Bloomberg Law Quotes Clark Armitage on Medtronic Ruling

The Eighth Circuit’s decision to send the Medtronic case back to the Tax Court brings more certainty for companies involved in intercompany transactions by squashing the court’s controversial method to resolve the dispute.

The appeals court didn’t rule clearly Wednesday for either Medtronic Inc. or the IRS, but it leaned more toward the agency. And it emphatically nixed the Tax Court’s choice to apply its own unspecified transfer pricing method to Medtronic’s intellectual property deal with its Puerto Rican subsidiary.

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“CUT is out,” said Clark Armitage of Caplin & Drysdale. “The court said basically—it seems quite blunt to me—they’re not going to accept any kind of CUT that comes up out of the universe of information that’s in front of them.” He said that position is too extreme.

Armitage said the court found that the comparable transaction used by Medtronic was too different from the transaction in dispute, because the Medtronic deal included elements that weren’t included in the comparable. Armitage called this a minor difference, and said disqualifying the comparables for not perfectly matching up poses a big challenge to the method going forward.

“There’s never gonna be an arrangement that looks like that. There’ll always be some difference,” Armitage said. “So, they’re really taking CUT off the table, and I think they went too far.”

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But even if it does accept the CPM as the correct method, how the Tax Court would apply it could lead to a wide variety of outcomes, Armitage said.

“Let’s say the Tax Court approaches this with, ‘OK, I’ve got a recipe here now for how the Eighth Circuit expects me to apply the CPM, so I’m just going to follow the recipe.’ Well, the recipe involves tons of judgment,” he said.

That could mean that even applying the CPM, the Tax Court could end up in a position very similar to its position on the unspecified method, depending on where it landed on those judgments. Additionally, those judgments would be factual conclusions, not legal ones, Armitage said, making them much harder to overturn on appeal.

Medtronic’s legal team is likely already working to figure out how to get the best outcome even with the IRS’s preferred method, he said.

“I’ve heard a couple of people basically say, ‘so it’s all over for Medtronic now,’ and, you know, maybe, but I think that if the court wants to come up with the same outcomes that it had before, it can do so and they’ll be much less likely to be overturned on appeal.”

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