Internal Revenue Service Agrees to Settle Transfer Pricing Case Filed in the United States Tax Court Against Caterpillar Inc.
In a case that had been docketed in the United States Tax Court, Caterpillar Inc. v. Commissioner, Docket No. 10790-13 (2013), the petitioner-corporation and respondent, Internal Revenue Service, entered into and filed a stipulated settlement on July 31, 2014 with the Court. In many instances a stipulated settlement will be reached by the parties prior to trial, which would further mean that no evidenced was adduced and possibly occured prior to the submission of stipulations of fact being filed with the court.
The compromise and settlement of tax cases is government by principles of contract law. Robbins Tire & Rubber Co., v. Commissioner, 52 T.C. 420, 435-436, supplemented by 53 T.C. 274 (1969); Brink v. Commissioner, 39 T.C. 602, 606 (1962), aff'd 328 F.2d 622 (6th Cir. 1964). Where a decision is entered under a stipulated settlement, the parties are generally held to their agreement without regard to whether the decision is correct on the merits. See Stamm International Corp. v. Commissioner, 90 T.C. 315, 321-322 (1988); Spencer M. Stillman, et ux., TC Memo 1995-591.
This case involved a Section 482 transfer pricing matter concerning the deductiblity (or non-inclusion of imputed income) with respect to royalty paments owed to the petitioner from its European subsidiaries in Belgium and France. The stipulated settlement requires that Caterpillar pay additional taxes totaling approximately $1.9 million for the tax years 1990 and 1992 to 1994. The amount includes a $3.3 million deficiency in tax for 1990 which is partialliy offset by a residual FTC balance of $1.475 million for the same year. The deficiency in income tax sought by the Service in its notice of deficiency was approximately $7.2 million.
The center of the controversy was the effect to be given to Caterpillar's amendment of a long-standing licencing agreement(s) that had been in place for close to 30 years with its manufacturing subsidiaries in Belgium and France. Amendments agreed to in 1990 suspended the subsidiaries' obligations to remit the required 5% of revenues ( net sales less direct costs) under the licensing contracts until the subsidiaries were once again profitable.
The licensing agreements covered the use by the foreign subsidiaries of groups of intangibles including Caterpillar patents, manufacturing methods, trademarks and copyrighted...
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