Opinion
16017-21 15631-22
07-03-2024
AMGEN INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves Judge
The primary issue in these consolidated cases is the Commissioner's allocation of income under § 482 between Amgen Inc., and Amgen Manufacturing Limited (AML). Currently before the Court is respondent's Motion for Partial Summary Judgment (motion), filed February 2, 2024. Therein respondent requests summary adjudication on the issue of whether the Internal Revenue Service (IRS or respondent) violated petitioner's rights under the Due Process Clause of the Fifth Amendment for tax years 2013 through 2015. For the reasons set forth below, we grant respondent's motion with respect to Docket No. 15631-22.
On December 19, 2022, we granted the parties' joint Motion to Consolidate Docket No. 16017-21, related to tax years 2010 through 2012, and Docket No. 15631-22, related to tax years 2013 through 2015. We decide the present motion solely as it relates to Docket No. 15631-22 for the reasons discussed infra.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding the motion and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Petitioner had its principal place of business in California when it filed the petitions. Absent stipulation to the contrary, appeal of these cases would lie to the U.S. Court of Appeals for the Ninth Circuit. See § 7482(b)(1)(B).
Amgen Inc., a Delaware corporation, is the parent corporation of a multinational group of consolidated corporations and affiliated companies (collectively petitioner), specializing in biologic therapeutics. The transfer pricing adjustments in this motion involve the following related companies: Immunex Corporation (Immunex), Amgen Manufacturing Limited (AML), and Amgen USA, Inc (Amgen USA). Immunex, a Washington Corporation, is a wholly owned subsidiary of Amgen Inc. AML is an indirectly owned Bermuda Corporation with a principal place of business in Puerto Rico. Finally, Amgen USA, a Delaware corporation, is a wholly owned subsidiary of Amgen Inc.
The process of manufacturing medication involves two-steps: manufacturing drug substances and manufacturing drug products. Drug substances are proteins that achieve a specific pharmacologic activity and will be the basis of the final medications. In the second stage, drug substances are refined into drug products, which are the final form of the medications. Beginning in 2002, Amgen Inc. and Immunex licensed to AML the rights to manufacture and sell certain drug products in the United States in exchange for royalties. AML initially purchased the necessary drug substances from Amgen Inc., but after significant investment, AML began to manufacture certain drug substances. AML refined drug substances into the licensed drug products. AML then transferred the finished drug products to Amgen USA for sale and distribution to end users in the United States.
The IRS has routinely selected petitioner's returns for examination. As relevant to the pending motion, petitioner's 2002 through 2009 returns were selected for audit. These audits were long and complex with several IRS economists attempting to determine the proper arm's-length result for each of the transactions described above. At the end of these audits, the IRS and petitioner entered into closing agreements with relatively minor adjustments. The five relevant closing agreements each set forth transfer pricing adjustments related to Amgen Inc.'s gross income and earnings and profits. None of the closing agreements used the phrase "best method" or "arm's length." The two latest closing agreements, covering tax years 2007 through 2009, stated "This agreement does not prevent further allocations under § 482 with respect to taxable events involving Amgen and AML that are attributable to taxable periods of Amgen for which allocations are not determined by this agreement." Petitioner continued to use similar transfer pricing methods for tax years 2010 through 2015.
The IRS selected petitioner's 2010 through 2012 tax returns for audit. During the audit, the IRS also selected petitioner's 2013 through 2015 tax returns for audit. For all these years, the IRS determined deficiencies, related in part to transfer pricing adjustments. For tax years 2013 through 2015, the IRS also determined accuracy-related penalties related to the transfer pricing adjustments. The IRS issued notices of deficiency for these tax years, and petitioner timely petitioned this Court for redetermination of the deficiencies and penalties. Petitioner's case for tax years 2010 through 2012 was assigned Docket No. 16017-21. Petitioner's case for tax years 2013 through 2015 was assigned Docket No. 15631-22. On December 19, 2022, we granted the parties' joint Motion to Consolidate these cases.
