiency is not a grant or denial of a license or sanction relief, or a failure to act. “Rules” and “orders” under the APA¹³ generally arise out of agency rulemaking and formal adjudications and are reviewed on a closed record confined to what the agency considered. See 5 U.S.C. §§ 551-59. But a notice of deficiency does not fall into either category and is reviewed de novo. Ax, 146 T.C. 153 at 161; O'Dwyer v. Commissioner, 266 F.2d 575, 580 (4th Cir. 1959).

A notice of deficiency applies current law in an individual determination without the intent of impacting law or policy in the future. See Neustar, Inc, v. FCC, 857 F.3d 886, 895 (D.C. Cir. 2017) (where an “individualized determination was not intended to impact law or policy,” such determination was not considered a rule). The IRS issues a notice of deficiency after a fact-intensive inquiry that proceeds on a case-by-case basis. See Busse Broad. Corp, v. FCC, 87 F.3d 1456, 1463-64 (D.C. Cir. 1996) (citing NLRB v. Bell Aerospace Co., 416 U.S. 267, 294, 94 S.Ct. 1757, 40 L.Ed.2d 134 (1974)) (“Given the fact-intensive nature of the Commission's role in these proceedings, it is surely within the agency's authority to proceed on a case-by-case basis rather than by rulemaking”). Therefore, a notice of deficiency does not resemble a “rule” under the APA in that the notice of deficiency results from the application of current law to a single taxpayer's facts.

A notice of deficiency, in contrast to either a “rule” or an “order,” “merely hails the taxpayer into” Tax Court, where the facts and law are considered de novo. Clapp v. Commissioner, 875 F.2d 1396, 1403 (9th Cir. 1989). As such, a notice of deficiency has been described as more “analogous to filing a civil complaint.” Id.; see also United States v. Gimbel, 782 F.2d 89, 93 (7th Cir. 1986) (notice of deficiency was not a final, irrevocable determination, so that its issuance did not moot summons). Therefore, the notice of deficiency lacks the finality of an “order.”

Although a notice of deficiency is not an agency action to which the APA's judicial review provisions apply under 5 U.S.C. § 702, petitioner asks the Court to review the notice of deficiency as an agency action under administrative law. For example, petitioner misplaces a reference to administrative law when it quotes W. Deptford Energy, LLC v. FERC, 766 F.3d 10, 20 (D.C. Cir. 2014), as stating, “'It is textbook administrative law that an agency must provide a reasoned explanation for departing from precedent or treating similar situations differently.'” Pet'r Mot. Recons. 37. But the Court of Appeals for the Fourth Circuit in QinetiQ flatly rejected the applicability of this APA requirement to notices of deficiency, holding “that the APA's requirement of a reasoned explanation in support of a final agency action does not apply to a Notice of Deficiency issued by the IRS.” 845 F.3d at 561.

Petitioner's argument that the APA's prohibition against arbitrary-and-capricious decisionmaking should be applied outside the context of the APA is also misplaced. The APA's arbitrary-and-capricious standard only applies to agency actions. Bowen v. Massachusetts, 487 U.S. 879, 902 n.35 (1988). As discussed above, notices of deficiency are not agency actions. The Court should therefore not only disregard the authorities cited by petitioner that rely on the APA specifically, but also those that otherwise ask the Court to review the notice of deficiency under the APA's arbitrary-and-capricious standard (e.g„ Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016); Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 156 (2012); FCC v. Fox Television Stations, Inc., 556 U.S. 502, 516 (2009); Nat'l Lifeline Ass'n v, FCC, 921 F.3d 1102, 1114 (D.C. Cir. 2019); ANR Storage Co. v. FERC, 904 F.3d 1020,1024 (D.C. Cir. 2018); LePage's 2000, Inc. v. Postal Regul. Comm'n, 674 F.3d 862, 866 (D.C. Cir. 2012); W. Deptford Energy, LLC v. FERC, 766 F.3d 10, 20 (D.C. Cir. 2014); Nat'l Ass'n of Indep. Television Producers & Distribs. v. FCC, 502 F.2d 249, 255 (2d Cir. 1974)).

