Court Opinion

ID: 9895829
Source: CourtListenerOpinion
Date Created: 2023-11-08 20:03:09.184275+00
Date Added: 2024-06-11T09:12:20.590193
License: Public Domain

United States Tax Court

                         T.C. Memo. 2023-135

        THE COCA-COLA COMPANY AND SUBSIDIARIES,
                        Petitioner

                                   v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              —————

Docket No. 31183-15.                            Filed November 8, 2023.

                              —————

John Michael Luttig, Sanford W. Stark, Lisandra Ortiz, Jonathan S.
Massey, Steven R. Dixon, Gregory G. Garre, Laurence H. Tribe, Carl
Terrell Ussing, Lamia R. Matta, John F. Craig III, Shay Dvoretzky, Saul
Mezei, Michael D. Kummer, and Kevin L. Kenworthy, for petitioner.

Lisa M. Goldberg, Heather L. Lampert, Steven D. Garza, Veronica L.
Richards, Elizabeth P. Flores, Julie Ann P. Gasper, Eli Hoory, Justin L.
Campolieta, Huong T. Bailie, and Jill A. Frisch, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       LAUBER, Judge: This Opinion addresses a question, involving
petitioner’s Brazilian manufacturing affiliate, that was left unresolved
in Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. 145 (2020). Before
diving into that question, some background may be helpful.

       The Coca-Cola Company (TCCC) is the ultimate parent of a group
of entities (Company) that do business in more than 200 countries
throughout the world. Id. at 148. TCCC and its domestic subsidiaries
(petitioner) joined in filing consolidated Federal income tax returns for
2007–2009. Upon examination of those returns, the Internal Revenue
Service (IRS or respondent) made adjustments that increased peti-
tioner’s aggregate taxable income by more than $9 billion, producing tax

                           Served 11/08/23
                                           2

[*2] deficiencies that the IRS determined to be in excess of $3.3 billion.
Id. at 148–49.

       These deficiencies chiefly resulted from transfer-pricing adjust-
ments under section 482, 1 by which the IRS reallocated income to peti-
tioner from its foreign manufacturing affiliates. Coca-Cola, 155 T.C.
at 149. These affiliates, to which we refer as “supply points,” manufac-
tured concentrate—syrups, flavorings, powder, and other ingredients—
used to produce petitioner’s branded soft drinks (including Coca-Cola,
Fanta, and Sprite). Ibid. The supply points sold concentrate to inde-
pendent Coca-Cola bottlers throughout the world (excluding the United
States and Canada). Ibid. The bottlers used the concentrate to produce
finished beverages that they marketed to millions of retail establish-
ments worldwide. Ibid.

       To enable the supply points to manufacture and sell concentrate,
petitioner licensed them to use its intangible property (IP). Id. at 149–
50. On its tax returns for 2007–2009, petitioner took the position that
the arm’s-length compensation the supply points were obligated to pay
for use of these intangibles (royalty obligation) should be calculated us-
ing the “10-50-50” method. Id. at 150–51. That was a formulary appor-
tionment method to which petitioner and the IRS had agreed as a mech-
anism for settling a dispute regarding petitioner’s tax liabilities for
1987–1995. Id. at 151. That settlement, embodied in a closing agree-
ment executed in 1996, permitted a supply point to satisfy its royalty
obligation to petitioner by paying actual royalties or by paying divi-
dends. Ibid.

       The closing agreement was valid and binding only for the tax
years it covered, i.e., for 1987–1995. Id. at 204–07. 2 But for all subse-
quent years petitioner continued to use the 10-50-50 method to calculate
the supply points’ royalty obligations. Id. at 150. The gist of

        1 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. We round mon-
etary amounts to the nearest dollar.
         2 The 1996 closing agreement had only one significant prospective feature,

providing that, if petitioner employed the 10-50-50 method to determine a supply
point’s royalty obligation for years after 1995, and if the IRS upon examination of pe-
titioner’s return determined that a higher Product Royalty was due, petitioner would
“not be subject to the accuracy-related penalty under section 6662 * * * with respect to
the portion of any underpayment that is attributable to an adjustment of such Product
Royalty.” Coca-Cola, 155 T.C. at 206.
                                          3

[*3] respondent’s position is that the amounts thus calculated for 2007–
2009 did not sufficiently compensate petitioner for use of its intangibles.

       Our November 2020 opinion addressed all but one of the issues in
the case. Our principal holding was that the Commissioner did not
abuse his discretion in reallocating income to petitioner using a “compa-
rable profits method” that treated independent Coca-Cola bottlers as
comparable parties. See id. at 217. The IRS regarded these bottlers as
comparable to the supply points because they operated in the same in-
dustry, faced similar economic risks, had similar contractual relation-
ships with petitioner, employed many of the same intangible assets (pe-
titioner’s brand names, trademarks, and logos), and ultimately shared
the same income stream from sales of petitioner’s beverages. In essence
we held that the independent Coca-Cola bottlers furnished a benchmark
for arm’s-length profitability and that, to the extent the supply points
enjoyed profits in excess of that benchmark, the excess must be reallo-
cated to petitioner as compensation for use of petitioner’s intangibles.
See id. at 217–18.

       The question remaining for decision involves petitioner’s Brazil-
ian supply point. 3 It paid no actual royalties to petitioner during 2007–
2009. Id. at 282. Rather, it compensated petitioner for use of TCCC’s
intangibles by paying dividends of $886,823,232, the aggregate amount
of the royalty obligation that petitioner calculated using the 10-50-50
method. We held that the Brazilian supply point’s arm’s-length royalty
obligation for 2007–2009 was actually about $1.768 billion, as deter-
mined by the IRS in the notice of deficiency. See id. at 197–98, 237. But
we held that the dividends remitted in place of royalties should be de-
ducted from that sum. See id. at 287. This offset reduces the net trans-
fer pricing adjustment to petitioner from the Brazilian supply point to
about $882 million.

      The issue we must now decide is whether this $882 million net
transfer-pricing adjustment is barred by Brazilian law. During 2007–
2009 Brazil capped the amounts of trademark royalties and technology
transfer payments (collectively, royalties) that Brazilian companies
could pay to foreign parent companies. Id. at 261; see Brazil Law No.
4131/1962, Art. 14, No. 8383/1991, Art. 50 (collectively, Brazilian legal

         3 Formed in 1962, Coca-Cola Indústria e Comércio Limitada was petitioner’s

first supply point in Brazil. Succeeding it was Coca-Cola Indústrias Limitada, which
operated during the years at issue. See id. at 154 n.5. We will refer to these entities
collectively as the Brazilian supply point.
                                           4

[*4] restriction). 4 The parties have stipulated that the Brazilian legal
restriction capped the royalties payable by the Brazilian supply point to
petitioner at roughly $16 million for 2007, $19 million for 2008, and $21
million for 2009. See Coca-Cola, 155 T.C. at 261. Petitioner contends
that Brazilian law thus blocks the $882 million net transfer-pricing ad-
justment we have sustained as arm’s-length compensation to petitioner
for use of its intangibles.