In its petition at Docket No. 15631-22, petitioner alleged that the IRS's income adjustments and penalties for tax years 2013 through 2015 are unlawful under the Due Process Clause because it "reasonably relied upon a transfer pricing method that had been audited and effectively approved by the IRS several times." On February 2, 2024, respondent filed the motion, seeking summary adjudication in his favor on this issue. Respondent improperly filed this motion in both dockets. On March 7, 2024, petitioner filed an Opposition to Motion for Partial Summary Judgment. Respondent filed a Reply on April 10, 2024.
After respondent filed the motion related to Docket No. 15631-22, petitioner amended its petition at Docket No. 16017-21 to advance an identical due process argument. The motion does not address petitioner's new due process claim related to Docket No. 16017-21 nor has respondent filed a supplement to its motion to cover these years. Therefore, we only consider the motion as it relates to Docket No. 15631-22.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(a)(2); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). Furthermore, we construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. See Bond v. Commissioner, 100 T.C. 32, 36 (1993). The nonmoving party may not rest upon the mere allegations or denials of his pleading but must set forth specific facts showing that there is a genuine dispute for trial. See Rule 121(d); Bond, 100 T.C. at 36. We conclude that no material facts are in dispute and that this issue may be adjudicated summarily.
II. Constitutional Avoidance Doctrine
We first address petitioner's argument that we cannot decide the issue of whether the IRS's determination of deficiencies and penalties related to the transfer pricing adjustments violate the Due Process Clause of the Fifth Amendment because of the constitutional avoidance doctrine. The constitutional avoidance doctrine provides that a court will not decide a constitutional question if there is another ground upon which the case may be disposed. See Escambia Cnty., Fla. v. McMillan, 466 U.S. 48, 51 (1984); Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 345-47 (1936) (Brandeis, J. concurring). "[W]e do not ordinarily reach out to make novel or unnecessarily broad pronouncements on constitutional issues when a case can be fully resolved on a narrower ground." Greater New Orleans Broad. Ass'n, Inc. v. United States, 527 U.S. 173, 184 (1999).
The resolution of this motion does not conflict with the constitutional avoidance doctrine. There are no clear alternative grounds on which this case may be disposed. If we make any transfer pricing adjustments, we will be forced to consider petitioner's Due Process Clause argument. We have frequently used summary adjudication to reject unfounded constitutional claims. See, e.g., Estate of Armstrong v. Commissioner, 119 T.C. 220, 231-38 (2002). Finally, resolution of petitioner's Due Process Clause argument is not a novel question and may be decided in accordance with our precedent. See Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. 145, 204-07 (2020).
III. Due Process Clause Claim
The Fifth Amendment provides that "[n]o person shall . . . be deprived of life, liberty, or property, without due process of law." The Due Process Clause limits the extent to which the government may alter legal consequences of an action after it has occurred. See Landgraf v. USI Film Products, 511 U.S. 244, 265-66 (1994). This retroactivity may violate the touchstone of due process that a regulated party have fair notice of the conduct that is prohibited. See id.; FCC v. Fox Television Station, Inc., 567 U.S. 239, 253 (2012). Generally, an agency should not impose liability based on past actions which were taken in reliance on agency action. See NLRB v. Bell Aerospace Co. Div. of Textron Inc., 416 U.S. 267, 295 (1974); PHH Corp. v. CFPB, 839 F.3d 1, 46-48 (D.C. Cir. 2016), reh'g granted on other grounds, 881 F.3d 75 (D.C. Cir. 2016). The Supreme Court has previously held that an agency violated the Due Process Clause of the Fifth Amendment when it retroactively switched its interpretation of a statute that was contrary to a published policy statement intended to provide guidance. See Fox Television Stations, Inc., 567 U.S. at 258.
Petitioner alleges that respondent violated its due process rights by making transfer pricing adjustments and determining accuracy-related penalties for tax years 2013 through 2015 after "effectively approving [petitioner's] transfer pricing method in the 2002-2009 audits." Petitioner's argument appears premised on the allegation that the IRS violated petitioner's legitimate reliance interest when the IRS abruptly departed from its prior approval of petitioner's transfer pricing methods without prior notice. Petitioner draws its support from a haphazard selection of precedent and the Administrative Procedure Act. We must determine whether petitioner had a legitimate reliance interest based on the closing agreements.
