D.C. Transfer Pricing Challenge Moves Toward Trial

The District of Columbia Office of Tax and Revenue scored a significant victory April 23 in a long-running battle to defend its use of a controversial method of transfer pricing. [BP Products North America Inc. v. District of Columbia, D.C. Super. Ct., Tax Div., No. 2011cvt10619, hearing on motion for summary judgment 4/23/13]

At a hearing on a summary judgment motion filed by taxpayer BP Products North America, Judge John Campbell of the D.C. Superior Court said that there were enough questions of fact at issue that the case should proceed to trial.

BP Products is challenging a $722,585 assessment for tax years 2006-08 that was based on a transfer pricing study by Chainbridge Software LLC, a company that BP claims misapplies federal transfer pricing guidelines by improperly aggregating transactions with related and unrelated parties.

Campbell said that the question of whether Chainbridge is using the right pricing method is one that involves issues of fact as well as law and, thus, he was inclined to deny the summary judgment motion and schedule the case for trial. In fact, Campbell set May 31 as the date for a pre-trial conference.

While the judge did not rule from the bench—he said he would issue a written opinion later—his came as a surprise to some practitioners who thought that an earlier ruling by the D.C. Office of Administrative Hearings would control.

"This was certainly a win for the district, because at least one judge feels these are cases that should be tried on the facts, rather than a wholesale shut-down of the method, which is what taxpayers were hoping for," said Diann Smith, of McDermott Will & Emery, who represents other taxpayers facing transfer pricing assessments in the district.

Smith also had served on the legal team that represented Microsoft Corp. in its challenge of a transfer pricing assessment that also was based on a Chainbridge analysis. In that case, filed in OAH, Administrative Law Judge Paul Handy found that the Chainbridge method was “useless in determining whether Microsoft's controlled transactions were conducted in accordance with the arm's length standard.”

But Campbell was not persuaded by the Microsoft ruling.

"I don't think Microsoftis going to control this decision," he said.

While Microsoft serves as "guidance," Campbell said, "sometimes guidance helps to illustrate what the issues are, rather than what the proper resolution should be."

Dolores W. Gregory, Reporter, Transfer Pricing Report