       In briefs filed during 2018 and 2019, respondent contended that
the Brazilian legal restriction should be given no effect in determining
the arm’s-length transfer price, relying on what is commonly called the
“blocked income” regulation. See Treas. Reg. § 1.482-1(h)(2). This reg-
ulation generally provides that foreign legal restrictions will be taken
into account for transfer-pricing purposes only if four conditions are met,
including the requirement that the restrictions must be “applicable to
all similarly situated persons (both controlled and uncontrolled).” See
id. subdiv. (ii)(A). Petitioner urged that the blocked income regulation
did not apply here and that, if it did apply, it was invalid under the
Administrative Procedure Act (APA) and/or Chevron, U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

       When the Court issued its November 2020 opinion in this case,
challenges to the validity of the blocked income regulation had been
taken under advisement by another Division of this Court. See 3M Co.
& Subs. v. Commissioner, T.C. Dkt. No. 5816-13. We accordingly re-
served ruling on the parties’ arguments regarding the effect of the Bra-
zilian legal restriction “until an opinion in the 3M case has been issued.”
Coca-Cola, 155 T.C. at 261. On February 9, 2023, the Court issued a
reviewed opinion in 3M that rejected the taxpayer’s Chevron and APA
arguments and sustained the validity of the blocked income regulation.
See 3M Co. & Subs. v. Commissioner, No. 5816-13, 160 T.C. (Feb. 9,
2023).

       After the Court issued its opinion in 3M, we invited the parties to
address in supplemental briefs the applicability of the Brazilian legal
restriction to this case. The parties filed simultaneous briefs directed to
this question in March 2023, followed by simultaneous reply briefs in
April 2023.

        4 Copies of the relevant Brazilian statutes, in their English translation, appear

in the record of this case as joint exhibits.
                                    5

[*5]                     FINDINGS OF FACT

       We incorporate our findings in Coca-Cola, amplifying certain fac-
tual findings as needed for purposes of this Opinion.

A.     The Brazilian Supply Point’s Exploitation of TCCC’s Assets

        During 2007–2009 the Brazilian supply point exploited TCCC’s
intangible assets, including its patents, brand names, logos, secret for-
mulas, proprietary manufacturing processes, and mixing protocols. See
Coca-Cola, 155 T.C. at 149–50. TCCC was the owner of 114 (and nearly
all) of the Company’s patents registered in Brazil. These patents cov-
ered aesthetic designs (such as bottle shapes and caps), vending and dis-
pensing equipment, packaging materials (such as polymers, vacuum
panels, and coatings), beverage ingredients (such as plant sterols and
sweeteners), and production processes. See id. at 188. TCCC’s patents,
secret formulas, proprietary manufacturing processes, confidential in-
gredients, and mixing protocols were essential to the Brazilian supply
point’s operations. The supply point could not have manufactured con-
centrate without access to those intangibles.

       Among the intangible assets the Brazilian supply point exploited
were TCCC’s registered trademarks for original Coca-Cola (Coke Red),
Fanta, Sprite, and their lines and extensions (core brands) and its trade-
marks for numerous other beverages sold in Brazil (non-core brands).
Id. at 193–94. TCCC-owned brands generated roughly 98% of the Bra-
zilian supply point’s gross revenues during 2007–2009. The core brands
accounted for roughly 80% of those revenues. The non-core brands ac-
counted for about 20%.

B.     TCCC’s Trademark Registrations in Brazil

       TCCC had registered nine trademarks in Brazil between 1912
and 1962, when the Brazilian supply point was formed. Id. at 193, 257.
Five of these trademarks related to Coke Red, covering the product
names Coca-Cola and Coke, the stylized label, and the Spencerian
script. Ibid. Two related to Fanta and two to Sprite, covering those
product names and their stylized labels. Ibid.

       Between 1962 and November 17, 1985, TCCC registered an addi-
tional six trademarks in Brazil. Id. at 194, 257. Five of these trade-
marks related to Coca-Cola, covering the dynamic ribbon and the prod-
uct names Coke Light, Coca-Cola Light, and Coke Classic, and the sixth
trademark related to Sprite. Ibid. We will refer to the 9 trademarks
                                    6

[*6] registered before 1962 and the 6 trademarks registered between
1962 and November 17, 1985, as the pre-1986 registered trademarks.
All 15 of those trademarks related to TCCC’s core brands.

       Between November 17, 1985, and the tax years at issue, TCCC
registered in Brazil 53 additional trademarks relating to the core
brands. Id. at 194, 260 n.57. These trademarks covered Coke Zero, Diet
Fanta, the Coca-Cola contour bottle shape, the Coca-Cola polar bear, the
“S” logo related to Sprite, secondary design features for the core brands,
advertising slogans, and composites of existing trademark elements.
See ibid. TCCC also registered more than 100 Brazilian trademarks for
its newer, non-core, beverage products, including Dasani, Minute Maid,
Powerade, Aquarius, Burn, Kuat, and other local Brazilian brands. See
ibid.

        Brazil amended its trademark law in 1997 to recognize, for the
first time, implied licenses of registered trademarks not included in le-
gally enforceable written agreements. See Brazil Law No. 9279/1996,
Art. 140(2). That same law also codified for the first time the principle
of trademark exhaustion, whereby the owner of a registered trademark
was prohibited from blocking the resale of a product identified with the
trademark once the owner had introduced the product for sale in Brazil.
See id. Art. 132. However, Brazilian courts have interpreted the
amended trademark law to allow a registered trademark owner to pro-
tect against “parallel imports.” See T.J.R.S, Apelação Cível No.
70002659688, Sexta Câmara Cível, Relator: Des. João Pedro Freire,
01.08.2001. Parallel imports—sometimes referred to as the “grey mar-
ket”—occurred when products identified with a registered trademark
were first sold outside Brazil and then imported into Brazil for resale by
persons whom the trademark owner had not authorized to make such
sales.

      Trademark registrations in Brazil expire after ten years but may
be renewed. Brazil Law No. 9279/1996, Art. 133. If a pre-1997 trade-
mark was renewed after 1997, the registered owner enjoyed the right to
protect its trademarked products against parallel imports. TCCC after
1997 renewed many of the trademarks in question. Thus, the Brazilian
supply point continued to enjoy after 1997 the right of protection against
parallel imports of TCCC-trademarked products.
                                         7

[*7] C.      TCCC’s Agreements with the Brazilian Supply Point

       Between 1963 and 1966, TCCC and the Brazilian supply point
executed four agreements addressing the use of TCCC-owned trade-
marks and other IP. The first agreement, executed on February 1, 1963,
granted the supply point a license to use specified trademarks in the
Coke Red family, as well as all “required materials for” and “instructions
and other information necessary to enable it to manufacture Coca-Cola
concentrate and/or syrup.” Two later agreements, executed in Septem-
ber 1964 and November 1966, granted the supply point a similar license
to manufacture Sprite and Fanta, respectively. Each agreement pro-
vided that the license would continue for an indefinite period but was
cancelable at TCCC’s option upon 30 days’ written notice. To compen-
sate TCCC for the use of TCCC’s IP, the supply point was supposed to
pay a royalty embedded in the price of the ingredients it purchased from
TCCC.