The text of § 482 establishes the bounds of the Commissioner's discretion, and the Commissioner adopted regulations on how he would exercise his discretion. Further, the Commissioner may voluntarily limit his discretion by entering into an advanced pricing agreement or a closing agreement. See § 7121; Coca-Cola Co. & Subs., 155 T.C. at 204. Broadly speaking, closing agreements are contracts that are governed by the rules applicable to contracts generally. See Davis v. United States, 811 F.3d 335, 338-39 (9th Cir. 2015); Long v. Commissioner, 93 T.C. 5, 10 (1989), aff'd, 916 F.2d 721 (11th Cir. 1990). As such, a closing agreement is construed according to the intent of the parties at the time of entering the contract. See Long, 93 T.C. at 10. If the agreement is unambiguous, the intent will be inferred from the four corners of the document. See id. "Under section 7121 a court may not include as part of the agreement matters other than the matters specifically agreed upon and mentioned in the closing agreement." Analog Devices, Inc. v. Commissioner, 147 T.C. 429, 445 (2016) (quoting Zaentz v. Commissioner, 90 T.C. 753, 766 (1988)).
It is well established that each tax year stands on its own, and the Commissioner's position in a prior audit does not preclude him from later taking a different position. See Harrison v. Commissioner, 138 T.C. 340, 347-48 (2012) ("[The IRS]'s position in prior audits does not bar [it] from later taking a different position."). It is also well established that the IRS is under no obligation to give a taxpayer prior notice that it is planning to change its stance when reliance on the prior stance is unwarranted. See, e.g., Dixon v. United States, 381 U.S. 68, 76 (1965); Allred v. Commissioner, T.C. Memo. 2014-54, at *11. The Supreme Court has emphasized these points:
[I]t is well established that the Commissioner may change an earlier interpretation of the law, even if such a change is made retroactive in effect. E.g., Dixon v. United States, 381 U.S. 68, 72-75, 85 S.Ct. 1301, 1304-1306, 14 L.Ed.2d 223 (1965); Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183-184, 77 S.Ct. 707, 709-710, 1 L.Ed.2d 746 (1957). This rule applies even though a taxpayer may have relied to his detriment upon the Commissioner's prior position. Dixon v. United States, supra, 381 U.S., at 73, 85 S.Ct., at 1304. The Commissioner is under no duty to assert a particular position as soon as the statute authorizes such an interpretation. See also Bob Jones University v. United States, 461 U.S. 574, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983).Dickman v. Commissioner, 465 U.S. 330, 343 (1984).
Petitioner had no legitimate reliance interest for future years derived from the closing agreements. The closing agreements unambiguously do not cover future tax years. The agreements are silent as to what transfer pricing methodology was to apply for years after 2009. In fact, the closing agreements related to tax years 2007 through 2009 made it clear that the IRS could make future transfer pricing adjustments regardless of any alleged prior approval. These closing agreements specifically stated "This agreement does not prevent further allocations under section 482 with respect to taxable events involving Amgen and AML that are attributable to taxable periods of Amgen for which allocations are not determined by this agreement." This clause put petitioner on notice that the IRS might make transfer pricing adjustments in future tax years. Additionally, none of the closing agreements used the phrases "best method" or "arm's length" to describe the reallocation.Instead, the adjustments are simply those to which the parties agreed in settling the disputes before them at that moment. The closing agreements unambiguously do not cover tax years past 2009, and therefore, petitioner does not have a legitimate reliance interest created by the closing agreements. See Coca-Cola Co. & Subs., 155 T.C. at 204-07 (2020).
Even if the IRS had agreed with petitioner on the "best method" for prior years, that would not necessarily bind the IRS going forward.
