On September 3, 2025, the U.S. Court of Appeals for the Eighth Circuit for the second time vacated and remanded a U.S. Tax Court decision in the long-running transfer pricing dispute between Medtronic and the Internal Revenue Service (IRS) over the arm's length royalty owed under intercompany licenses between the U.S. parent of the Medtronic consolidated group (Medtronic US) and its Puerto Rican affiliate (MPROC). The Eighth Circuit agreed with the Tax Court's conclusion that the comparable uncontrolled transaction (CUT) method put forward by Medtronic is not the best method but rejected an unspecified method that had been adopted by the Tax Court. Instead, the appellate court directed the Tax Court to take a second look at the IRS's comparable profits method (CPM) analysis, with due regard for the applicable regulatory requirements. 

As a refresher, the dispute revolves around the allocation of profit between Medtronic US and MPROC, which manufactures medical devices using intangible property licensed to MPROC by Medtronic US. Medtronic's primary litigation position was based on the application of the CUT method based on the "Pacesetter agreement" between Medtronic US and an unrelated party. The IRS, by contrast, maintained that the CPM with MPROC as the tested party was the best method to price the intercompany licenses. On its initial consideration of the case, the Tax Court held in 2016 that the CUT method was the best method and made several adjustments to the Pacesetter agreement, resulting in an overall profit split of roughly 54 percent to Medtronic US affiliates and 46 percent to MPROC. See T.C. Memo. 2016-112 (Medtronic I). The Eighth Circuit vacated that Tax Court opinion and remanded the case after concluding that the Tax Court's factual findings in Medtronic I were insufficient to enable the appellate court to evaluate the Tax Court's determination that the Pacesetter agreement was an appropriate CUT. See 900 F.3d 610 (8th Cir. 2018) (Medtronic II). On remand, the Tax Court again rejected the IRS's CPM but reversed course from its prior opinion, concluding that the Pacesetter agreement is not an appropriate CUT. Instead, the Tax Court adopted an unspecified method that incorporated aspects of the CPM and CUT methods proposed by each party, leading to an overall profit split of roughly 69 percent to Medtronic US affiliates and 31 percent to MPROC. See T.C. Memo. 2022-84 (Medtronic III) (which we covered here). 

On cross-appeal to the Eighth Circuit, the appellate court in its new opinion (Medtronic IV) vacated the Tax Court's 2022 opinion and revived the viability of the CPM as potentially the best method to price the intercompany licenses. The Eighth Circuit in Medtronic IV directed the Tax Court to reassess its conclusion that the 12-14 percent of total system profits allocated to MPROC under the CPM was unreasonably low after reevaluating the comparable companies proposed by the IRS in line with the Eighth Circuit's opinion. 

The Pacesetter Agreement Is Not a CUT

The Eighth Circuit affirmed the Tax Court's holding that the Pacesetter agreement is not a CUT. The Tax Court found, and the Eighth Circuit agreed, that the Pacesetter agreement did not involve intangible property of similar profit potential to the intangible property involved in the intercompany licenses. Despite that finding, the Tax Court adopted Medtronic's CUT method as an element to the unspecified three-step profit split method the Tax Court used in Medtronic III to determine the arm's length price for the intercompany licenses. The unspecified method was advocated by Medtronic as an alternative to its CUT approach.

In an echo of the Eighth Circuit's first opinion (Medtronic II) rejecting the Pacesetter agreement as a CUT without further factual findings, the Eighth Circuit in Medtronic IV held that the Tax Court did not clearly err by finding that the Pacesetter agreement was not comparable to the intercompany licenses and thus could not be used as a CUT. The Eighth Circuit took this conclusion one step further, though, and held that the Pacesetter agreement tainted the Tax Court's unspecified method as well. The Pacesetter agreement's failure to meet the regulatory similar-profit-potential comparability requirement of the CUT method also meant that the agreement did not provide reliable data for an unspecified method. As a result, the Eighth Circuit found that the Tax Court's unspecified method was not the best method.

