Tax Court Rules in BMC; Latest in Amazon, Eaton, Other Cases

Transfer Pricing Report's Dolores Gregory rounds up the latest U.S. Tax Court developments in this story, published in today's issue of Transfer Pricing Report.


In transfer pricing cases involving, Medtronic Inc. and Guidant LLC, taxpayers are seeking protective orders to prevent public disclosure of sensitive business information.

Meanwhile, in a case brought by BMC Software Inc., the U.S. Tax Court ruled that accounts receivable established under a Rev. Proc. 99-32 election constitute increased related-party debt for purposes of Section 965, rejecting a taxpayer's argument that the Section 965 related-party debt rule applies only to “intentionally abusive transactions.”

The Internal Revenue Service is opposing each of the protective order motions.

The agency also defeated a bid by the taxpayer in Eaton Corp. v. Comr. to seek a protective order in that case.

Eaton asked the court to bar the IRS from conducting discovery in an audit of the company's 2007-10 tax years, but the court ruled Aug. 21 that there was no compelling reason to do so.

Amazon Protective Order

In Amazon, the IRS Aug. 30 filed an objection arguing that the taxpayer failed to show good cause for such an order, which it said would be overly broad and restrictive if adopted as proposed.

Amazon's proposed order “goes far beyond protecting alleged trade secrets or confidential information disclosed during the discovery phase of this case,” the IRS said. “Petitioner's proposed protective order mandates that respondent join with petitioner to ask the Court to seal the record without requiring petitioner to show any harm from disclosure, let alone meeting the high standard needed to override the public's interest in access to judicial procedure.”

Rather, the agency said, Amazon relied solely upon general allegations of its trial counsel.

“It is well settled that contentions and conclusions of counsel cannot establish good cause under T.C. Rule 103(a),” the IRS said.

To show cause, the taxpayer must specify what information will cause it harm and why the information it seeks to protect is “not stale,” the agency said, noting that Amazon has already indicated that its preexisting intangible property at the time of its buy-in had a “limited useful life, seven years or less.” is challenging a $2 billion adjustment in connection with a qualified cost sharing arrangement between it and a European subsidiary, claiming that the IRS erred in relying on a discounted cash flow method previously rejected by the U.S. Tax Court in Veritas Software Corp. v. Comr.

The taxpayer also must show that the protections afforded it under Section 6103, which ensure confidentiality of returns and return information, are inadequate.

The IRS said that Amazon's proposed protective order is overly broad, preventing the agency from sharing information with its own employees. If the IRS's objection is overruled and the protective order is granted, the agency said, it should be modified to, among other changes, apply only to discovery and should not address whether the record should be sealed with respect to protected information.

Medtronic Set for Trial

In Medtronic Inc. v. Comr., a trial date is set for Dec. 1, 2014, in Chicago. Taxpayer motions also are pending for partial summary judgment and for a protective order barring public disclosure of trade secrets.

A medical device maker, Medtronic filed suit in March 2011, challenging $2.7 billion in upward income adjustments for 2005-06. The adjustments included $1.2 billion for transactions related to the manufacture and sale of cardiac and neurological devices in Puerto Rico, which are the subject of the partial summary judgment motion filed June 28.

In a motion filed Aug. 14, the Minneapolis-based medical technology company said it seeks to protect its proprietary and confidential documents and other commercial information, including trade secrets, from public disclosure.

Without a protective order, the company said, it could suffer competitive harm. It noted that the protective order it seeks is similar to protective orders issued by the court in Veritas Software Corp. v. Comr., 133 T.C. 297, (2009); Microsoft Corp. v. Comr., 115 T.C. 228 (2000); Seagate Technology Inc. v. Comr., 102 T.C. 149 (1994), and other cases.

The IRS was scheduled to file a response to the partial summary judgment motion by Sept. 13. On Sept. 5, the court ordered the IRS to file its response under temporary seal.

