Potential New Issue Emerges in Eaton Transfer Pricing Case

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Sony Kassam

The IRS has identified a potential inter-company debt issue in a transfer pricing case against electrical equipment manufacturer Eaton Corp.The new issue involves an increase in Eaton’s income for 2007-10 under tax code Sections 951(a)(1)(B) and 956, according to a filing from both parties in the U.S. Tax Court. The increase “arises from additional U.S. property in the form of loans” to a U.S. person by a controlled foreign corporation (CFC), the parties said, citing Section 956(c)(1)(C).

The Internal Revenue Service and Eaton said they have discussed discovery and stipulations for the issue, and the agency is considering making a motion to amend its answer in the case. Eaton will likely object to the new issue, the March 13 status report said ( Eaton Corp. v. Commissioner, T.C., No. 028040-14, status report filed 3/13/17 ).

The parties must first resolve whether the earnings and profits (E&P) of the CFCs at issue increased as a result of Eaton’s transferred intangibles, they said.

If Eaton prevails on the E&P determination, it will also prevail on the potential new issue, the parties said. But if the IRS prevails, and if the court allows the agency to amend its answer to add the issue, then more matters would need to be litigated.

Cross-Motioning Schedule

The IRS and Eaton said they would like to make cross-motions to efficiently present the E&P allocations to the court, adding that the new issue wouldn’t “delay or impede” the cross-motioning.

The parties proposed the following schedule:

  •  April 14, 2017: filing stipulations of facts;
  •  May 2, 2017: cross-motions for partial summary judgment;
  •  June 16, 2017: responses to cross-motions; and
  •  July 14, 2017: replies to responses.
The parties are also litigating the 2005-06 years in another transfer pricing case ( Eaton Corp. v. Commissioner, T.C., No. 5576-12, petition filed 2/29/12). They said the court’s opinion in that case will help determine the outcome of the 2007-10 issues.

‘Fatal’ to Claim

Eaton is also adamant about dismissing a dispute with several pension funds that claim company officials failed to disclose tax consequences of the company’s inversion in Ireland, according to the company’s April 5 filing in the U.S. District Court of the Southern District of New York. An Ohio federal court dismissed claims about “virtually the same ‘fraud’ allegations” in Graham v. Fearon , 2017 BL 94517, N.D. Ohio, No. 1:16-cv-02366, 3/24/17 , Eaton said in the April 5 New York court filing.

The plaintiffs in Graham had claims against Eaton’s Employee Retirement Income Security Act fiduciaries based on the company’s merger with Dublin-based Cooper Industries in 2012. “On the day the Cooper acquisition was announced, Cutler denied that the company had such plans. After the acquisition, Eaton executives continued to inform analysts that the company did not have plans to sell its vehicle business,” a Ohio federal court said March 24.

The pension funds in the New York case argue Eaton’s former CEO, Alexander M. Cutler, and its current chief financial officer, Richard H. Fearon, led shareholders to believe a spinoff of the company’s vehicle business was possible. The lawsuit also asserts Eaton didn’t immediately admit that tax laws prevented it from making tax-free spinoffs for five years after the inversion.

To contact the reporter on this story: Sony Kassam in Washington at skassam1@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

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