On July 26, 2017, the Tax Court issued its opinion in Eaton Corp. v. Commissioner, holding that the IRS’s cancellation of two advance pricing agreements (“APAs”) reached with Eaton Corporation (“Eaton”) was “arbitrary and unreasonable,” because the alleged misrepresentations upon which the IRS premised the cancellation were “inadvertent errors that do not fit the APA governing revenue procedures’ definition of ‘material.’” The decision signals that the IRS’s discretion to cancel APAs may be more limited than some, particularly the IRS, have assumed.

Background -

Section 482 of the Internal Revenue Code gives the IRS broad authority to “allocate gross income, deductions, credits, or allowances between two related corporations if the allocations are necessary either to prevent evasion of tax or clearly to reflect the income of the corporations.