        Brazil’s attributive system of trademark registration grants
trademark ownership and associated rights through registration and
not use. None of the agreements described in the preceding paragraph
was recorded with the Brazilian Patent & Trademark Office (BPTO). 5
Before 1991, the BPTO generally would not record a royalty-bearing li-
cense agreement (or agreement providing for the payment of technology
transfer fees) if the agreement was between a Brazilian company and
its foreign parent. Agreements not recorded with the BPTO, such as the
three agreements described in the preceding paragraph, were not en-
forceable against third parties under Brazilian law.

       A fourth agreement was executed on February 19, 1963, 18 days
after the first agreement described above. Unlike the other three, this
agreement was recorded with the BPTO. It granted the supply point a
license covering the use of Coke Red trademarks that had been regis-
tered before that date. This agreement also contained a “catch-all” pro-
vision, which purported to include within the license

       all other marks, as well as any and all renewals thereof,
       that may be hereafter registered by [TCCC] in connection
       with the manufacture, preparation, promotion, advertising
       and sale of the products protected by the said trademark

        5 The BPTO was created in 1970. Its predecessor agency was the National

Department of Industrial Property. For simplicity, we refer to these agencies collec-
tively as the BPTO.
                                    8

[*8]   registrations and, for this purpose, to affix said trademarks
       to the products and their containers . . . .

       The February 19, 1963, recorded agreement specified that the li-
cense was granted for an undetermined period and could be revoked by
TCCC upon 90 days’ notice. Unlike the three unrecorded agreements,
which provided for compensation to TCCC through an embedded roy-
alty, the recorded agreement required the Brazilian supply point to
make a one-time payment of $100, stating that no “payment of any roy-
alty, fee, or compensation whatsoever, outside the sum of [$100],” was
required.

         Between 1981 and 1996, TCCC and the Brazilian supply point
amended the BPTO-recorded agreement numerous times. Coca-Cola,
155 T.C. at 194. All of these amendments were likewise recorded with
the BPTO. The principal purpose of the amendments was to expand the
list of trademarks to include some trademarks covering products outside
the Coke Red family. Ibid.

       As of November 17, 1985, the BPTO-recorded agreement (as
amended) encompassed the use of eight trademarks covering the prod-
uct names and core design features for Coca-Cola, Coke, Fanta, the
Fanta contour bottle shape, and Sprite. A later amendment dated Au-
gust 30, 1993, expanded the trademark list to include five trademarks
covering the dynamic ribbon and the product names Coke Light, Coca-
Cola Light, Coke Classic, and Sprite. Two trademarks, covering Coca-
Cola in Spencerian script and the Sprite contour bottle shape with the
Sprite logo, were purportedly licensed by the Brazilian supply point to
its subsidiary, Recofarma, after November 17, 1985. But the record con-
tains no evidence that these two trademarks were ever included in any
written agreement or amendment thereto (recorded or otherwise) be-
tween TCCC and the Brazilian supply point.

D.     Dividends Paid by the Brazilian Supply Point to Satisfy Its
       Royalty Obligation

       The Brazilian legal restriction applies only to trademark royalties
and technology transfer fees paid by a Brazilian company to a foreign
company by which it is controlled. For 2007–2009, Brazilian law capped
the royalties payable to petitioner by the Brazilian supply point at about
$16 million, $19 million, and $21 million, respectively, or roughly $56
million in the aggregate. The parties have stipulated that the Brazilian
                                    9

[*9] legal restriction has no application to royalties paid by a Brazilian
company to a non-controlling (or unrelated) entity.

        Brazilian law permits a Brazilian company to pay dividends out
of its earnings and profits. The parties have stipulated that Brazilian
law placed no restrictions on the Brazilian supply point’s ability to pay
dividends to petitioner. During 2007–2009 the Brazilian supply point
paid petitioner dividends of $475 million, $447 million, and $428 million,
respectively, for a total of roughly $1.35 billion.

       Of that total, petitioner treated roughly $887 million of dividends,
the amount it calculated using the 10-50-50 method, as compensation
for the use of TCCC’s intangible assets. The parties have stipulated
that, under Brazilian law, the Brazilian supply point during 2007–2009
could legally have paid petitioner dividends exceeding $1.768 billion, the
aggregate transfer-pricing adjustment from the Brazilian supply point
as determined in the notice of deficiency.

                                OPINION

A.    “Blocked Income”

       We confront at the threshold the question whether the Brazilian
legal restriction, which prevented the supply point from paying royalties
in excess of $56 million during 2007–2009, actually blocked the payment
of arm’s-length compensation for the use of TCCC’s intangibles. During
these years the Brazilian supply point paid no royalties whatsoever to
petitioner, not even the modest amounts permitted by Brazilian law.
Rather, it compensated TCCC for use of these assets exclusively by re-
mitting dividends. Employing the 10-50-50 method, petitioner calcu-
lated the supply point’s aggregate royalty obligation as $886,823,232.
Petitioner caused the supply point to pay dividends exceeding that sum,
and it treated $886,823,232 of such dividends as compensation for the
use of TCCC’s intangible assets.

       Petitioner has stipulated that Brazilian law placed no limit on the
supply point’s payment of dividends. And petitioner has stipulated that
the supply point during 2007–2009 could legally have paid petitioner
dividends in excess of $1.768 billion, the aggregate transfer-pricing ad-
justment from the Brazilian supply point that we have sustained. Peti-
tioner thus concedes that the Brazilian legal restriction posed no obsta-
cle to the supply point’s payment (via dividends) of the amount peti-
tioner believed to be arm’s-length compensation for use of TCCC’s intan-
gibles. But if that is so, why does the Brazilian legal restriction pose an
                                    10

[*10] obstacle to the supply point’s payment (via dividends) of the larger
amount this Court has determined to be arm’s-length compensation for
use of TCCC’s intangibles?

       By way of answer to that question, petitioner relies chiefly on
Procter & Gamble Co. v. Commissioner, 95 T.C. 323 (1990), aff’d, 961
F.2d 1255 (6th Cir. 1992). That case involved tax years antedating the
promulgation of the blocked income regulation. Procter & Gamble Co.
(P&G), a U.S. taxpayer, owned 100% of Procter & Gamble A.G. (AG), a
Swiss company. Id. at 324. AG in turn owned 100% of Procter & Gamble
España, S.A. (España), a Spanish company that manufactured soaps,
toiletries, cleaning supplies, and other P&G products. Id. at 325–26.
España paid no royalties and made no technology transfer payments for
use of P&G’s intangible assets. Id. at 327. The IRS made a section 482
allocation from España to AG for 1978 and 1979, calculated as a 2% roy-
alty on España’s net sales of P&G products. Procter & Gamble, 95 T.C.
at 331. That reallocation increased P&G’s subpart F income under
section 951(a)(1)(A). Procter & Gamble, 95 T.C. at 331.

