IRS Wins $3.5B ‘Guidant' Case Holding That The IRS Can Make §482 Adjustments on an Aggregate Basis

A medical technology company and its subsidiaries lost their bid to challenge the Internal Revenue Service’s adjustments that increased their income by about $3.5 billion when the U.S. Tax Court ruled Monday, February 29. 2016 that the IRS acted well within its authority.
The deficiencies and the accuracy-related penalty flow from respondent's transfer pricing adjustments under section 482 that increased the income of Guidant Corp. and its U.S. subsidiaries (collectively, Guidant group) by approximately $3.5 billion. The Guidant group filed consolidated Federal income tax returns, and respondent's adjustments stem from transactions that the Guidant group engaged in with the group's affiliated foreign entities.

In consolidated cases, the Tax Court, denied taxpayers' summary judgment motion, and concluded that, when making transfer pricing adjustments under Code Sec. 482, IRS isn't required,
contemporaneously with such adjustments, to determine the true separate taxable income (STI) of each controlled taxpayer in a consolidated group. Further, IRS is allowed to aggregate one or more related transactions instead of making specific adjustments under Code Sec. 482 with respect to each type of transaction.

Respondent determined for purposes of ascertaining the Guidant group's consolidated taxable income (CTI) that all of the adjusted income was the separate taxable income (STI) of Guidant Corp. Respondent did not determine that any of the adjusted income was the STI of one or more of the Guidant group's U.S. subsidiaries. Respondent also did not determine the specific amount of the adjustments that related to tangibles, to intangibles, or to services.

Petitioners moved for partial summary judgment, asserting that respondent's adjustments are arbitrary, capricious, and unreasonable as a matter of law. Such is so, petitioners argue, because:

1. Respondent did not determine the “true separate taxable income” of each controlled taxpayer in the Guidant group as required by section 1.482-1(f)(1)(iv), Income Tax Regs., and
2. Respondent did not make specific adjustments with respect to each transaction involving an intangible, a purchase and sale of property, or a provision of services.

Petitioners filed a memorandum in support of their motion and set forth their factual and legal positions in the memorandum. The parties argued their respective positions at a hearing held in New York, New York.  

Judge David Laro denied Guidant’s motion for partial summary judgment, saying that the IRS has broad discretion to allocate income among controlled enterprises to either reflect income clearly or prevent tax evasion, and is not statutorily required to determine the true separate taxable income of each controlled taxpayer in a consolidated group while making transfer pricing adjustments.

Judge David Laro also stated that the IRS is also allowed to aggregate one or more related transactions instead of making specific adjustments for each transaction type.

In addition, the petitioners did not maintain financial records in a way that would have allowed them to readily track income and expenses by the place of manufacture and they were not able to tie income and expenses in a business unit’s financial statements to particular product lines, the judge said.

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Sources:

Law360

BNA DTR

 

 

 

 

 

 

 

IRS Wins Major Decision in $3.5B ‘Guidant' Case

The IRS scores a major victory as the U.S. Tax Court rules that the agency isn't obligated to determine the separate taxable income of each taxpayer in a consolidated group when making a transfer pricing adjustment.

The court denies a motion for partial summary judgment filed by Guidant LLC in its $3.5 billion transfer pricing dispute. Guidant maintained that the IRS abused its discretion when it failed to determine the separate taxable income for each controlled taxpayer in the group, even though the company admitted that it had refused to produce critical financial data the IRS requested.