Because the Court is not subject to the APA and the notice of deficiency is not an agency action, the Court should deny petitioner's requests to review the notice of deficiency under administrative law standards, including the APA's arbitrary-and-capricious standard and the requirement of reasoned explanation in support of a final agency action.

b. The Court conducts a de novo review in determining whether petitioner has proven that the Commissioner's 482 allocation was arbitrary and capricious.

Petitioner misstates the standard of review and the burden of proof that applies to this case. Petitioner confuses the standard under the APA with the standard used by the Court in reviewing the Commissioner's allocations under section 482, where “a taxpayer must establish that the Commissioner abused his discretion by making allocations that are arbitrary, capricious, and unreasonable.” Guidant LLC v. Commissioner, 146 T.C. 60, 73 (2016).

The Court of Appeals for the Seventh Circuit summarized Tax Court review in section 482 cases as follows: “the allocation should be upheld unless a de novo review of the facts shows it to be arbitrary, capricious or unreasonable.” Eli Lilly & Co. v. Commissioner, 856 F.2d 855, 861 (7th Cir. 1988). This statement encapsulates the de novo review standard that applies to deficiency cases, rather than the APA's arbitrary-and-capricious standard. Ax, 146 T.C. at 161 (“deficiency cases 'are subject to trial de novo'”); see also Gatlin v. Commissioner, 754 F.2d 921, 923 (11th Cir. 1985); Amazon.com, Inc. & Subs, v. Commissioner, 148 T.C. 108, 150 (2017), aff'd, 934 F.3d 976 (9th Cir. 2019) (“[t]he Commissioner has broad discretion in applying section 482, and we will uphold his determination unless the taxpayer shows it to be arbitrary, capricious, or unreasonable.”)

Rather than focus on carrying its burden of proof, petitioner seeks to have the Court review the Commissioner's adjustments for an abuse of discretion under 5 U.S.C. § 706(2)(A) (codifying the arbitrary-and-capricious standard of the APA), instead of the appropriate standard of review in section 482 deficiency cases. The Court should reject petitioner's attempt to apply the APA to this case.

3. The IRS's 2007-2009 deficiency determinations were not “retroactive” in a relevant constitutional sense.

Petitioner's complaint of unconstitutional retroactive action by the respondent fundamentally misstates the nature of closing agreements and IRS audit procedure. Petitioner alleges that respondent committed a “serious due process violation” (Pet'r Mot. Recons. 5, quoting PHH Corp, v. CFPB, 839 F.3d 1, 48 (D.C. Cir. 2016) (Kavanaugh, J.), reinstated in pertinent part on reh'g en banc, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc)) because “the IRS retroactively imposed a massive tax liability based on a new and previously unannounced standard with no warning, after having induced Coca-Cola to rely to its detriment on a different method.” Pet'r Mot. Recons. 35. Two incorrect assumptions premise this complaint: (1) that petitioner was entitled to rely on the Closing Agreement for tax years subsequent to those addressed in the Closing Agreement, and (2) that the IRS had somehow bound itself for future years with the Closing Agreement so that it had to “retroactively” change its standard in order to impose the CPM and determine a deficiency for petitioner's 2007-2009 tax years. Part II.E.1.a., c., above addresses these two incorrect assumptions.

Petitioner's complaint also fundamentally misstates what constitutes a constitutional violation by erroneously assuming that (1) a closing agreement is a published ruling or other type of authority or guidance interpreting the law that petitioner might have been entitled to prospectively rely on, and (2) appellate and Supreme Court authority addressing retroactivity in the tax law is applicable to respondent's exercise of its discretion under section 482 for petitioner's 2007-2009 tax years. The Commissioner did not retroactively apply a new ruling or regulation, or revoke a ruling, to determine deficiencies for petitioner's 2007-2009 tax years.

a. A closing agreement is not a binding ruling or any other guidance that petitioner might have been entitled to rely on for its 2007-2009 tax years.