       During the tax years involved in Procter & Gamble, Spain placed
no restrictions on a Spanish company’s payment of royalties to an unre-
lated entity. Id. at 338 n.6. However, Spanish law operated to prohibit
royalty payments “between a Spanish corporation with foreign invest-
ment in excess of 50 percent . . . and its foreign parent and subsidiaries.”
Ibid. We accordingly found that “Spanish law prohibited España from
making royalty payments to AG.” Id. at 336.

       Citing Commissioner v. First Security Bank of Utah, N.A., 405
U.S. 394, 400 (1972), this Court held that “section 482 simply does not
apply where restrictions imposed by law, and not the actions of the con-
trolling interest, serve to distort income among the controlled group.”
Procter & Gamble, 95 T.C. at 332–36. “Because Spanish law prohibited
or blocked Espana from paying royalties to AG,” we concluded, “it effec-
tively precluded AG from receiving the same.” Id. at 337. And we held
that the breadth of the Commissioner’s authority under section 482 did
not justify a different result, reasoning that “section 482 does not impel
the violation of a legal prohibition solely for the sake of matching income
and expense.” Procter & Gamble, 95 T.C. at 339 (citing Commissioner
v. First Sec. Bank, 405 U.S. at 404–05). We acknowledged that P&G
“possibly could have organized Espana so that royalties could be paid,”
but we held that “a taxpayer need not arrange its affairs so as to max-
imize its taxes as long as the transaction in question has substance.” Id.
at 338 (citing Gregory v. Helvering, 293 U.S. 465 (1935)). In sum,
                                          11

[*11] because P&G “ha[d] not utilized its control over AG and Espana
so as to improperly shift income”—the deflection of income having been
caused instead “by operation of Spanish law”—we held that the Com-
missioner’s reallocation of income was arbitrary and capricious. See id.
at 331, 341.

       The U.S. Court of Appeals for the Sixth Circuit affirmed, agreeing
that “the failure of España to make royalty payments was a result of the
prohibition against royalty payments under Spanish law and was not
due to the exercise of control by P&G.” Procter & Gamble Co. v.
Commissioner, 961 F.2d at 1258. Assuming that point arguendo, the
Government argued that España could have paid a dividend to AG and
that “the Commissioner would have treated such a dividend as a royalty
for United States tax purposes.” Id. at 1259. The Sixth Circuit rejected
that argument, finding: “[T]he record reflects that España did not have
distributable earnings from which to pay dividends” but rather “had ac-
cumulated deficits during the years at issue and would be unable to dis-
tribute dividends.” Ibid. In any event the Sixth Circuit “firmly disa-
gree[d] with the Commissioner’s suggestion that P&G should purposely
evade Spanish law by making royalty payments under the guise of call-
ing the payments something else.” Ibid. The appellate court reasoned
(as did our Court) that a “taxpayer need not arrange its affairs so as to
maximize taxes as long as a transaction has a legitimate business pur-
pose.” Ibid. 6

       Given the peculiar facts of this case, it is not clear that Procter &
Gamble dictates the answer to the threshold question presented here—
that is, whether the Brazilian legal restriction actually blocked payment
by the Brazilian supply point of arm’s-length compensation for use of
TCCC’s intangibles. The two cases are distinguishable in a relevant fac-
tual respect. The Spanish subsidiary in Procter & Gamble “did not have

        6 Petitioner similarly relies on Exxon Corp. & Affiliated Cos. v. Commissioner,

T.C. Memo. 1993-616, 66 T.C.M. (CCH) 1707, aff’d sub nom. Texaco, Inc. & Subs. v.
Commissioner, 98 F.3d 825 (5th Cir. 1996). That case, which likewise involved tax
years before promulgation of the blocked income regulation, involved a Saudi Arabian
legal restriction that prohibited the resale of Saudi crude at prices above the official
Saudi selling price, which was below prevailing market prices for oil of similar quality.
See id. at 1708. Adopting an analysis similar to that employed by the courts in Procter
& Gamble, the courts in Exxon/Texaco held that the Saudi legal restriction precluded
a section 482 allocation keyed to the difference between the official Saudi price and
prevailing market prices. Texaco, 98 F.3d at 831; Exxon, 66 T.C.M. (CCH) at 1760.
Exxon/Texaco differs from Procter & Gamble and the instant case in that the Saudi
legal restriction applied even-handedly to transactions involving unrelated as well as
related parties. See Exxon, 66 T.C.M. (CCH) at 1743.
                                    12

[*12] distributable earnings from which to pay dividends,” but rather
“had accumulated deficits during the years at issue and would be unable
to distribute dividends.” Id. at 1259. The Brazilian supply point, by
contrast, paid petitioner dividends of roughly $1.35 billion during 2007–
2009. And petitioner concedes that, under Brazilian law, the Brazilian
supply point could legally have paid petitioner dividends exceeding
$1.768 billion, the aggregate transfer-pricing adjustment that we have
sustained.

       Petitioner urges that “[d]ividends and royalties are different,” and
we of course do not dispute that statement as a general proposition. But
this argument sidesteps the fact that petitioner itself treated dividends
from the Brazilian supply point as a substitute for royalties for purposes
of satisfying what petitioner believed to be the supply point’s royalty
obligation. In other words, petitioner took the position that, for Federal
tax purposes, dividends from the Brazilian supply point could be used to
satisfy the latter’s obligation to pay petitioner arm’s-length compensa-
tion for the use of TCCC’s intangibles. It seems inconsistent for peti-
tioner to argue that dividends can be treated as deemed royalties up to
the amount petitioner thought to be correct, but not in the larger amount
that the Court has determined to be correct.

       Petitioner cites Commissioner v. First Security Bank, 405 U.S. at
405, for the proposition that the Commissioner’s power under section
482 does not “include[] the power to force a subsidiary to violate the law.”
Recharacterizing dividend payments as royalties, petitioner says, would
“circumvent Brazilian law” and “effectively imput[e] to the taxpayer a
violation of foreign law.” According to petitioner, Procter & Gamble
“makes clear that the IRS cannot force the taxpayer to do that.”

       Once again, petitioner’s arguments seem hard to square with the
facts of this case. Petitioner has stipulated that Brazilian law placed no
restrictions on the Brazilian supply point’s ability to pay dividends. And
petitioner concedes that the Brazilian supply point could legally have
paid petitioner dividends exceeding $1.768 billion during 2007–2009.
By causing the supply point to pay dividends in this amount, petitioner
would not be “forc[ing] a subsidiary to violate the law.” Commissioner
v. First Sec. Bank, 405 U.S. at 405.

