A U.S. Tax Court judge ruled Coca-Cola (NYSE:KO) shifted too much of the profit it generated between 2007 and 2009 to foreign subsidiaries and is now liable for much of the $3.3 billion in taxes the IRS has tried to assess the beverage giant, The Wall Street Journal reported Thursday.

Yet the judge also ruled the company properly used a dividend offset treatment paid by its foreign manufacturing affiliates to satisfy royalty obligations. It means some $1.8 billion in IRS reallocations have to be made, reducing the amount to be paid.

Coke vows to defend its position, but has previously noted an adverse ruling would have a material impact on the company.

Corporate tax forms

Image source: Getty Images.

An expensive shell game

The case revolves around Coca-Cola allocating profits to affiliate businesses in Brazil, Ireland, and elsewhere that have lower tax rates than in the U.S. 

While there is a certain amount of leeway in how a company assigns profitability because of intangible assets like trademarks and patents, the tax court judge noted Coke's affiliates had no such assets, but were reporting profits far greater than Coca-Cola itself. 

"Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world?" he wrote. "And why does their profitability dwarf that of [Coca-Cola], which owns the intangibles upon which the Company's profitability depends?"

However, the judge said Coke did use the dividend offset treatment properly, rejecting the IRS claim the beverage company had failed to notify the agency it was electing to do so. The judge said Coca-Cola's taxes had been audited several times and the company had previously used the treatment without objection.

As a result, Coca-Cola's total tax bill will be reduced, though by how much is not known at this time.

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