Overview
Eighth Circuit Vacates Tax Court’s Decision in Medtronic:
In Medtronic, Inc. v. Commissioner, No. 17-1866, the Eighth Circuit vacated the order of the Tax Court and remanded for further proceedings.
In the Tax Court, the IRS had asserted that the comparable profits method should be used to determine an arm’s-length royalty under Medtronic’s intercompany license agreement between the U.S. parent and its Puerto Rican subsidiary, while the Tax Court agreed generally with Medtronic that the comparable uncontrolled transaction (CUT) method was the best method for determining an arm’s-length royalty. The IRS appealed, seeking a reevaluation of the best transfer pricing method and a recalculation of the arm’s-length royalty rate.
In a unanimous decision, an Eighth Circuit panel vacated the order of the Tax Court holding that the Tax Court “did not address in sufficient detail whether the circumstances of the [agreement used as a CUT] were comparable to the licensing agreement between Medtronic and Medtronic Puerto Rico.” In particular, the Eighth Circuit held that the Tax Court did not adequately address whether: (i) the circumstances of a settlement reached in conjunction with the agreement used as a CUT affected the comparability of the transactions; (ii) terms such as a lump-sum payment and cross-license affected comparability; (iii) differences in the covered intangibles affected comparability; and (iv) the appropriate amount of risk and product liability expense was attributed to Medtronic Puerto Rico. Circuit Judge Shepherd joined the court’s opinion in full, but also wrote a concurrence emphasizing that consideration of “all of the factors that affect comparability” is “mandatory” under Treasury regulations under section 482.
Finance Committee Republicans Request Guidance on Certain Provisions in New Tax Law:
The Republican members of the Senate Finance Committee wrote a letter to Treasury Secretary Steven Mnuchin and IRS Acting Commissioner David Kautter requesting that Treasury and the IRS issue guidance that is “consistent with the congressional intent” of P.L. 115-97 as “reflected in the conference report, revenue estimates, and other legislative history.” In particular, the letter requests guidance regarding qualified improvement property expensing (section 13204); changes to the net operating losses deduction (section 13302); and the sexual misconduct settlement deduction (section 13307). The letter also states that the Senate Finance Committee is conducting a “thorough review . . . to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress.”