      Nor would the payment of such dividends “circumvent Brazilian
law.” For 2007–2009 the Brazilian legal restriction capped total royalty
payments from the Brazilian supply point to petitioner at $56 million.
But petitioner caused the Brazilian supply point to pay dividends of
                                          13

[*13] $886,823,232 and treated that amount as compensation for use of
TCCC’s intangibles. We assume that petitioner did not think it was im-
permissibly “circumventing Brazilian law” by doing this. That being so,
it is hard to see how petitioner would be circumventing Brazilian law by
causing the supply point to remit a larger volume of dividends as com-
pensation for use of TCCC’s intangibles. 7

        Finally, petitioner cites Procter & Gamble Co. v. Commissioner,
961 F.2d at 1259, for the proposition that a “taxpayer need not arrange
its affairs so as to maximize taxes as long as a transaction has a legiti-
mate business purpose.” See also Procter & Gamble, 95 T.C. at 338.
That oft-cited maxim fits poorly with the facts here. From 1996 through
2007, petitioner consistently “arranged its affairs” in a manner that
treated dividends paid by the Brazilian supply point as deemed royalties
for Federal tax purposes, up to the dollar amount that petitioner be-
lieved to constitute arm’s-length compensation for use of TCCC’s intan-
gibles. No one is suggesting that petitioner should have arranged its
affairs differently. The only question is whether petitioner picked the
right number—that is, the amount corresponding to the supply point’s
true arm’s-length royalty obligation—and we held that it did not.

       It seems to us that petitioner is attempting to use Brazilian law
as both a shield and a sword. For Federal income tax purposes, peti-
tioner took the position that Brazilian law permitted it to receive divi-
dends in lieu of royalties as compensation for use of TCCC’s intangibles,
up to the dollar amount that petitioner viewed as representing arm’s-
length compensation. But it seeks to use Brazilian law as a sword to
prevent the receipt of dividends in lieu of royalties in a larger dollar
amount—specifically, in the dollar amount that this Court has deter-
mined to constitute arm’s-length compensation. This one-way ratchet is
not entirely convincing.

      For these reasons, we think respondent advances a reasonable
argument that the Brazilian legal restriction, which prevented the sup-
ply point from paying royalties in excess of $56 million during 2007–
2009, did not actually “block” the payment of arm’s-length compensation

        7 The Brazilian legal restriction seems to have been designed to protect the

Brazilian fisc by preventing foreign companies from extracting profits from a Brazilian
subsidiary via payments (like royalties or technology transfer fees) that would be tax-
deductible by the subsidiary. Dividends were not tax deductible by the payor company
in Brazil. Payment of dividends in lieu of royalties to a controlling foreign company
would not “circumvent” Brazilian law because dividends would not erode the Brazilian
tax base.
                                    14

[*14] for use of TCCC’s intangibles. If that is so, respondent might pre-
vail under the law as it existed before 1994, when the Treasury Depart-
ment promulgated Treasury Regulation § 1.482-1(h)(2). Had this Court
in 3M invalidated the regulation, we would need to decide this question.
But because the Court sustained the regulation’s validity, we proceed to
consider how the regulation applies here, assuming arguendo that the
Brazilian legal restriction accomplished the blocking function that peti-
tioner ascribes to it.

B.    Satisfaction of the Regulation’s Conditions

       Treasury Regulation § 1.482-1(h)(2)(i) provides that a foreign le-
gal restriction will be taken into account for transfer-pricing purposes
“to the extent that such restriction affects the results of transactions at
arm’s length.” “Thus, a foreign legal restriction will be taken into ac-
count only to the extent that it is shown that the restriction affected an
uncontrolled taxpayer under comparable circumstances for a compara-
ble period of time.” Ibid.

       Implementing this general rule, the regulation specifies four con-
ditions, all of which must be satisfied before a foreign legal restriction
will be given effect in determining the arm’s-length transfer price. For
purposes of this case, we need go no further than the first condition: A
foreign legal restriction (whether temporary or permanent) will be taken
into account only if, and so long as, the restriction is “publicly promul-
gated [and] generally applicable to all similarly situated persons (both
controlled and uncontrolled).” Id. subdiv. (ii)(A).

       The foreign legal restriction at issue here, like the restriction at
issue in 3M, was enacted by Brazil. And the terms of this Brazilian legal
restriction were the same during 2007–2009, the tax years involved
here, as in 2006, the tax year involved in 3M. We held in 3M that the
Brazilian legal restriction failed to satisfy one or more of the conditions
set forth in the regulation. We reach the same conclusion here, for the
same principal reason: The Brazilian legal restriction has no applica-
tion to royalties paid to unrelated parties, but only to royalties paid to a
controlling foreign company. Thus, as petitioner concedes, the legal re-
striction is not “generally applicable to all similarly situated persons
(both controlled and uncontrolled).” Ibid.

C.    Grandfather Clause

      Conceding that it cannot meet the conditions set forth in Treasury
Regulation § 1.482-1(h)(2), petitioner contends that the regulation’s
                                    15

[*15] effective-date provision exempts or “grandfathers” the intangible
assets exploited by the Brazilian supply point. Treasury Regulation
§ 1.482-1(j)(4) provides: “These regulations will not apply with respect
to transfers made or licenses granted to foreign persons before Novem-
ber 17, 1985 . . . .” This grandfather clause is subject to the proviso that
the blocked income regulation “will apply . . . to transfers or licenses
before such date[] if, with respect to property transferred pursuant to an
earlier and continuing transfer agreement, such property was not in ex-
istence or owned by the taxpayer on such date.” Ibid. Petitioner has the
burden of proving (1) which of TCCC’s intangibles were covered by this
grandfather clause and (2) what portion of the Commissioner’s transfer-
pricing adjustment reflects income attributable to such grandfathered
assets. See Rule 142(a).

       Petitioner asserts that “all [of TCCC’s] economically significant
intangibles were licensed to the Brazilian supply point before November
17, 1985.” In advancing this argument, petitioner focuses almost exclu-
sively on trademarks, largely ignoring other intangibles (non-trademark
IP) that were essential to the supply point’s manufacturing operations.
With respect to trademarks, petitioner focuses on 15 pre-1986 trade-
marks, all relating to its core brands and in use during 2007–2009, that
were analyzed by its expert, Dr. Franklyn, at trial. But only 8 of these
trademarks were licensed under the February 19, 1963, agreement rec-
orded with the BPTO, and they were the only trademarks enforceable
against third parties under Brazilian law. Another 53 trademarks cov-
ering TCCC’s core brands were licensed to the supply point after No-
vember 17, 1985, and the blocked income regulation clearly applies to
them. The same is true for more than 100 trademarks covering peti-
tioner’s non-core brands, all of which were licensed to the supply point
after the regulation’s effective date.

