US vs Medtronic, August 2018, U.S. Court of Appeals, Case No: 17-1866

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The IRS was of the opinion, that Medtronic erred in allocating the profit earned from its devises and leads between its businesses located in the United States and its device manufacturer in Puerto Rico.

To determine the arm’s length price for Medtronic’s intercompany licensing agreements the comparable profits method was therefor applied by the IRS, rather than the comparable uncontrolled transaction (CUT) method used by Medtronic.

Medtronic brought the case to the Tax Court.

The Tax Court applied its own valuation analysis and concluded that the Pacesetter agreement was the best CUT to calculate the arm’s length result for intangible property.

This decision from the Tax Court was then appealed by the IRS to the Court of Appeals.

The Court of Appeal found that the Tax Court’s factual findings were insufficient.

The Tax Court failed to:

  • address whether the circumstances of the Pacesetter settlement was comparable to the licensing agreements in this case,
  • the degree of comparability of the contractual terms between the two situations,
  • how the different treatment of intangibles affected the two agreements and
  • the amount of risk and product liability expenses that should be allocated.

 

US vs Medtronic 16 August 2018

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