Leaving aside the reliance argument addressed above in Part II.E.1., petitioner's argument that respondent's actions were unconstitutionally “retroactive” assumes that the Closing Agreement's recital paragraph, that the 1050-50 formula was “arm's-length,” qualifies as a “ruling,” the revocation of which is limited by Treas. Reg. § 601.601(d)(2)(v)(c). Pet'r Mot. Recons. 35 (citing Estate of McLendon v. Commissioner, 135 F.3d 1017 (5th Cir. 1998)).

Petitioner elevates the provisions of the decades old Closing Agreement to a “standard previously established” (Pet'r Mot. Recons. 35), “prior agency guidance,” (id.) and a “ruling” that the IRS cannot “retroactively abrogate” (id.) under McLendon. But a closing agreement that only settles “matters specifically spelled out in [the] closing agreement” (Zaentz, 90 T.C. 753 at 766) cannot establish any standard or provide agency guidance on which taxpayers may rely with respect to matters not addressed by the agreement.

In addition to the fact that the court of appeals in McLendon did not decide that case on APA or constitutional law grounds, petitioner's reliance on McLendon demonstrates that it overextends the provisions in the Closing Agreement. The term “ruling” in McLendon was not used casually to simply mean any decision by the Commissioner. McLendon dealt with a revenue ruling, an official form of published guidance recognized as such by the IRS, that taxpayers are specifically authorized to rely on under Treas. Reg. § 601.601(d)(2)(v)(e) (“Taxpayers generally may rely upon Revenue Rulings published in the Bulletin in determining the tax treatment of their own transactions”). 135 F.3d at 1024 (citing Silco, Inc, v. United States, 779 F.2d 282, 286 (5th Cir. 1986)).

While revenue rulings are issued in response to specific facts for a particular taxpayer, they are written in a way to provide guidance to other taxpayers on the issue raised. Unlike revenue rulings, closing agreements only bind the parties who enter into them. I.R.C § 7121; Treas. Reg. § 301.7121-1; see also McKenny v. United States, 973 F.3d 1291, 1298 (11th Cir. 2020) (citing Ellinger, 470 F.3d at 1336 (finding closing agreement are binding on the parties who enter into them)); Philips v. Commissioner, 178 F.2d 270, 271 (3d Cir. 1949) (declining to enforce a closing agreement where the plaintiffs were “stranger to [the] agreement,” and stating that they could neither be “bound by it nor [could] they take advantage” of it).

A closing agreement for specific tax years concerning a specific taxpayer does not even reach the level of an unpublished ruling or decision, and cannot be compared to official published guidance in the form of a revenue ruling, especially when closing agreements only apply to the parties involved. See Treas. Reg. § 601.601(d)(1) (“No unpublished ruling or decision will be relied on, used, or cited by any officer or employee of the Internal Revenue Service as a precedent in the disposition of other cases”). Petitioner therefore has no grounds to assert an abrogation, retroactive or otherwise, of the Closing Agreement provisions, which gave no indication that petitioner could rely on them for future tax years.

As to petitioner's allegation of a due process violation under the Fifth Amendment, petitioner erroneously compares respondent's exercise of his discretion under section 482 to the actions of the Consumer Financial Protection Bureau (“CFPB”) in PHH Corp, v, CFPB, 839 F.3d 1 (D.C. Cir. 2016), and the Federal Communications Commission (“FCC”) in FCC v. Fox Television Stations, 567 U.S. 239 (2012). In PHH Corp., the United States Department of Housing and Urban Development (“HUD”) had issued official letters and a regulation interpreting the Real Estate Settlement Procedures Act (“RESPA”) to allow captive reinsurance arrangements. After Congress transferred authority for interpreting RESPA from HUD to the CFPB, the CFPB reversed course, filing an enforcement action against a lender in which it claimed that captive reinsurance arrangements violated RESPA. The Court of Appeals for the D.C. Circuit found that the CFPB's about-face violated due process because it contradicted “decades of carefully and repeatedly considered official government interpretations” of RESPA. PHH Corp., 839 F.3d at 42 (emphasis added).

