District of Columbia Confounds Opposition to its Transfer Pricing Strategy

DALLAS, Feb. 12, 2018 /PRNewswire/ -- In a surprising decision, dissimilar to the previous ruling in Microsoft,¹ a District of Columbia Administrative Law Judge (ALJ) denied three motions for summary judgment in an order dated January 26, 2018, finding that the transfer pricing method developed by Chainbridge Software LLC ("Chainbridge") was not arbitrary, capricious, or unreasonable. The ALJ's denial of the motions for summary decision concluded the District's Office of Tax and Revenue (OTR) was justified in its implementation of this method.

In their appeals of combined assessments totaling almost $4 million, three taxpayers—Hess Corporation, Exxon Mobil Corporation, and Shell Oil Company—challenged the transfer pricing analysis provided by Chainbridge, citing violation of Internal  Revenue Code section 482 regulations. Those regulations prohibit grouping controlled (related-party) and uncontrolled (third party) entities, unless there is no alternative appropriate method. The analysis in the taxpayers' challenge was similar to the analysis that formed the foundation of the taxpayer's appeal in Microsoft. The decision in that case invalidated Chainbridge's transfer pricing method, with the ALJ determining the failure to separate Microsoft's controlled transactions from uncontrolled transactions, as required by section 482 regulations, to the extent possible, resulted in the transfer pricing analysis being  "arbitrary, capricious, and unreasonable," thereby invalidating the audit method.

In these assessments, the OTR maintained that Chainbridge considered the various methods available under the section 482 regulations and concluded that the Comparable Profits Method (CPM) was appropriate. Instead of analyzing activities on a transaction level, CPM analyzes business profits at the entity level. 

A status conference for these three related cases is scheduled for March 7, 2018, unless a settlement can be reached to avoid trial.

¹ Microsoft v. Office of Tax and Revenue [No. 2010-OTR-00012 (5/1/12)].

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