The Tax Court has decided in favor of Medtronic in its dispute over the transfer pricing methodology used by the IRS in valuing the contributions of the medical device maker's Puerto Rican affiliate.

The error in allocation resulted in deficiencies of over $1.3 billion.

The court, in T.C. Memo 2016-112, found that the IRS undervalued the role of Medtronic’s Puerto Rican licensee by using the comparable profits method. Instead, the court found that the comparable uncontrolled transactions method, which Medtronic used, was applicable to the majority of the transactions between the parent and subsidiary.

“Heimert’s [the IRS expert’s] analysis was based on his findings that MPROC [Medtronic Puerto Rico Operations Co.] performed one important function— finished manufacturing—among many important functions within the highly integrated value chain,” Judge Kathleen Kerrigan stated. “This approach treated MPROC as equivalent to many other third-party medical device manufacturers who do not create nonroutine assets and who do not bear additional risks that would require the assignment of additional profits.”

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