      1.     Non-Trademark IP

       During 2007–2009 the intangible assets exploited by the Brazil-
ian supply point included TCCC’s patents, secret formulas, confidential
ingredients, mixing protocols, and proprietary manufacturing processes.
See Coca-Cola, 155 T.C. at 149–50. TCCC was the registered owner of
114 patents in Brazil. These patents covered (among other things) aes-
thetic designs (such as bottle shapes and caps), packaging materials,
beverage ingredients (such as plant sterols and sweeteners), and pro-
duction processes. TCCC had a robust research program at its central
research laboratory in Atlanta, investigating new sugar substitutes, en-
vironmentally friendly packaging materials, and other innovations,
                                   16

[*16] and the supply points had access to the fruits of this research. See
id. at 158.

       The Brazilian supply point manufactured concentrate. Its man-
ufacturing activity consisted of procuring raw materials and using
TCCC’s guidelines and production technologies to mix and convert these
materials into concentrate. Id. at 160. The manufacturing process en-
tailed various forms of extraction, filtration, mixing, blending, aging,
and precision filing. Ibid. In performing these activities the supply
point employed TCCC’s secret formulas, production processes, proprie-
tary mixing specifications, and confidential ingredients, many of which
could be obtained only through Company-owned flavor plants. Ibid. The
entire production process was “governed by a detailed manufacturing
protocol dictated by TCCC.” Ibid.

        Exploitation of the intangibles described above was essential to
the Brazilian supply point’s ability to discharge the manufacturing ac-
tivities that generated its revenues. After completing the manufactur-
ing process, the supply point packaged the concentrate into kits tailored
to the needs of the bottlers to which it distributed. See ibid. In produc-
ing these kits the supply point presumably used TCCC’s trademarks—
e.g., the product names Coca-Cola, Fanta, and Sprite—to identify the
contents of each kit. But its use of (and reliance on) TCCC’s trademarks
in the manufacturing process was quite limited, particularly as com-
pared with the bottlers, who employed TCCC’s product names, stylized
labels, and aesthetic designs in manufacturing every single bottle and
can they produced annually.

        Although petitioner asserts that “the non-trademark intangibles
. . . were also licensed [to the Brazilian supply point] before November
17, 1985,” it has supplied no persuasive evidence to support that asser-
tion. The BPTO-recorded agreement dated February 19, 1963, as
amended as of November 17, 1985, addresses only trademarks. It does
not purport to license any other IP.

       The only references to non-trademark IP are found in the three
agreements that were not recorded with the BPTO. The February 1,
1963, agreement authorized the Brazilian supply point to use specified
trademarks in the Coke Red family, as well as all “required materials
for” and “instructions and other information necessary to enable it to
manufacture Coca-Cola concentrate and/or syrup.” Two other agree-
ments, executed in September 1964 and November 1966, granted the
                                     17

[*17] supply point a similar authorization to manufacture Sprite and
Fanta, respectively.

       For three reasons, these agreements do not carry the day for pe-
titioner. First, “the sole owner of [an] intangible” for section 482 pur-
poses is considered to be “[t]he legal owner of [the] intangible pursuant
to the intellectual property law of the relevant jurisdiction, or the holder
of rights constituting an intangible pursuant to contractual terms (such
as the terms of a license).” Treas. Reg. § 1.482-4(f)(3)(i)(A); Temp. Treas.
Reg. § 1.482-4T(f)(3)(i)(A) (2006); see Coca-Cola, 155 T.C. at 242–45. The
three agreements referenced above were not recorded with the BPTO,
and those agreements were thus unenforceable against third parties in
Brazil. The Brazilian supply point, therefore, was not the legal owner
of the non-trademark IP “pursuant to the intellectual property law” of
Brazil. See Temp. Treas. Reg. § 1.482-4(f)(3)(i)(A). Nor was it the “owner
of rights constituting an intangible pursuant to . . . a license,” see ibid.,
because it had no rights to protect that property against use by third
parties.

       Second, even if these agreements afforded rights against third
parties, they did not identify any specific intangibles (apart from trade-
marks) that were the subject of the license. Rather, they referred in
general terms to “required materials” and “instructions and other infor-
mation necessary” for manufacturing TCCC’s products. Petitioner has
supplied no evidence that terminology as vague as this would suffice un-
der Brazilian law to license a company’s patents, secret formulas, pro-
prietary manufacturing processes, and other non-trademark IP.

       Third, the three unrecorded agreements were executed between
1963 and 1966, and they were never amended. At best, therefore, those
agreements could have licensed the Brazilian supply point to use
TCCC’s non-trademark IP as it existed before 1967. During the ensuing
40 years, TCCC “maintained an active R&D program to explore new
beverages, ingredients, sweeteners, and packaging.” Coca-Cola, 155
T.C. at 158. During this period TCCC created a variety of new beverages
within its core product family, including Coke Light, Coca-Cola Light,
Coke Classic, Coke Zero, and Diet Fanta. It also launched dozens of new
products in addition to its core brands, including Dasani, Minute Maid,
Powerade, Aquarius, Burn, Kuat, and other local Brazilian beverages.
These new beverage products, as well as technological improvements
and modifications to TCCC’s original brands, necessarily involved new
patents, formulas, secret ingredients, proprietary mixing protocols, and
proprietary manufacturing processes. None of this post-1966 non-
                                   18

[*18] trademark IP was covered by the three unrecorded agreements
discussed above.

      2.     Trademarks

             a.     Original Eight Trademarks

       As of November 17, 1985, the BPTO-recorded agreement (as
amended) licensed the Brazilian supply point to utilize eight trademarks
in use during the tax years at issue. They covered the product names
and core design features for Coca-Cola, Coke, Fanta, Sprite, and the
Fanta contour bottle shape. Because this agreement was recorded with
the BPTO, it endowed the Brazilian supply point with legally enforcea-
ble rights. With respect to these trademarks, the Brazilian supply point
was thus the “holder of rights constituting an intangible.” Treas. Reg.
§ 1.482-4(f)(3)(i)(A); Temp. Treas. Reg. § 1.482-4T(f)(3)(i)(A). Respond-
ent agrees that these eight trademarks are covered by the grandfather
clause because the blocked income regulation does not apply to “licenses
granted to foreign persons before November 17, 1985.” Treas. Reg.
§ 1.482-1(j)(4).

       While conceding that TCCC licensed the original eight trade-
marks to the Brazilian supply point before November 17, 1985, respond-
ent notes that TCCC after that date renewed those licenses in Brazil. In
at least one respect, the licenses as thus renewed conferred additional
protection—namely the right, afforded by a 1997 amendment to Brazil’s
IP law, to protect against parallel imports. Respondent urges that the
rights associated with the eight trademark renewals “were not in exist-
ence” on November 17, 1985, and hence are not covered by the grandfa-
ther clause. Petitioner resists this argument.

