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US Inbound: Medtronic: Motion for summary judgment



Jim Fuller

David Forst

A few months ago, we discussed Intersport Fashions West v United States, 103 Fed. Cl. 396 (2012), which involved a taxpayer-initiated transfer pricing adjustment that would have reduced its US subsidiary's US tax. In court, the IRS was successful in contesting that tax reduction under Treas. Reg. § 1.482-1(a)(3). The potential application of that regulation now is the subject of a pending motion for partial summary judgment in Medtronic, Inc. v Commissioner. Medtronic has significantly different facts, however. We discussed the Medtronic fact pattern in a generic manner when we addressed Intersport, and think the court should reach a different answer.

Medtronic filed its motion in the context of a § 482 transfer pricing case and seeks a holding that the IRS's position is arbitrary, capricious or unreasonable. It also seeks a holding that Treas. Reg. § 1.482-1(a)(3) does not limit the Tax Court's authority to determine the correct arm's-length result.

As a result of a 2000-2002 audit, Medtronic, a US corporation, agreed to a transfer pricing increase with the IRS (thereby increasing its US tax). Thereafter, the parties entered into a Memorandum of Understanding (MOU). Medtronic and the IRS agreed they would apply the MOU to 2002 and all future years. In an audit of 2003-2004, the IRS agreed with Medtronic's application of the MOU.

In 2005-2006, the IRS proposed certain modifications to Medtronic's income, which the Service referred to as "corrections" to the methodology set forth in the MOU (though the "corrections" resulted in a substantial tax deficiency). Medtronic filed a protest and went to IRS Appeals. Before a resolution of the matter could be reached in Appeals, the IRS requested that Appeals return the case to the examination team for a further examination. Medtronic states this was due to a change in IRS policy, not because of any change in the facts.

Exam subsequently repudiated the MOU and increased Medtronic's income for 2005 and 2006 by a substantially greater amount – $1.25 billion – than first proposed.

Medtronic does not argue that the MOU is a closing agreement or otherwise a binding agreement. It states, however, that the MOU reflects a factual determination by the IRS's exam team of what constitutes an arm's-length price. The Service, states the taxpayer's motion for partial summary judgment, decided that the MOU royalty rates were no longer arm's-length and that the comparable uncontrolled transactions previously accepted by the Service were no longer comparable.

The facts had not materially changed, however. Consequently, Medtronic states, the IRS cannot now void its factual determinations upon which the MOU was based.

Medtronic also seeks a holding that Treas. Reg. § 1.482-1(a)(3) does not limit the Tax Court's authority to determine the correct arm's-length results. Medtronic states that since the IRS repudiated the MOU, Medtronic now has the right to establish that the lower royalty rates that were used before the MOU are the proper arm's-length royalty amounts.

As we previously discussed, the courts seem to support this: Once the Service has put the amount of the taxpayer's transfer prices in issue, then those prices are in play. See Pikeville Coal v. United States, 37 Fed. Cl. 304 (1997), motion for reconsideration denied, 37 Fed. Cl. 304 (1997); and Ciba-Geigy v. Commissioner, 85 T.C. at 236-37 (1985).

In such a case, the adjustment is not a taxpayer-initiated adjustment as in Intersport. Rather, it involves an effort to determine just what is the proper transfer price in a situation in which the IRS has proposed that the price should be adjusted.

Jim Fuller (

Tel: +1 650 335 7205
David Forst (

Tel: +1 650 335 7274

Fenwick & West


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