Transfer Pricing: Litigation Strategy and Tactics (893)

Tax Management Portfolio, Transfer Pricing: Litigation Strategy and Tactics, discusses the unique strategic and procedural considerations attendant to contesting through the administrative process and, if necessary, in litigation a transfer pricing dispute identified during the examination phase.

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Section I of the Portfolio discusses a taxpayer's procedural alternatives following the identification of a dispute during examination, and Section II of the Portfolio identifies considerations for the taxpayer in deciding whether to pursue pre-litigation alternatives or instead proceed directly to court. It is at this early stage that the taxpayer must evaluate the impact that its procedural alternatives may have on costs incurred, publicity, timing to resolution, potential settlement, and the disclosure of the taxpayer's case prior to litigation. Section III of the Portfolio discusses the key related issue of a taxpayer's preferred choice of forum, which will determine whether and when payment of the disputed tax liability must be made, the pool of potential judges, the timing of commencement and the course of any litigation, government counsel, discovery, and the availability of alternative dispute resolution. Section IV of the Portfolio outlines burden of proof considerations, which are particularly important in a transfer pricing case, given the distinct but related burdens of demonstrating that the IRS adjustment was arbitrary and capricious and that the taxpayer's intercompany pricing met the arm's-length standard.

Likewise, as discussed in section V of the Portfolio, discovery and objections thereto are particularly important in the transfer pricing context due to the broad factual scope of the inquiry. The burden to demonstrate that the government's adjustment is arbitrary and capricious, and the potential availability of affirmative refund claims, make discovery of the government potentially more relevant than in other tax cases. Moreover, the international nature of transfer pricing cases and the increased efforts at global cooperation in the discovery process raise concerns over the availability of documents and witnesses located overseas.

Sections VI and VII of the Portfolio address pretrial procedures and the trial of a transfer pricing case, with an emphasis on the development of fact and expert witness testimony, and related evidentiary concerns, given the fact-intensive and complex nature of §482 issues.

Finally, sections VIII, IX, and X of the Portfolio discuss post-trial procedures, appellate review, and the potential for the application of the doctrine of res judicata to transfer pricing decisions and judgments.


Transfer Pricing: Litigation Strategy and Tactics was authored by the following experts.
Sanford W. Stark, Esq.

Sanford W. Stark, Bingham McCutchen LLP, Washington, D.C. B.A., cum laude, Yale University (1988); J.D., with High Honors, Duke University School of Law (1991); Member, Alaska Law Review and Moot Court Board; Law Clerk to the Honorable Peter Hill Beer, U.S. District Court for the Eastern District of Louisiana (1991–92); Trial Attorney, U.S. Department of Justice Tax Division, Civil Trial Section (1995–99); Adjunct Professor, LL.M. (Taxation) program, Georgetown University (“Introduction to Transfer Pricing”) (2009–); Member, American Bar Association, Section of Taxation, Transfer Pricing Committee, Foreign Activities of U.S. Taxpayers Committee; Member, bars of the District of Columbia and Illinois.

Hartman E. Blanchard, Jr., Esq.

Hartman E. Blanchard, Jr., Esq., Bingham McCutchen LLP, Washington, D.C. B.A., magna cum laude, Harvard University (1991); J.D., with honors, The George Washington University (1994); Member, The George Washington Journal of International Law and Economics; LL.M. (Taxation), with distinction, Georgetown University; Law Clerk to the Honorable James C. Turk, U.S. District Court for the Western District of Virginia (1994–95); Member, American Bar Association, Section of Taxation; Member, bars of the District of Columbia and Maryland.

