The U.S. Court for the Northern District of Ohio ruled on May 12, 2025, that Eaton must comply with IRS summonses requesting annual performance evaluations for certain foreign technical employees as part of a transfer pricing audit, but do not have to submit the evaluations for the non-technical employes (US v. Eaton Corp., No. 1:23-mc-00037 (N.D. Ohio, May 12, 2025)).

The case had been remanded to the district court from the U.S. Court of Appeals for the Sixth Circuit to address this issue.

Background

The case concerns a transfer pricing audit conducted by the IRS for 2017, 2018 and 2019, examining whether Eaton's sale of certain intellectual property to its Irish affiliate, Eaton Intelligent Power Limited (EIPL), was conducted on an arm's-length basis under IRC Section 482.

The IRS issued summonses in 2023 for performance evaluations for certain domestic employees and employees of Eaton's foreign related parties to determine how much Eaton contributed to the intellectual property. Both the IRS and Eaton filed memorandums on the enforcement of the summonses.

In 2024, the district court ruled that the summonses should be enforced, finding that the comity factors weighed in favor of enforcing the summonses, which trumped the European Union's General Data Protection Regulation (GDPR) blocking Eaton from producing the performance evaluations. The U.S. Court of Appeals for the Sixth Circuit then granted a 30-day administrative stay, temporarily relieving Eaton from complying with the summonses, and remanded the case back to the district court to review the performance evaluations (see Tax Alert 2024-1711 for a history of the case).

District court ruling

After reviewing the performance evaluations, the district court found that the evaluations for the three non-technical employees (who worked in Human Resources, Finance and as an Executive Assistant) had no relevance and did not have to be produced because they had no role in managing intellectual property or working on Eaton's technologies.

The district court then found that comity still favored enforcing the summonses for the performance evaluations for the remaining 10 employees, who had technical, engineering or patent management roles. According to the district court, the discussion of intellectual property in these performance evaluations could support an inference on whether the employee contributed to control and ownership of the intellectual property and therefore would help the IRS assess whether Eaton or EIPL was responsible for and controlled the intellectual property in question.

"That said, the inferences that the IRS could draw from these evaluations are weak. The evaluations are very short — roughly four-to-five pages — and do not convey how much time or effort an employee spent on a project. Assessing the time and effort spent on the intellectual property, though, is crucial to determining the level of control and ownership being exerted," according to the district court.

Eaton submitted a letter to the Sixth Circuit on May 14, 2025, requesting additional time from the appeals court so it could ask the district court to allow it to redact information from the technical employees' performance evaluations that the district court considered irrelevant.¹ The case is currently awaiting decision from the district court.

Implications

The district court's ruling demonstrates that performance evaluations for technical employees can be relevant in assessing control over intellectual property in transfer pricing audits, even if their probative value is limited. While evaluations for non-technical employees were deemed irrelevant, the decision underscores that employee roles and functions drive the scope of discoverable material. The district court's willingness to enforce the summonses despite GDPR concerns signals that foreign data privacy laws may not override US tax enforcement interests. Taxpayers should expect continued scrutiny of employee-level contributions in IP transactions and ensure documentation aligns with functional realities.