Medtronic Ruling Shows Risks of ‘Check-the-Box’ Transfer Pricing

The latest federal appeals court ruling involving Medtronic Inc.’s ongoing transfer pricing fight underscores that comparability analysis is the crux of transfer pricing cases.

Once again, the US Court of Appeals for the Eighth Circuit vacated and remanded the US Tax Court’s decision, this time with specific instructions. The central dispute is determining the best method to price intercompany licenses.

The Eighth Circuit rejected the Tax Court’s reliance on an “unspecified method.” It directed the lower court to reconsider whether the comparable profits method, or CPM, can be more rigorously applied—provided that comparables are carefully selected, material differences are identified and quantified, and realistic alternatives are considered.

For companies preparing transfer pricing documentation, the Medtronic litigation highlights that a CPM analysis can’t be treated as a “box checking” exercise.

Where intangible property is broad and complex (as in Medtronic’s licensing of patents, know-how, and regulatory approvals), a finely tuned CPM often provides the most reliable framework.

The CPM evaluates comparability based on the profitability of comparable uncontrolled companies. It doesn’t require identical products or contracts. Instead, it depends on the comparables chosen and the reliability of adjustments for differences in functions, assets, and risks.

The Tax Court had rejected the IRS’s proposed comparables because they made different classes of medical devices or performed broader functions. The appellate court emphasized that product or functional differences don’t automatically disqualify a company.

It directed the Tax Court to identify the differences in assets, functions, and risks between Medtronic Puerto Rico (MPROC) and the proposed comparables, quantifying their effect on profitability, and evaluating if adjustments would improve reliability.

The CPM is by far the most commonly applied transfer pricing method, mainly because reliable benchmarks for transfer pricing transactions are often scarce and because operating profit is less sensitive to product differences than gross margins.

However, relying on broad comparables elevates the need to identify material differences in functions, risks, and assets, and then make reliable offsetting adjustments. Quantifying adjustments, however, is often controversial. In Medtronic, for instance, experts’ estimates of MPROC’s product liability risk varied by a factor of about ten.

The Eighth Circuit nevertheless insisted that the Tax Court, rather than dismissing comparables outright, undertake such an analysis—even if reliable, objective data is unavailable—because companies don’t track risk exposure or intangible contributions in a way that translates neatly into quantitative adjustments.

CPM remains the most widely used method because it’s flexible, market based, and often the only practical approach. Its weakness, however, lies in the difficulty of making reliable comparability adjustments.

By contrast, the comparable uncontrolled transaction method often breaks down in practice. Real world licenses seldom align with the breadth of intangibles or profit potential embedded in intercompany arrangements. Even modest differences in license scope can render results unreliable.

CPM, though imperfect, provides a sturdier benchmark because it rests on market level profitability across multiple companies rather than the quirks of a single contract.

In addition to promoting a more reliable application of the CPM, the Eighth Circuit instructed the Tax Court to evaluate if Medtronic had “realistic alternatives” to operating MPROC and what would be the cost and time involved in those alternatives.

Although appealing in theory, this can be difficult to implement. It would require the Tax Court to ask if an unrelated party in Medtronic’s position would have chosen to license intangibles to MPROC if other options, such as expanding a US facility or building a new one, were realistically available.

But counterfactuals are inherently speculative. To recreate them, the Tax Court must consider not only construction and operating costs but also the time required to get a facility running, the regulatory hurdles, the workforce constraints, and the risks of disrupting global supply chains.

None of that information is available in financial statements or external databases; it would require a separate and likely contentious analysis.

Going forward, taxpayers should carefully review the pool of companies considered and select comparables consistently and objectively. They must analyze accepted comparables functionally and financially; identify material differences such as product liability exposure, working capital intensity, asset base variations, or workforce specialization; and attempt countervailing adjustments.

The realistic alternatives principle requires proactivity. The IRS challenged whether Medtronic could have realistically replaced MPROC with an FDA-compliant facility in the mainland US rather than licensing intangibles offshore.

Evaluating such alternatives requires weighing construction timelines, regulatory approvals, workforce constraints, capital outlays, and supply chain risks—none of which are straightforward.

Taxpayers facing questions about comparables shouldn’t ignore these alternatives but instead explain, with supporting evidence, why they were commercially impractical. Documenting this analysis helps ensure that the taxpayer, rather than the IRS or a court, frames the narrative.

By combining disciplined CPM execution with thoughtful, documented consideration of realistic alternatives, taxpayers can strengthen their transfer pricing files and significantly reduce the risk of audit and litigation.

The case is Medtronic, Inc. v. Commissioner, 8th Cir., Nos. 23-3063 and 23-3281, Opinion 9/3/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Vernon Noronha is a director at Baker Tilly with expertise in transfer pricing services across a range of industries.

Ravi Ganapathy is a senior manager at Baker Tilly with extensive experience in transfer pricing.

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