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U.S. Tax Court rules it can hear IRS, Eaton Corp tax dispute

WASHINGTON (Reuters) - The U.S. Tax Court said on Wednesday it has jurisdiction to hear a $126.5 million tax dispute between the Internal Revenue Service and Eaton Corp , and that a trial may be scheduled soon.

In a case widely watched by other U.S. multinational companies, the IRS and Eaton are battling over a tax bill stemming from two tax agreements the IRS canceled with the company in December 2011.

The IRS has argued it broke the agreements because Eaton was not abiding by the terms of the deals.

Eaton, maker of electrical and hydraulic systems, is arguing that the IRS broke contracts, known as "advance pricing agreements," and that the company should not have to pay more taxes or penalties.

The case deals with transfer pricing agreements among the company's units, complicated tax strategies widely used among global corporations.

Eaton must prove that the IRS canceled the APAs for reasons that were "arbitrary, capricious or without sound basis in fact," Tax Court Judge Diane Kroupa wrote in a 17-page decision.

A spokesman for Eaton could not immediately be reached on Wednesday. The IRS declined to comment.

(Reporting by Patrick Temple-West; editing by Matthew Lewis)