United States: APAs cancelled; no transfer pricing adjustments and taxpayer not liable for 40% penalty

United States: APAs cancelled

The U.S. Tax Court today issued an opinion finding that the taxpayer was not liable for 40% penalties under section 6662(h) in a dispute stemming from the cancellation of two advance pricing agreements (APAs) by the IRS.


The IRS had asserted that the taxpayer had failed to comply with the terms of the governing APA revenue procedures and canceled the two APAs. As a result, the IRS determined that section 482 adjustments were needed to reflect an arm’s length result for the taxpayer’s intercompany transactions. The IRS then issued a notice of deficiency determining deficiencies of approximately $19.7 million and $55.3 million for tax years 2005 and 2006, respectively, and penalties under section 6662(h) of approximately $14.3 million and $37.3 million for 2005 and 2006, respectively. The deficiency notice made section 482 adjustments and stated that in order to properly reflect an arm’s length result for intercompany transactions, the taxpayer’s taxable income for tax years 2005 and 2006 was increased by about $102 million and $267 million, respectively.

In an earlier decision, the Tax Court held that the IRS’s decision to cancel the APAs was an abuse of discretion. Prior opinions in this matter did not address the penalties assessed under section 6662(h).

The Tax Court today held that no adjustments were made pursuant to section 482 to support imposition of section 6662(h) penalties, and that the taxpayer was not liable for the penalties under section 6662 for the tax years at issue. The case is: Eaton Corp. v. Commissioner, 153 T.C. No. 6 (October 28, 2019). 

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