In a major turnaround, an administrative law judge has found no showing that the District of Columbia’s use of the transfer pricing method developed by third-party contractor Chainbridge Software LLC was arbitrary, capricious, or unreasonable.
In an order dated January 26, Office of Administrative Hearings Judge Bernard H. Weberman denied the motions for summary judgement filed by Hess Corp., ExxonMobil Oil Corp., and Shell Oil Co. in a consolidated appeal of $3.8 million in assessments issued by the District’s Office of Tax and Revenue (OTR) for tax years 2007-2009. The OTR’s assessments were based on transfer pricing analyses conducted by Chainbridge.
The judge directed the parties to exhaust all settlement possibilities before a March 7 status conference.
Represented by M. Miller Baker, Stephen P. Kranz, and Diann Smith of McDermott Will and Emery, the oil companies had argued that Chainbridge applied the comparable profits method in a way that violates IRC section 482 regulations prescribing how the method is to be applied.
OTR Chief Counsel Alan Levine and Assistant General Counsel Jessica L. Brown told the judge in September 2017 that transfer pricing is inherently facts-and-circumstances-based, that no discovery has yet been allowed in the consolidated case, and that the circumstances need to be evaluated in an evidentiary hearing.
In his order, Weberman described how Chainbridge considered applying each of the several transfer pricing methods provided for in the Treasury regulations and concluded that the comparable profits method was the best method for determining the arm’s-length nature of the tested transactions. While several of the transfer pricing methods provided for by Treasury compare specific controlled transactions with specific uncontrolled transactions, the comparable profits method determines whether a taxpayer has engaged in arm’s-length controlled transactions indirectly, Weberman wrote. The comparison thus is made at the entity or business-activity level instead of at the transaction level, he said.
Weberman said that for a motion for summary adjudication to be granted, petitioners must show there is no genuine issue as to any material fact that they are entitled to judgment as a matter of law. “In this case, there has been no showing that OTR’s use of the CPM as the best transfer pricing method or its application of same was arbitrary, capricious or unreasonable,” Weberman wrote.
Weberman twice cited declarations in support of the OTR written by Chainbridge’s Eric W. Cook and Ednaldo Silva, one of the drafters of the IRC section 482 transfer pricing regulations. In both instances, Weberman said that whether the declarations are right or wrong, he could not infer without factual development that Chainbridge’s analyses or conclusions are unreasonable, arbitrary, or capricious.