On August 16, the US Court of Appeals for the Eighth Circuit vacated and remanded the Tax Court’s June 2016 memorandum opinion in Medtronic, Inc. v. Commissioner, which had found substantially in favor of medical device manufacturer Medtronic in its transfer pricing dispute with the IRS. The Tax Court did not accept the IRS’s arguments that Medtronic’s Puerto Rico licensee should be treated as a routine medical device manufacturer under the comparable profits method (CPM) and that significantly higher royalty income therefore should be allocated to Medtronic US for its tax years 2005 and 2006. Instead, the Tax Court applied the comparable uncontrolled transaction method (CUT), deriving arm’s-length royalty rates from an analysis of a third-party license agreement between Medtronic and Pacesetter that was part of a patent infringement litigation settlement.
The Eighth Circuit held that the Tax Court’s findings were factually insufficient for the court to conduct an evaluation of the Tax Court’s determinations.
