The U.S. Court of Appeals for the Sixth Circuit (the appeals court) affirmed that Eaton must comply with IRS summonses requesting annual performance evaluations for certain foreign technical employees as part of a transfer pricing audit.

The appeals court also held that the district court did not abuse its discretion when it found that the comity factors favored enforcing the summons.

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 at arm's-length 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 the most recent opinion, the district court held that the summonses should be enforced, finding that the comity factors weighed in favor of enforcing the summonses, which trumped the GDPR blocking Eaton from producing the performance evaluations. The case has bounced back and forth between the district court and appeals court to determine whether, and how much, of the information Eaton must submit to the IRS (see Tax Alerts 2025-1507, 2024-1791, 2024-1711, 2024-1136, 2023-0719).

Sixth Circuit order

The appeals court upheld the district court's order that Eaton must comply with the IRS summonses. In its analysis, the appeals court said disclosure could still be justified under concepts of international comity, even if it would violate the GDPR. In this case, the appeals court believed the district court did not abuse its discretion when concluding that the five-factor comity test favored disclosure.

The parties agreed that the first (the information's importance) and third (the information's geographic origin) factors favored Eaton, and the second factor (the request's specificity) favored the IRS. The remaining issues were whether the fourth factor (available alternatives) and the fifth factor (weighing the United States' and Ireland's national interests) favored disclosure.

Regarding the available alternatives, the appeals court held that the district court did not abuse its discretion by finding that Eaton's proposed alternatives were not substantially equivalent because "they were more expensive, more time-consuming, and limited by fading memory," according to the appeals court.

Regarding the weighing of national interests, the appeals court also held that the district court did not abuse its discretion when it found that "the balance, while close, favored the IRS." According to the appeals court, the IRS has an interest in investigating potential tax liabilities. Even assuming the GDPR applies, the opinion stated that Ireland's "interest in shielding these evaluations is minimal." The appeals court said the district court permissibly found that the evaluations (1) are mainly about work assignments and so would receive the lowest level of protection under the GDPR; and (2) do not contain any sensitive information about the employees' race, religion or health. In addition, the district court had entered a protective order allowing Eaton to redact any sensitive information, allowing Eaton to remove any sensitive data before it delivers the evaluations to the IRS.

"All in all, the specificity of the summonses, the lack of alternatives, and the balance of national interests all favor the IRS, while only the evaluations' minimal relevance and foreign location favor Eaton," the appeals court concluded.

Implications

The appeals court's upholding of the district court's ruling despite GDPR concerns indicates that US courts may determine that foreign data privacy laws do not override US tax enforcement interests. In this case, US tax enforcement interests entitled the IRS to request data that the court says has minimal relevance to the matters under audit. Taxpayers should expect continued scrutiny of employee-level contributions to IP transactions and ensure documentation aligns with functional realities.