Table of Contents

Portfolio Description


Technical Advisors


Detailed Analysis

I. Procedural Alternatives Following Identification of a Transfer Pricing Dispute in Examination

Introductory Material

A. Appeals Consideration

1. Appeals Consideration Before Receipt of 30-Day Letter

2. Traditional Appeals Consideration Following Receipt of 30-Day Letter

a. The Protest

b. Review of Case by Appeals

c. Settlement

d. Mediation in Appeals

e. Arbitration in Appeals

B. Competent Authority Relief

1. Revenue Procedure 2006-54

2. Mandatory Arbitration Under Tax Treaties

3. Special Settlement Guidelines for Issues Where Competent Authority Relief Is Available

C. Proceeding to Court

D. Appeals Consideration Following Tax Court Docketing

II. Considerations in Deciding Whether to Pursue Pre-Litigation Alternatives or Proceed Directly to Court

Introductory Material

A. Costs

1. Liability for Interest, Including "Hot Interest"

2. Costs of Proceeding Directly to Litigation

B. Publicity

1. Public Nature of the Controversy

2. Financial Statement Disclosure

C. Timing Considerations

1. Time to Resolution

2. Guarding Against the Potential Loss of Evidence

a. Preserving Documentary Evidence

b. Preserving Witnesses' Recollections of Relevant Events

c. Perpetuating the Trial Testimony of Key Witnesses

3. Impact on IRS Theories and Adjustments

4. Effect of Pending Litigation on Issue

5. Effect of Facts in Later Taxable Years

D. Potential for Settlement

1. Settlement Considerations at Appeals

2. Settlement Considerations in Litigation

a. Cases Docketed in Tax Court

b. Refund Cases

3. Settlement Considerations in Post-Docketing Appeals

E. Disclosure of the Taxpayer's Case

III. Choice of Forum

Introductory Material

A. Available Forums for Litigation

1. U.S. Tax Court

2. Forums for Refund Litigation

a. Forum Characteristics

b. Jurisdictional Prerequisites to Filing Suit

3. Valid Tax Court Petition Can Divest Refund Forum of Jurisdiction

4. U.S. Bankruptcy Courts

B. Forum-Selection Considerations in a Transfer Pricing Case

1. Payment

2. Availability of Refund

3. Post-Docketing Appeals Consideration

4. Applicable Judicial Precedent

5. Procedural and Evidentiary Rules

6. Timing to Commence Litigation

a. Tax Court

b. Refund Forums

7. Judges

8. Counsel

9. Discovery

10. Additional Claims or Theories

11. Jury Trial

12. Settlement and Alternative Dispute Resolution

13. Timing to Resolution of Litigation

14. Foreign Law

IV. Burden of Proof

Introductory Material

A. Taxpayer's Burden in Transfer Pricing Cases

1. Arbitrary, Capricious, and Unreasonable Adjustment Burden

a. General Standard

b. Disregarding the Presumption of Correctness

2. Taxpayer's Evidentiary Burden

B. Carrying Taxpayer's Burdens in Transfer Pricing Cases

1. Traditional Sources of Arm's-Length Pricing

2. Going Behind the Notice of Deficiency

3. IRS's Treatment of Other Taxpayers

C. Shifting the Burden to the IRS

1. Conduct of the IRS

a. Changes in Amount of Deficiency

b. New Claims, Theories, or Evidence

(1) "Different Evidence" Approach

(2) "Consistency" Approach

(3) "Adequate-Notice" Approach

2. Discretion of the Court

3. Special Circumstances: § 7491

V. Discovery

Introductory Material

A. Pre-Discovery Use of FOIA to Obtain Information from the Government

B. Informal Discovery in the Tax Court

C. Timing of Formal Discovery

1. Initial Disclosures in the Refund Forums

2. Timing Restrictions on the Use of Discovery Devices

a. The Tax Court

b. Refund Forums

3. Sequence and Frequency of Discovery

D. Duty to Supplement Discovery Responses

1. Tax Court

2. Refund Forums

3. Implications for Transfer Pricing Cases

E. Discovery Devices

1. Interrogatories

2. Requests for Production of Documents and Things

a. Common IRS Requests

(1) Agreements

(2) Financial Data

(3) General Corporate Documents

(4) Documents Regarding Other Litigation or Regulatory Submissions

(5) Requests for Documents from Foreign Affiliates

