UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

┐ EATON CORPORATION AND SUBSIDIARIES, │ Petitioner-Appellee/Cross-Appellant, │ > Nos. 21-1569/2674 │ v. │ │ COMMISSIONER OF INTERNAL REVENUE, │ Respondent-Appellant/Cross-Appellee. │ ┘

Appeal from the United States Tax Court; No. 5576-12—Kathleen M. Kerrigan, Judge.

Argued: July 21, 2022

Decided and Filed: August 25, 2022

Before: DONALD, BUSH, and NALBANDIAN, Circuit Judges.

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COUNSEL ARGUED: Judith A. Hagley, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant/Cross-Appellee. Shay Dvoretzky, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Washington, D.C., for Appellee/Cross-Appellant. ON BRIEF: Judith A. Hagley, Francesca Ugolini, Arthur T. Catterall, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant/Cross-Appellee. Shay Dvoretzky, Raj Madan, Nathan Wacker, Parker Rider-Longmaid, Sylvia O. Tsakos, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Washington, D.C., Brian Kittle, MAYER BROWN LLP, New York, New York, for Appellee/Cross-Appellant. Nos. 21-1569/2674 Eaton Corp. and Subsidiaries v. CIR Page 2

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OPINION _________________

NALBANDIAN, Circuit Judge. Taxes may well be “what we pay for civilized society,” Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting), but that doesn’t mean the tax collector is above the law. This case arises from the IRS’s efforts to circumvent basic contract law.

Eaton Corporation and the IRS entered into two contracts: a pair of advance pricing agreements (“APAs”) meant to govern Eaton’s tax calculations from 2001 through 2010. A few years after entering in to the APAs, Eaton reviewed its records and caught some inadvertent calculation errors. After letting the IRS know, Eaton corrected the mistakes. But the IRS thought that Eaton’s mistakes were serious enough to warrant its unilateral cancellation of the APAs for tax years 2005 and 2006. And after cancelling the APAs, the IRS handed Eaton a notice claiming a deficiency of tens of millions of dollars. Eaton filed a petition in the Tax Court, challenging the deficiency notice and the IRS’s cancellation of the APAs.

The Tax Court sided with Eaton on the major issues, concluding that the IRS had wrongfully cancelled the APAs. The parties raise a much-narrowed subset of arguments in their dueling appeals. For the reasons below, we affirm in part and reverse in part, siding with Eaton on all issues presented.

I.

A. The Tax Framework

Many corporations have overseas affiliates. This presents a challenge for the IRS. An American corporation can exploit its international network to minimize its income-tax liability in the following way: Rather than purchase products that it needs through an arm’s-length transaction like everyone else (e.g., for $50 million), it can instead buy the products from its foreign subsidiary at an inflated price (e.g., $100 million). This inflated “transfer pri