       On this point we agree with petitioner. The grandfather clause
specifies that the blocked income regulation “will not apply with respect
to transfers made or licenses granted to foreign persons before Novem-
ber 17, 1985.” Ibid. TCCC accomplished its license renewals by taking
certain prescribed steps with the relevant Brazilian authorities. By tak-
ing these steps, TCCC did not transfer any property to the supply point,
nor did it license any additional property to the supply point. The re-
newal simply preserved the status quo, ensuring that the original, pre-
1986 trademark license would not expire.

       Respondent seeks support for his argument from the second sen-
tence of the effective-date provision. It provides that the blocked income
regulation “will apply . . . to transfers or licenses before [November 17,
                                   19

[*19] 1985] if, with respect to property transferred pursuant to an ear-
lier and continuing transfer agreement, such property was not in exist-
ence or owned by the taxpayer on such date.” Ibid.

       We think respondent’s reliance on this proviso is misplaced. The
proviso seeks to capture “property transferred” pursuant to “an earlier
and continuing transfer agreement.” The February 19, 1963, recorded
agreement contained a “catch-all” provision stating that it covered the
trademarks enumerated in the agreement “as well as any and all renew-
als thereof.” We assume arguendo that the agreement, by virtue of this
verbiage, may be classified as “an earlier and continuing transfer agree-
ment.” But we fail to see what “property [was] transferred” when the
trademarks were renewed. The renewals did not effect any transfer of
property from TCCC to the supply point, but simply preserved the status
quo. Any incremental rights that arose thereby—e.g., the right to pro-
tect against parallel imports after 1997—arose solely by virtue of
changes to Brazilian law, not by virtue of any “transfer” or other action
between TCCC and the supply point. We thus conclude that these eight
trademarks, as originally licensed and as renewed, are covered by the
grandfather clause.

             b.     Additional Seven Trademarks

       Dr. Franklyn’s analysis covered 15 trademarks. Eight of those
trademarks, as discussed above, were enumerated in the February 19,
1963, BPTO-recorded agreement. Seven other trademarks, registered
by TCCC in Brazil between 1960 and 1983, were not listed in that agree-
ment. Five of those trademarks, covering the dynamic ribbon and the
product names Coke Light, Coca-Cola Light, Coke Classic, and Sprite,
were first enumerated in an August 30, 1993, amendment to the rec-
orded agreement. The remaining two trademarks, covering Coca-Cola
in Spencerian script and the contour bottle with the Sprite logo, were
never specifically enumerated in a written license agreement or amend-
ment thereto (recorded or otherwise). Because these seven trademarks
were not licensed by a BPTO-recorded agreement before November 17,
1985, they were not legally enforceable against third parties in Brazil as
of that date. We accordingly conclude that they were not covered by the
grandfather clause.

       Petitioner advances three principal arguments against this con-
clusion. First, it contends that the catch-all provision in the recorded
agreement, granting the supply point the right to use “all other
marks . . . that may be hereafter registered by [TCCC],” caused the
                                          20

[*20] seven trademarks to be licensed to the supply point as soon as
TCCC registered or renewed them in Brazil.

       We disagree. For a license to be enforceable against third parties
under pre-1997 Brazilian law, the license needed to have been specifi-
cally enumerated in a written agreement and recorded with the BPTO.
See Brazil Law No. 9279/1996, Art. 140(2). Any such agreement was
required to list the name, date of registration, and registration number
of each licensed trademark. See ibid. For this reason, the catch-all pro-
vision could not have caused the seven trademarks to be licensed to the
supply point when TCCC registered or renewed them. The February 19,
1963, agreement, in which the catch-all provision was included, con-
tained none of the names, dates of registration, or registration numbers
of any of the seven trademarks.

       Second, petitioner contends that the course of dealing between
TCCC and the Brazilian supply point endowed the latter with an “im-
plied license” to use the seven additional trademarks. We reject this
argument as well. Brazil’s attributive system of trademark registration
grants trademark ownership and associated rights through registration
and not use. Brazil did not recognize implied trademark licenses until
1997, when it amended its trademark law to recognize, for the first time,
implied licenses of registered trademarks not included in a legally en-
forceable written agreement. See ibid. As of November 17, 1985, there-
fore, the Brazilian supply point had no implied license to use the seven
additional trademarks. 8

       Third, petitioner argues that the supply point should be deemed
a licensee of the seven additional trademarks as a matter of “economic
substance.” Again we disagree. The regulations provide that legal own-
ership of an intangible, while the paramount consideration, is not dis-
positive if “such ownership is inconsistent with the economic substance
of the underlying transactions.” Treas. Reg. § 1.482-4(f)(3)(i)(A); Temp.
Treas. Reg. § 1.482-4T(f)(3)(i)(A). But as we held in our opinion, “only
the Commissioner, and not the taxpayer, may set aside contractual

        8 Petitioner cites the testimony of Dr. Viegas, one of respondent’s experts, as

“acknowledging that Brazilian law recognize[d] implied licenses” before 1997, when
Brazil amended its IP law so to provide. We disagree. As we read her testimony, she
was suggesting that Brazil before 1997 might have recognized an implied license for
the limited purpose of protecting a Brazilian company from cancellation of the trade-
mark by the putative licensor. But her testimony offers no support for the proposition
that an implied license, before 1997, could give rise to legally enforceable rights in
Brazil against third parties.
                                   21

[*21] terms as inconsistent with economic substance.” Coca-Cola, 155
T.C. at 245. As we explained, id. at 246:

             Notably absent from this regulation is any provision
      authorizing the taxpayer to set aside its own contract terms
      or impute terms where no written agreement exists. That
      is not surprising: It is recurring principle of tax law that
      setting aside contract terms is not a two-way street. In a
      related-party setting such as this, the taxpayer has com-
      plete control over how contracts with its affiliates are
      drafted. There is thus rarely any justification for letting
      the taxpayer disavow contract terms it has freely chosen.
      But because the terms of such contracts may be self-serv-
      ing and tax-motivated, the regulations regularly authorize
      the Commissioner to set contract terms aside if they do not
      reflect economic reality.

       For these reasons, we reject petitioner’s “economic substance” ar-
gument, as well as its other arguments urging that the Brazilian supply
point be recognized as a pre-1986 deemed licensee of the seven addi-
tional trademarks. Five of these trademarks were enumerated in a
BPTO-recorded license agreement only after November 17, 1985, and
two were never enumerated in any written license agreement at all. Be-
cause these seven trademarks were not the subject of “transfers made
or licenses granted to [a] foreign person[] before November 17, 1985,”
Treas. Reg. § 1.482-1(j)(4), they are not covered by the grandfather
clause.