Similarly, in Fox Television Stations, 567 U.S. 239, the FCC had issued official orders and “a policy statement 'intended to provide guidance to the broadcast industry'” on how the FCC intended to interpret the Public Telecommunications Act of 1992. Id. at 246 (emphasis added). The Supreme Court found that the FCC violated the Fifth Amendment when it issued notices of apparent liability to broadcasting companies for engaging in behaviors that were permissible under its prior interpretations of the Public Telecommunications Act. The Supreme Court found that the FCC violated the Fifth Amendment because its “lack of notice to Fox and ABC that its interpretation had changed” failed to provide fair notice of what was prohibited by the Public Telecommunications Act. Id. at 254.

In both PHH Corp, and Fox Television Stations, the reason the agency actions violated the Fifth Amendment was because they reversed officially-published agency interpretations of a statute. The regulation and letters in PHH Corp, and the policy statement and official orders in Fox Television Stations were announcements of the position the agency would take with respect to specific statutes and were intended to provide prospective guidance to the regulated parties. In contrast, the Closing Agreement merely settled the matters at issue in the Closing Agreement and was not an official policy statement intended to provide taxpayers guidance of the Commissioner's interpretation of section 482. Because the provisions of the Closing Agreement only applied to the years specifically addressed in the Closing Agreement and do not provide guidance for future years, there is no “retroactive switch” (Mot. Recons, at 34) that would give rise to a due process violation, even if the Closing Agreement constituted a “ruling.” Likewise, petitioner makes no specific allegations that the IRS made any affirmative statements that would induce petitioner to rely on the 10-50-50 formula or even indicated that the formula applied for future years. “The closing agreement says nothing whatever about the transfer pricing methodology that was to apply for years after 1995.” Coca-Cola Co., 155 T.C. No. 10, slip op. at 94.

b. Appellate and Supreme Court authority on retroactivity in the tax law does not apply here.

Appellate and Supreme Court authority addressing retroactivity in the tax law concerns circumstances where the Commissioner applies a new ruling, a new regulation, or a revocation of a ruling to prior tax years. See Auto. Club of Mich, v. Commissioner, 353 U.S. 180 (1957) (finding that the Commissioner may apply a revocation of a ruling retroactively); Anderson, Clayton & Co. v. United States, 562 F.2d 972 (5th Cir. 1977) (finding that the Commissioner may apply a regulation retroactively); Wendland v. Commissioner, 739 F.2d 580, 581 (11th Cir. 1984) (“[t]he decision to make a ruling or regulation retroactive will stand unless it constitutes an abuse of discretion”); CWT Farms, Inc, v. Commissioner, 755 F.2d 790 (11th Cir. 1985); see also I.R.C. § 7805 (rules and regulations). Here, the Commissioner did not apply a new ruling or regulation, or revoke a ruling when it found that the 10-50-50 formula did not accurately reflect petitioner's income for the 2007-2009 tax years. And, while the cases do not apply, it is worth noting that the courts grant the Commissioner broad authority to retroactively apply a new ruling, regulation, or to revoke a ruling. And these are more drastic acts than in this case where the Commissioner applied existing law.

The most analogous Supreme Court authority comes from Dickman v. Commissioner, 465 U.S. 330 (1984). In Dickman, the IRS asserted a deficiency, finding that the taxpayers' interfamily interest-free loan constituted a taxable gift. The taxpayers argued that the IRS had unfairly departed from prior IRS position, because the IRS had allowed these kinds of gifts up until a 1966 case when it first challenged them. The Supreme Court ruled that, even assuming that the IRS had departed from prior administrative practice, “it is well established that the Commissioner may change an earlier interpretation of the law, even if such a change is made retroactive in effect” and that “[t]his rule applies even though a taxpayer may have relied to his detriment upon the Commissioner's prior position.” Id. at 343. Like the taxpayers in Dickman, petitioner argues that the Commissioner's allowance of the 10-50-50 method for over a decade represents a policy that it relied upon to its detriment and which the Commissioner suddenly and retroactively reversed. The Supreme Court rejected this argument in Dickman because “[t]he Commissioner is under no duty to assert a particular position as soon as the statute authorizes such an interpretation.” Id. Accordingly, where, as here, there is no question of respondent's statutory authority under section 482, petitioner's argument that respondent's section 482 allocations were unconstitutionally “retroactive” under appellate and Supreme Court authority is meritless.