On Sept. 6, the court also ordered the parties to file an “issues memorandum” no later than April 30, 2014, which will set out the issues of fact and law that must be resolved at trial. The memorandum must include an exposition of each party's position and theory with respect to those issues, the court said.

The issues of fact and law are to be set forth in “sufficient detail to enable the Court to decide the case in its entirety by addressing each of the issues listed,” according to the order.

The exposition of the parties' positions and underlying theories are to include a narrative statement explaining what each party expects to prove, the court said. The memorandum also must indicate whether expert testimony is expected and what that testimony is likely to entail.

The issues memorandum will control the admissibility of evidence at trial, the court said, and neither party will be permitted to advance a theory or underlying position that differs from the positions and theories set forth in the memorandum.

Guidant Seeks Protection

Guidant LLC also filed a motion for a broad protective order Sept. 3, seeking to protect trade secrets from public disclosure in a consolidated case involving more than $2.3 billion in transfer pricing adjustments.

Guidant in March 2011 filed a protest of $1 billion in transfer pricing adjustments for 2001-02 related to technology licenses and manufacturing arrangements between it and its Puerto Rican and Irish subsidiaries. The case was consolidated with complaints filed by related parties Boston Scientific Corp. and Cardiac Pacemakers Inc.

During the period covered by the original deficiency notice to Guidant, Cardiac Pacemakers had been its subsidiary. Guidant was acquired by Boston Scientific Corp. in 2006.

The deals covered by the Guidant litigation are also the subject of a petition filed by Abbott Laboratories to protest $1.2 billion in transfer pricing adjustments for 2006-08, which relate to Abbott's financing of the purchase of Guidant by Boston Scientific and the subsequent migration of Guidant's intangibles to Ireland. Abbott's petition is not consolidated with the other cases.

In its motion for a protective order, Guidant said that the IRS has sought technology trade secrets and other confidential business information as part of its first informal discovery request. The documents it seeks relate to sales, manufacturing improvements, R&D processes and projects, third-party contracts and agreements, clinical trials, product recalls, and product liability litigation.

The company said that public disclosure could subject it to competitive disadvantages. Further, release of third-party information could violate confidentiality agreements with those parties, and certain documents related to product recalls, product liability and clinical trials might implicate confidential patient information, in violation of federal or state privacy laws.

A broad protective order would be more efficient than document-by-document requests, the taxpayer said, citing similar orders issued in Veritas and GlaxoSmithKline Holdings (Americas) Inc.

IRS Seeks to Split Eaton Proceedings

In other developments, the IRS asked the U.S. Tax Court to bifurcate the issues in Eaton Corp., dealing first with the cancellation of the taxpayer's two advance pricing agreements and second with the transfer pricing adjustment.

In its motion to bifurcate the case, the IRS cited U.S. Tax Court Rule 141(b) in arguing that separate trials are appropriate where a threshold question—in this case, whether the agency acted properly in canceling the company's APAs—can prove dispositive or lead to a negotiated settlement. The question of whether the resulting $368 million adjustment to Eaton's income was appropriate could be determined after the threshold issue of the APA cancellations, the IRS said.

“A separate trial of the cancellation issue, regardless of outcome, would enhance the likelihood that the parties could reach a settlement of many, if not all issues, remaining in the case,” the agency said, noting that a negotiated settlement would be unlikely if the issues were tried together.

The court also ruled Aug. 21 that Eaton may take a nonconsensual deposition of IRS expert John Hatch.

IRS Obtains Extension in Tyco

The tax court Sept. 10 also granted the IRS an extension to file its answers to 14 petitions by seven former subsidiaries of Tyco International.

The subsidiaries are challenging nearly $3 billion in income adjustments related to intercompany financing of acquisitions and restructurings in the late 1990s—deals that the companies structured as loans and the IRS says are not “bona fide debt” for federal income tax purposes.

The petitions were filed July 22. The court granted the IRS's motion for an extension to Oct. 30.