      3.     Additional 53 Trademarks Covering Core Products

       Between November 17, 1985, and the tax years at issue, TCCC
registered in Brazil 53 additional trademarks relating to Coca-Cola,
Fanta, Sprite, and their lines and extensions. Coca-Cola, 155 T.C.
at 194. These trademarks covered Coke Zero, Diet Fanta, the Coca-Cola
contour bottle shape, the Coca-Cola polar bear, the “S” logo related to
Sprite, secondary design features for these product families, advertising
slogans, and composites of existing trademark elements.

      Petitioner concedes that these 53 trademarks are not covered by
the grandfather clause. But citing testimony of Dr. Franklyn, its expert
witness at trial, it contends that these 53 trademarks are “redundant,
highly related, derivative of or superfluous to” the 15 trademarks regis-
tered before November 17, 1985. Petitioner then asserts that “there is
                                  22

[*22] no value allocable to trademarks licensed on or after November 17,
1985, because the value of those trademarks is de minimis” in the hands
of the holder of trademarks registered previously.

      We disagree with petitioner’s submission in the extreme form in
which it is advanced. We have determined that 7 of the 15 pre-1986
trademarks are not covered by the grandfather clause. Petitioner has
not shown that the 53 trademarks are “redundant and derivative” once
those 7 trademarks are removed from the relevant universe.

      Moreover, at least 4 of the 53 trademarks—covering the product
names Coke Zero and Diet Fanta, the Coca-Cola contour bottle shape,
and the “S” logo related to Sprite—were independently significant in an
economic sense. And they held value for the Brazilian supply point be-
cause it manufactured concentrate for these beverage products. We
agree with petitioner that trademarks used primarily for marketing
purposes, such as advertising slogans and composites of existing trade-
mark elements, had only incremental economic value. But these trade-
marks were basically irrelevant to the supply point anyway because it
engaged in no consumer marketing.

      4.     Trademarks Covering Non-Core Products

       TCCC was the registered owner in Brazil of more than 100 trade-
marks related to its non-core beverage products. During 2007–2009,
these products included Dasani, Minute Maid, Powerade, Aquarius,
Burn, Kuat, and other local Brazilian brands. Sales of these noncore
products accounted for roughly 20% of the Brazilian supply point’s rev-
enue. All trademarks for these newer products were registered after
November 17, 1985. None of these trademarks is covered by the grand-
father clause.

D.    Allocation of Value Between Grandfathered Intangibles and Those
      Not Grandfathered

       Petitioner has shown that eight of TCCC’s trademarks were li-
censed to the supply point before November 17, 1985. Those are the only
intangibles in commercial use during 2007–2009 that were covered by
the grandfather clause. We find that petitioner has failed to carry its
burden of proving what portion of the Commissioner’s adjustment is at-
tributable to income derived from this (relatively small) subset of the
licensed intangibles. And the record does not contain data from which
we could make a reliable estimate of that percentage.
                                   23

[*23] While we do not dispute the tremendous economic value inherent
in TCCC’s trademarks generally, we find that TCCC’s non-trademark
IP held the greatest relative value for the supply points, including the
Brazilian supply point. After all, the supply point was engaged in
manufacturing. In producing concentrate, it employed TCCC’s patents,
secret formulas, production processes, proprietary mixing specifications,
and confidential ingredients, all “governed by a detailed manufacturing
protocol dictated by TCCC.” Id. at 160. Without access to this non-
trademark IP, the Brazilian supply point could not have earned a single
dollar (or rial) of revenue.

       The Brazilian supply point did need access to certain of TCCC’s
trademarks in order to distribute concentrate to bottlers. But this dis-
tribution function was not complex. The Brazilian supply point was
“permitted to sell concentrate only to bottlers that had an existing con-
tract with TCCC.” Id. at 172. And the bottlers “agreed to purchase con-
centrate from whichever supply point TCCC dictated.” Id. at 224. The
supply point thus sold concentrate “to preordained buyers.” Ibid.

       Because the supply point sold concentrate to preordained buyers,
it had no occasion to use TCCC’s trademarks for economically significant
marketing purposes. By contrast, the bottlers and service companies
were much heavier users of TCCC’s trademarks. The bottlers placed
those trademarks on every bottle and can they manufactured and on
every delivery truck in their fleet. See id. at 264. And the service com-
panies, which arranged consumer marketing, continuously exploited the
trademarks in television, print, and social media advertising. See id.
at 240, 263–64.

       We conclude that all non-trademark IP exploited by the Brazilian
supply point was outside the scope of the grandfather clause. The
blocked income regulation thus applies to that portion of the transfer-
pricing adjustment attributable to exploitation of those intangible as-
sets. We further find that this non-trademark IP represented the bulk
of the value that the Brazilian supply point derived from use of TCCC’s
intangibles generally. Petitioner has supplied no evidence that would
enable us to determine, or even to guess, what percentage of the overall
value was attributable to the residual intangible assets, i.e., the
trademarks.

        Roughly 20% of the supply point’s revenue was attributable to
sale of non-core brands, i.e., beverages outside the Coca-Cola, Fanta, and
Sprite families. TCCC owned virtually all of those non-core trademarks,
                                   24

[*24] and all of them were registered after November 17, 1985. All of
this trademark IP was thus outside the scope of the grandfather clause.

       Petitioner concedes that the 53 core-product trademarks regis-
tered after November 17, 1985, are outside the scope of the grandfather
clause. Petitioner has failed to quantify the relative value of those 53
trademarks, simply insisting that their value was zero or “de minimis.”
We find that the value of these trademarks—particularly those covering
the product names Coke Zero and Diet Fanta, the Coca-Cola contour
bottle shape, and the “S” logo related to Sprite—was not de minimis.

       This leaves the 15 pre-1986 core-product trademarks. Petitioner
has shown that eight of these are covered by the grandfather clause, and
we agree that they are among “the . . . most important marks.” Id.
at 257. But as Dr. Franklyn found, the other seven pre-1986 trademarks
were also important, and we have determined that they are not covered
by the grandfather clause. Petitioner has supplied no evidence that
would enable us to estimate the portion of the aggregate transfer-pricing
adjustment that is attributable to exploitation of the eight original
trademarks, as opposed to the seven additional trademarks.

       In sum, petitioner has failed to satisfy its burden of proof in two
major respects. It has offered no evidence that would enable us to de-
termine what portion of the transfer-pricing adjustment is attributable
to exploitation of the non-trademark IP, which we have found be the
most valuable segment of the intangibles from the Brazilian supply
point’s economic perspective. And petitioner has offered insufficient ev-
idence to enable us to determine what portion of the transfer-pricing
adjustment is attributable to exploitation of the 8 original core-product
trademarks, as opposed to the 60 other core-product trademarks and the
entire universe of non-core-product trademarks. Because petitioner has
failed to establish what portion of the aggregate transfer-pricing adjust-
ment might be attributable to exploitation of the eight grandfathered
trademarks, we have no alternative but to sustain that adjustment in
full.

      To implement the foregoing,

      Decision will be entered under Rule 155.