(6) Requests for Third-Party Documents

(7) Requests for Plant Tours

b. Potential Taxpayer Requests

(1) IRS's Arm's-Length Evidence

(2) Going Behind the Notice of Deficiency

(3) IRS's Treatment of Other Taxpayers

c. Responding to Requests for Production

3. Requests for Admission

4. Depositions

a. Tax Court

b. Refund Forums

F. Objections and Defenses to Discovery

1. Relevance

2. Overbroad or Burdensome

3. Attorney-Client Privilege

a. Elements of the Attorney-Client Privilege

b. Limitations of the Privilege

c. Waiver

4. Federally Authorized Tax Practitioner Privilege

5. Work-Product Doctrine

a. Elements of the Work-Product Doctrine

b. Scope of Work-Product Protection

c. Work-Product Protection Is Not Absolute

d. Waiver

6. Privilege and Work-Product Issues Raised by Tax Accrual Workpapers

a. IRS Policy on Requesting Tax Accrual Workpapers in Civil Audits

b. Privilege and Work-Product Concerns

7. Guidelines for Preserving and Maximizing Privilege and Work-Product Protection

G. Government-Specific Discovery Defenses

1. Section 6103

2. Deliberative Process Privilege

3. Section 6105

H. Discovery Regarding Expert Witnesses

I. Relationship Between Administrative Summonses and Tax Court Discovery

J. International Discovery

1. Global Cooperation and Information Sharing

2. Foreign Discovery Devices

VI. Pretrial Procedures

A. Assignment of a Judge and Establishment of a Trial Date

B. Pretrial Conferences

C. Pretrial Orders

1. Tax Court

a. Discovery

b. Status Reports

c. Identification of Expert Witnesses, Expert Witness Reports, and Rebuttal Reports

d. Limitations on the Amendment of Pleadings and Raising of Additional Issues

e. Statements of the Theories Relied Upon by the Parties

f. Stipulation of Facts

g. Pretrial Memoranda

h. Other Provisions

2. Refund Forums

D. Pretrial Disclosures

E. Stipulation of Facts

F. Summary Judgment

G. Motions in Limine

H. Pretrial Settlement

I. Arbitration

VII. Trial

Introductory Material

A. Tactical Considerations

1. Taxpayer's Case-in-Chief

2. Rebuttal of the Government's Case

B. Fact Witnesses

1. Traditional Fact Witnesses

2. Opinion Testimony by a Lay (Fact) Witness

C. Traditional Expert Witnesses

1. Use of Experts to Establish the Taxpayer's Case-in-Chief

a. In General

b. Testifying and Non-Testifying Experts

2. Selecting Specific Experts

3. Presenting Expert Opinions in Court

4. Substance of Expert Evidence

a. Bases of Expert Testimony

b. Opinions Concerning the Ultimate Issue

c. Exclusion of Expert Opinion

5. Taxpayer's Rebuttal of Government's Expert Testimony

D. Other Evidentiary Issues

E. Foreign Law

1. Relevance of Foreign Law in Transfer Pricing Cases

2. Notice Requirement

3. Determination of Foreign Law by a Court

VIII. Post-Trial Procedures

A. Briefs

1. Tax Court

a. Form and Content

b. Significance of Omissions or Admissions

2. Refund Forums

B. Opinions and Decisions

C. Post-Trial Motions

IX. Appellate Review

A. Appellate Venue and Time Frame

1. Appeal from Tax Court Decision

2. Appeal from Federal District Court Judgment

3. Appeal from Court of Federal Claims Judgment

B. Standard of Review by Courts of Appeals

C. Supreme Court Review

X. Effect of Court Decision or Judgment

A. Effect of Court Decision or Judgment on Competent Authority Process

B. Res Judicata (Claim Preclusion) and Collateral Estoppel (Issue Preclusion)

1. Res Judicata (Claim Preclusion)

2. Collateral Estoppel (Issue Preclusion)

a. General Principles

b. Test for Application of Collateral Estoppel (Issue Preclusion)

(1) Identity of Issues

(2) Identity of Facts or Legal Principles

(3) Special Circumstances

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Sample Guidelines for Preserving and Maximizing Protection Under the Attorney-Client Privilege and the Work Product Doctrine




Treasury Regulations:

Federal and Tax Court Rules:

Legislative History:

IRS Materials and Guidance:

Treasury Rulings:

International Governmental Publications:




Texts and Treatises: