On August 8, 2025, the U.S. Court of Appeals for the Sixth Circuit issued an order in United States v. Eaton Corporation (Case No. 24-3732) that upheld the Internal Revenue Service's (IRS) ability to obtain employee performance evaluations from the taxpayer's foreign affiliate in a U.S. transfer pricing audit. The order, coming two years after the IRS summons was issued, reinforces the breadth of the IRS's authority to request information relevant to its examination function, even when such a request may be in conflict with foreign privacy laws.

The summons enforcement dispute arose from the IRS's transfer pricing audit of Eaton's 2017-2019 tax years. The audit included review of whether Eaton's sale of intellectual property to its Irish affiliate in 2017, and subsequent royalty payments for continued use of that intellectual property, were priced at arm's length as required under section 482. Through the long life of the enforcement case, including a prior appeal to the Sixth Circuit and remand back to the U.S. District Court for the Northern District of Ohio, the IRS argued that the evaluations were critical to understanding the extent of the contributions made by Eaton's Irish affiliate to development of the intellectual property. Eaton countered that the evaluations had minimal relevance to the IRS inquiry and that, alternatively, the IRS could obtain the information through employee interviews and answers to written questions. Furthermore, Eaton argued that producing the evaluations would violate the EU's General Data Protection Regulation (GDPR), which it said the IRS must respect under the principles of international comity.

The Sixth Circuit's August 8 order affirmed that the district court had not abused its discretion when it determined to enforce the summons for a limited set of employee performance evaluations. Responding to Eaton's GDPR argument, the court found that enforcement of the summons was supported by the five-factor comity test in Société Nationale Industrielle Aérospatiale v. U.S. Dist. Ct. for S. Dist. of Iowa, 482 U.S. 522 (1987). The appeal only involved arguments by Eaton on application of two factors, the fourth and the fifth, which the court rejected in upholding the summons. The Sixth Circuit held that the fourth factor – the availability of alternatives to the information sought by the IRS – weighed in favor of enforcement. An alternative must be a "substantially equivalent alternative means" to obtain the information sought by the IRS. The Sixth Circuit emphasized that this required that the alternative provide a substantially equivalent means of obtaining the requested information, not merely a substantially equivalent alternative to the information sought by the IRS. Eaton's proposed alternatives would have been more expensive, more time-consuming, and limited by faded memories such that the means would not be substantially equivalent, even if the information ultimately secured was. Contemporaneous written records can be more probative, the Sixth Circuit noted, and, in any event, would likely be required to test the veracity of any testimony.

The Sixth Circuit also held that the fifth factor – the interests of the United States and the foreign country where the information is kept – weighed in favor of enforcement. While the balance was close, the IRS's broad interest in investigating potential tax liabilities prevailed over Ireland's weak interest in shielding the evaluations. The evaluations did not contain sensitive information on the employees' race, religion, or health that would trigger GDPR's heightened restrictions and penalties, and the district court allowed Eaton to redact any information that might rise to that level. Furthermore, any possible enforcement of GDPR against Eaton was hypothetical. The fact that the evaluations had minimal relevance to the transfer pricing dispute (as observed by the district court based on its in camera review) did not change this analysis, because relevance is considered under the first factor of the comity test (which was not contested before the Sixth Circuit).

In future transfer pricing audits, the IRS may be emboldened by the Sixth Circuit's order to issue more expansive requests for foreign information that is facially protected by foreign laws, even if the information has only minimal relevance to the issues under review. The Sixth Circuit's order also appears to limit the alternative approaches that could be available to taxpayers, particularly for audits involving tax years that are more than a few years in the past. Taxpayers are not left without defenses, however. During an earlier stage of the litigation, the Sixth Circuit ordered the district court to conduct an in camera review of the evaluations. Coming out of that review, the district court agreed with Eaton that only the evaluations of employees with technical roles related to the transferred intellectual property were relevant to the IRS's summons and excluded from production the evaluations of non-technical employees. While the threshold for relevance in enforcing an IRS summons is low (see United States v. Powell, 379 U.S. 48 (1964)), it is a real threshold that must be met. In addition, taxpayers should consider whether the redaction of sensitive information would facilitate the production of foreign records to the IRS while maintaining compliance with foreign laws.

For more information, please contact:

Michael J. Desmond, mdesmond@milchev.com, 202-626-1575

Jaclyn Roeing, jroeing@milchev.com, 202-626-5929

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