Petitioner urges us to consider testimony and reports of IRS economists that indicate the 2002 through 2009 examination teams were seeking the correct answer as to petitioner's transfer pricing adjustments and their determinations that petitioner's transfer pricing methodology produced arm's-length results. However, as noted above, if the closing agreement is unambiguous, we confine our analysis to the four corners of the agreement. See Long, 93 T.C. at 10. Even if during the examination, the examiners indicated approval of petitioner's transfer pricing methodology, it would not preclude summary judgment on this issue. The closing agreements unambiguously do not cover tax years past 2009 nor determine that petitioner's transfer pricing methodology was the best method. Therefore, we will not consider this extraneous information. See Coca-Cola Co. & Subs., 155 T.C. at 204- 07; Long, 93 T.C. at 10.
Petitioner directs us to cases for the proposition that an agency's change of position represents an unlawful retroactive revising of its prior position. However, these cases address reliance interests created when an agency publishes a formal rule or other official guidance which the agency clearly intends the public to rely on. See Fox Television Stations, Inc., 567 U.S. at 246 (analyzing a policy statement "intended 'to provide guidance to the broadcast industry'"); A.B. Small Co. v. American Sugar Refin. Co., 267 U.S. 233, 238-41 (1925) (analyzing whether a statute violated the Due Process Clause for vagueness); PHH Corporation, 839 F.3d at 44-45 (analyzing an official government interpretation); Velásquez-García v. Holder, 760 F.3d 571, 578- 84 (7th Cir. 2014) (analyzing an interpretation announced by adjudication); Williams v. Barry, 708 F.2d 789, 792 (D.C. Cir. 1983) (noting without deciding the question of whether statements and declarations of policy can create an entitlement). The IRS has not published any guidance, formal or informal, to petitioner or anyone else, suggesting that petitioner's transfer pricing method is the best method for determining the arm's-length result. See Treas. Reg. § 1.482-1(c)(1). To the contrary, the closing agreements simply represent the parties' mutual agreement to settle the disputes at hand. We will not bind the IRS to a stipulation it did not make. Other cases petitioner cites do not discuss the Due Process Clause and instead focus on estoppel or other Administrative Procedure Act requirements.
In a last attempt to stave off summary judgment, petitioner relies on Seven Canal Place Corp. v. Commissioner, 332 F.2d 899, 900 (2d Cir. 1964), rev'g and remanding T.C. Memo. 1962-307 for the proposition that the Commissioner must justify deviation from a prior closing agreement before making an adjustment in a subsequent year. However, petitioner places too much significance on the passing reference to due process in that case. Instead, the opinion focused on the failure of the Tax Court to properly develop the factual record necessary for its findings. See id. In any event, we are bound by Dickman, 465 U.S. at 343, in which the Supreme Court specifically approved the Commissioner's ability to change interpretations.
If petitioner sought to apply its transfer pricing methodology to future years, it could have attempted to negotiate a closing agreement that made the method applicable for future years. Petitioner likewise could have applied for an advanced pricing agreement that would have set forth a "binding agreement" between petitioner and the IRS as to "the best transfer pricing method ("TPM") within the meaning of § 482 of the Code and the regulations." Rev. Proc. 2006-9, §§ 2.04, 10.01, 2006-2 I.R.B. 278. Had petitioner sought one of these options, it would have had a genuine reliance interest grounded in a binding contract. However, the closing agreements fall significantly short of creating a legitimate reliance interest.
In conclusion, we note that petitioner was provided and took advantage of the prior opportunity to challenge the adjustments and penalties in this case before paying the liability by petitioning this Court for our de novo review. This process has been found to more than satisfy the requirements of due process. See Phillips v. United States, 283 U.S. 589, 595 (1931); Catania v. Commissioner, T.C. Memo. 1986- 437.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment (Petitioner's Due Process Claim), filed February 2, 2024, is denied as to Docket No. 16017-21. It is further
ORDERED that respondent's Motion for Partial Summary Judgment (Petitioner's Due Process Claim), filed February 2, 2024, is granted as to Docket No. 15631-22.