IRS pursues $1.4B tax case against Medtronic

The U.S. Internal Revenue Service wants an appeals court to give it another bite at the $1.4 billion apple it alleges it’s owed by Medtronic (NYSE:MDT).

Last summer, a federal tax judge found for the Fridley, Minn.-based company in its lawsuit against the IRS over the dispute, which involves “transfer pricing” among the company’s various units during the tax years 2005 and 2006.

In transfer pricing, income is allocated among branches in different countries. It’s a legal tax maneuver companies can use to attribute profits from a product made and sold in the U.S. to a unit in a foreign country. The tax bureau claimed Medtronic owed income tax of $548.2 million for 2005 and $810.3 million for 2006; the Fridley, Minn.-based company disputed the $1.34 billion bill and took the case to the U.S. Tax Court.

Judge Kathleen Kerrigan found in June 2016 that Medtronic proved that the IRS was “arbitrary, capricious, or unreasonable” in its interpretation of the transfer pricing for its Puerto Rico subsidiary. But if Kerrigan’s ruling had gone the other way, the IRS could have dunned Medtronic for extra taxes from 2007 on. Medtronic has said it expects to repatriate between $500 million and $4.5 billion in overseas cash once the dispute is put to bed.

In January Kerrigan found that Medtronic owed some $26.7 million for the 2005 tax year but had overpaid by nearly $12.5 million the next year, leaving a tax tab of just $14.3 million, according to court documents.

Last week IRS commissioner John Koskinen’s office asked the U.S. Court of Appeals for the 8th Circuit to reopen the case, arguing that the Tax Court was mistaken to use Medtronic’s transfer pricing technique rather than the IRS’s.

“The commissioner contends that the court erred as a matter of law because its adoption of Medtronic’s transfer-pricing method, and its rejection of the commissioner’s method, conflict with the relevant rules. A remand is required so that the Tax Court may reevaluate the best transfer-pricing method,” according to court documents filed July 21. “Alternatively, the commissioner contends that the case should be remanded so that certain adjustments may be made to the transfer price adopted by the Tax Court.”

 

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