Medtronic Seeks Panel Rehearing of Transfer Pricing Decision
Scalar comment:
An interesting case as it highlights the issues surrounding the Best Method rule. At issue is the taxpayer’s use of a Comparable Uncontrolled Price Method (CUP) versus the IRS’s Comparable Profits Method (CPM).
1. Issue & What Was at Issue
Issue:
Medtronic is seeking a rehearing from the Eighth Circuit after the court sided with the IRS in a transfer pricing dispute regarding the valuation of intellectual property (IP) transferred to a Puerto Rican subsidiary.
What was at issue:
- The dispute centers on which transfer pricing method should be used under IRC §482:
- Medtronic’s position: Use the Comparable Uncontrolled Transaction (CUT) method.
- IRS’s position: Use the Comparable Profits Method (CPM) based on profitability comparisons across similar businesses.
- Medtronic argues the court misunderstood transfer pricing regulations, particularly:
- The proper interpretation of §482.
- Congress’s intended rules.
- Treasury’s blocked income rule, which Medtronic says supports using CUT.
- The case has broader significance because another Eighth Circuit panel (including one of the same judges) recently ruled against the IRS in a similar 3M dispute, creating tension in how §482 should be interpreted.
2. Present Result / Current Outcome
- As of now, the Eighth Circuit’s September ruling stands, siding with the IRS and affirming the use of CPM rather than CUT.
- Medtronic has filed a petition for panel rehearing, arguing the panel misapplied both the law and transfer pricing regulations.
- The rehearing request highlights concerns that the current ruling:
- Could lead to misapplication of §482 across many taxpayers.
- Would force taxpayers and the IRS to disregard high-quality evidence if it doesn’t fit within strict method definitions.
- The Medtronic case, alongside the 3M decision, may affect many ongoing transfer pricing disputes involving IP valuation.
3. To-Dos / Expectations / Next Steps
For Medtronic:
- Await the Eighth Circuit’s decision on whether to grant a panel rehearing.
- If denied, Medtronic could consider:
- A new court hearing, or
- Escalation to the U.S. Supreme Court.
For the IRS:
- Continue defending the CPM-based valuation if the rehearing is granted.
- Monitor broader implications, as the 3M ruling complicates the consistency of Eighth Circuit precedent.
Broader expectations:
- The outcome will be closely watched by multinationals with pending §482 disputes—particularly those involving IP transfers and contested method selection.
- A rehearing could clarify or reshape how §482 and the CUT method are interpreted and applied in future tax litigation.
