A federal appeals court has tossed out a $1.4 billion U.S. Tax Court ruling that found in favor of Medtronic, saying that the lower court failed to analyze several relevant factors related to the Minnesota-run medical device company's past taxes.
The dispute involves the taxes owed on heart devices and leads manufactured at Medtronic factories in Puerto Rico in 2005 and 2006. Medtronic's internal accounting had placed most of the tax liability for those products on plants on the Caribbean island, but the Internal Revenue Service called that accounting a "classic case" of a multinational corporation shifting income on paper to avoid paying U.S. taxes.
The IRS eventually determined that Medtronic owed about $1.4 billion to the U.S. to settle the back taxes related to those products. But following litigation, a judge in U.S. Tax Court sided with Medtronic, finding that the company owed $26 million for 2005, and had actually overpaid by $12 million in 2006.
On Thursday, a three-judge panel of the 8th Circuit U.S. Court of Appeals ruled that the Tax Court failed to consider several important technical legal factors in its analysis of Medtronic's tax situation. As a result, the panel vacated the ruling and sent the case back to the Tax Court for deeper legal analysis.
A Medtronic spokesman noted that the federal appeals court has remanded the case back to Tax Court for additional factual findings on four specific issues.
"It is important to note that this is a procedural decision and not a ruling on the merits," Medtronic spokesman Jeffrey Trauring said via e-mail. "The Eighth Circuit determined that it needed additional analysis from the Tax Court before it could rule on the merits of the appeal, which could now take years to finally determine. We still believe our initially filed tax returns were correct and will continue to defend our position."
The appeals judges wrote that the Tax Court failed to consider: the complex circumstances surrounding another tax-accounting agreement known as the "Pacesetter agreement," which was used as a comparable example in the Medtronic case; the value of "cross-licenses" and intangible items related to the Medtronic products made in Puerto Rico; and the amount of risk and liability that the Puerto Rico plants actually bore in return for their share of the profits on paper.
Medtronic had argued that its Puerto Rico subsidiary "bears the lion's share of potential liability" for any of its defectively made products, which meant that it was also entitled to a "commensurate rate of return" on its operations, the circuit judges wrote, summarizing the arguments in Tax Court.
The IRS called it a "classic case of a U.S. multinational taxpayer (Medtronic) shifting income from its highly profitable U.S. operations and intangibles to an offshore subsidiary operating in a tax haven (Medtronic (Puerto Rico)), by charging an artificially low rate for the intangibles." (brackets in the original.)
In a concurring opinion with the 3-0 decision Thursday, U.S. Circuit Judge Bobby Shepherd noted that federal guidelines require that such factors be considered before the court can rule on a complex tax case like Medtronic's.
"Simply put, the Treasury Department and courts in (other types of) cases deem these factors significant. At the very least, the taxpayer deserves an explanation why they are insignificant in this case," Shepherd wrote.
