Medtronic, Inc. & Consolidated Subsidiaries v. Comissioner, No. 17-1866 (8th Cir. 2018)
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The Eighth Circuit vacated the tax court's valuation of Medtronic's true income for the 2005 and 2006 tax years. The Commissioner claimed that Medtronic shifted income from its highly profitable U.S. operations and intangibles to an offshore subsidiary operating in a tax haven in Puerto Rico by charging an artificially low rate for the intangibles.
The court held that the tax court's factual findings were insufficient to enable the court to conduct an evaluation of the tax court's determination that the Pacesetter agreement was an appropriate comparable uncontrolled transaction (CUT) because it involved similar intangible property and had similar circumstances regarding licensing. In this case, the tax court did not address in sufficient detail whether the circumstances of the settlement between Pacesetter and Medtronic US were comparable to the licensing agreement between Medtronic and Medtronic Puerto Rico; did not analyze the degree of comparability of the Pacesetter agreement's contractual terms and those of the Medtronic Puerto Rico licensing agreement; did not evaluate how the different treatment of intangibles affected the comparability of the Pacesetter agreement and the Medtronic Puerto Rico licensing agreement; and did not decide the amount of risk and product liability expense that should be allocated between Medtronic US and Medtronic Puerto Rico.
Court Description: Wollman, Author, with Shepherd and Erickson, Circuit Judges] Tax Appeal. Following a determination 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, the IRS used the comparable profits method, rather than the comparable uncontrolled transaction (CUT) transfer pricing method to determine than arm's length price for Medtronic's intercompany licensing agreements to determine income tax deficiencies for 2005 and 2006. Medtronic appealed to the Tax Court. The Tax Court applied its own valuation analysis and concluded the Pacesetter agreement as the best CUT to calculate the arm's length result for intangible property. The Commissioner appeals. The Tax Court's factual findings are insufficient to enable this court to conduct an evaluation of Tax Court's determination; specifically, it 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. Thus, the case is remanded for further consideration. Judge Shepherd concurs.
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