Coca-Cola tax matters may resurface following recent ruling, cautions Deutsche Bank

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By Sam Boughedda

Deutsche Bank analysts said in a note Friday that Coca-Cola's (NYSE:KO) tax matters may resurface for the company following the recent court ruling in favor of the IRS in the 3M Company (NYSE:MMM) lawsuit.

On Thursday, the U.S. tax court issued a ruling in the IRS's favor in its suit against 3M related to "blocked income" in Brazil, which was first filed back in 2013.

"Recall that KO's own suit with the IRS has been on hold since November 2020 pending the outcome of this 3M case, in order to determine the ultimate value of KO's tax potential liability," wrote the analysts, who have a Hold rating and $62 per share price target on Coca-Cola shares.

While Deutsche Bank does not believe the associated impact from this ruling on Brazilian blocked income is "overly material relative to the aggregate liability in KO's case," they believe it now "theoretically permits the Tax Court to issue an opinion with respect to KO's Brazilian blocked income."

The analysts feel Thursday's ruling seemingly restarts a process in Coca-Cola's case that has effectively been on hold for the better part of two years.

"We expect Thursday's decision could renew investor focus on KO's potential tax liability, following several quarters in which strong fundamental momentum had outshined the tax overhang," said the analysts.

"For our part, we estimate that KO's tax liability for the 2007-2009 litigated years and 2010-2022 years now amounts to roughly $14 billion, including accrued interest and penalties (to be confirmed in KO's upcoming 10-K filing). Upon final ruling, KO would be required to pay the IRS an estimated ~$5.2 billion (included within the $14 billion above), some or all of which would be refunded if KO prevails on appeal."