The Eighth Circuit's opinion does not close the door on the use of an unspecified method in other contexts where no specified method in isolation reaches a reliable result. Taxpayers that want to consider an unspecified method that incorporates one of the specified methods should be careful to follow the guidance in the regulations regarding those specified methods. 

The IRS's CPM Gets a Fresh Look

In both of its opinions in this case, the Tax Court rejected the CPM proposed by the IRS as the best method based on its conclusion that the proposed comparable entities made different products and had different assets, functions, and risks than MPROC. The Tax Court also rejected the IRS's proposed adjustment to account for differences in the product liability risk borne by MPROC compared to the comparables.

The Eighth Circuit in Medtronic IV held that the Tax Court erred in finding that these differences required rejecting the IRS's application of the CPM. Regarding product comparability, the Eighth Circuit concluded that the Tax Court applied too high a threshold of comparability. The applicable regulations do not require that proposed comparable companies produce the same products as the tested party, but instead that the comparable companies are "sufficiently similar" to provide "a reliable measure of an arm's length result." On remand, the Eighth Circuit directed the Tax Court to "consider whether the proposed comparable companies were 'sufficiently similar' to [MPROC] and, if not, whether adjustments can be made to account reliably for any material differences."

In addition, the Eighth Circuit concluded that the Tax Court's opinion in Medtronic III lacked sufficient factual findings to support the court's conclusion that the differences in assets, functions, and risks between the IRS's comparables and MPROC required rejecting the CPM. With respect to differences in asset bases, the Eighth Circuit directed the Tax Court to "make findings as to what were the purported differences in asset bases, what effect any differences had on the amount of profit allocated to [MPROC], and, if necessary, whether adjustments can be made to account reliably for any material differences that negatively impacted [MPROC]'s profit allocation." Hewing closely to the section 482 regulations, the Eighth Circuit viewed differences in the functions performed by the IRS's proposed comparable companies and MPROC as insufficient grounds to reject the CPM and asked the Tax Court to reconsider this aspect of its analysis on remand. Finally, the Eighth Circuit similarly directed the Tax Court to make additional findings regarding the risks borne by MPROC and the proposed comparable companies and evaluate the impact of those findings on application of the CPM.

Realistic Alternatives 

In the Tax Court remand proceedings, the IRS presented evidence that Medtronic US had realistic alternatives to MPROC's function as a finished-device manufacturer, such as relying on a different Medtronic facility or building a new manufacturing facility. The Tax Court found that those alternatives would not be viable "without substantial time and cost," thus dismissing the import of any realistic alternatives on the pricing of the intercompany licenses. The Eighth Circuit held that this was an area where, yet again, the Tax Court failed to make sufficient findings to support its conclusion, such as about how much time and cost Medtronic would have to incur to replicate MPROC. "On remand, the tax court should make those findings and determine whether manufacturing the devices and leads in a different Medtronic facility or building a new manufacturing facility was a realistic alternative to the [intercompany licenses]. This determination is necessary to facilitate review of the tax court's ultimate profit allocation to [MPROC]."

Observations

The Eighth Circuit's opinion vacating Medtronic III and for the second time remanding the case to the Tax Court represents another important milestone in the transfer pricing space. Given the twists and turns the Medtronic case has taken to date, it is premature to draw definitive conclusions. In our prior analysis of the Tax Court's opinion in Medtronic III, we observed that it was unusual for the court to have resorted to an unspecified method in light of the detailed guidance in the post-1994 regulations on specified methods applicable to transfers and licenses of intangible property, including profit splits. The Eighth Circuit's opinion directs the Tax Court to grapple more fully with those detailed regulations, including the painstaking factual findings necessary to appropriately apply them. The final word on this case is yet to be written, however, and care should be taken before attempting to extend the conclusions of the Eighth Circuit to other cases. 

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Brian S. Gleicher, bgleicher@milchev.com, 202-626-1589

Lisandra Ortiz, lortiz@milchev.com, 202-626-5841

Jaclyn Roeing, jroeing@milchev.com, 202-626-5929

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