F. Petitioner's Motion for Reconsideration includes new inaccurate proposed findings of fact that petitioner could have introduced by the exercise of due diligence in the prior proceeding.

A motion for reconsideration should generally be granted only to correct substantial errors of fact and to introduce newly discovered evidence that the moving party could not have introduced by exercise of due diligence in the prior proceeding. Estate of Quick, 110 T.C. at 441.

Throughout petitioner's Motion for Reconsideration, petitioner alleges new, inaccurate factual allegations — which it did not propose as findings of facts in its briefs. For example, petitioner alleges, “[t]he IRS's own experts acknowledged that Coca-Cola relies on the Supply Points' sustained local marketing contributions to maintain the brands and their value worldwide.” Pet'r Mot. Recons. 50. The transcripts petitioner cites for this finding were available long before the briefs were completed in this case. Thus, petitioner could have proposed this alleged fact had it exercised diligence. Additionally, a closer look at the citations reveals that the sources do not support petitioner's proposed finding.

Allowing petitioner to raise these previously known “new facts” is inconsistent with the stated purpose for motions for reconsideration and would greatly prejudice respondent. Respondent would be required to confirm the accuracy of petitioner's new proposed findings of fact and respond to them, amounting to essentially a complete do-over of the briefing process.

III. CONCLUSION

Petitioner presents no new facts or law that would constitute good cause for filing a motion for reconsideration out of time. Granting petitioner's Motion for Leave would prejudice respondent. He would have to rebrief the case and address the same issues he has already addressed at length in the earlier proceeding. In addition, he would have to address new — albeit previously available — legal theories about the APA and the Due Process Clause of the Fifth Amendment. Allowing this would vitiate the importance of finality in litigation. While the decision in this case has not been entered, the issues have not only been fully argued but long since decided. And, even if the Court were to grant petitioner's Motion for Leave, the new legal theories petitioner raises in its Motion for Reconsideration have no merit; therefore, granting petitioner's Motion for Leave would be futile.

Petitioner's Motion for Leave should be denied.

RESPECTFULLY SUBMITTED,

WILLIAM M. PAUL
Acting Chief Counsel
Internal Revenue Service

Date: August 23, 2021

By: JILL A. FRISCH
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. FJ0677
1085 Raymond Boulevard
Suite 1500
One Newark Center
Newark, NJ 07102
Telephone No. 973-681-6623
jill.a.frisch@irscounsel.treas.gov

CURT M. RUBIN
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. RC0327
Curt.M.Rubin@irscounsel.treas.gov

JULIE P. GASPER
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. PJ0751
Julie.P.Gasper@irscounsel.treas.gov

HUONG T. BAILIE
Associate Area Counsel
(Large Business & International)
Tax Court Bar No. DH0267
Huong.T.Bailie@irscounsel.treas.gov

VERONICA L. RICHARDS
Senior Counsel
(Large Business & International)
Tax Court Bar No. TV0030
Veronica.L.Richards@irscounsel.treas.gov

STEVEN D. GARZA
Attorney
(Large Business & International)
Tax Court Bar No. GS0568
Steven.D.Garza@irscounsel.treas.gov

OF COUNSEL:
ROBIN L. GREENHOUSE
Division Counsel
(Large Business & International)
JOHN M. ALTMAN
National Strategic Litigation Counsel
(Large Business & International)
ELIZABETH P. FLORES
Senior Level Strategic Litigation Counsel
(Large Business & International)