In two U.S. Tax Court transfer pricing cases filed in July, the IRS underscored its firm stance on Section 6662 penalties for insufficient taxpayer documentation.
In Newell Brands v. Commissioner, a consumer products manufacturer is disputing an alleged $90 million tax underpayment along with $34 million in related penalties. Meanwhile, the taxpayer in Airbnb v. Commissioner contested the IRS’s assertion that it underpaid its taxes by $1.33 billion for 2013, with an additional $573 million in penalties.
Given the IRS’s enforcement stance, taxpayers should reassess their transfer pricing documentation to determine if adjustments are needed. Any adjustments exceeding $20 million can result in a 40% penalty, potentially escalating the financial impact.
The transfer pricing issue in Newell centers on intercompany procurement services by Newell Rubbermaid Asia Services to Newell Brands Inc. Using the comparable uncontrolled services price method, Newell provided supporting documentation. However, the IRS found inconsistencies, deeming Newell’s transactions incomparable and not priced at arm’s length, leading to the assertion of penalties per Section 6662.
In Airbnb, the IRS posited that Airbnb Inc. understated its U.S. taxable income by $4.2 billion due to resources and rights allocated to its Irish affiliate, Airbnb International. Formed in 2013, the affiliate signed a technology and IP licensing agreement with Airbnb. Despite Airbnb presenting documentation using an “income method,” the IRS applied a different, unspecified method based on Airbnb’s financing transactions, resulting in tax deficiencies surpassing Section 6662 thresholds and leading to 40% penalties.
Congress established Section 6662 penalties in 1989 to incentivize reasonable efforts in determining and documenting arm’s-length transfer prices. These penalties can be transactional or net-based, imposing a 20% or 40% penalty. Regulations provide for a reasonable cause and good faith exception if appropriate contemporaneous documentation is produced within 30 days of an IRS request.
Historically, the IRS rarely applied Section 6662 penalties, but a 2018 IRS Advisory Council report noted potential deficiencies in transfer pricing documentation. Post-report, IRS executives announced increased enforcement of these penalties, emphasizing documentation quality.
The substantial penalties in recent high-profile cases like Amgen ($10.7 billion in tax, penalties, and interest) and Microsoft ($28.9 billion in taxes, plus penalties and interest) echo this policy shift. Taxpayers must now thoroughly evaluate their transfer pricing documentation in light of this policy evolution.
The cases discussed are Newell Brands, Inc. v. Commissioner, T.C., No. 11897-24, petition filed 7/19/24 and Airbnb, Inc. v. Commissioner, T.C., No. 12423-24, petition filed 7/30/24.
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