In recent years, the U.S. Tax Court has been at the center of high-stakes transfer pricing disputes involving multinational corporations and the Internal Revenue Service. Two of the most consequential cases—Facebook, Inc. v. Commissioner and Medtronic, Inc. v. Commissioner—highlight a potential shift in the Tax Court's approach to evaluating transfer pricing methodologies under Section 482 of the Internal Revenue Code. These cases not only underscore the complexity of valuing intangible assets but also suggest that the Tax Court may be shifting its stance on its role in resolving methodological disputes—particularly in light of the contentious Medtronic appeal currently before the Eighth Circuit and the Supreme Court's rejection of Chevron deference.
The Facebook decision, issued in 2025, is particularly notable for the Tax Court's refusal to substitute its own methodology after rejecting both parties' approaches—marking a departure from its more interventionist stance in Medtronic. This article explores the facts, legal reasoning, and implications of the Facebook decision, and contrasts it with the Tax Court's handling of Medtronic, where the Court undertook its own transfer pricing analysis. Together, these cases offer a window into the possible future of transfer pricing litigation and judicial deference in tax controversies.
Facebook's Transfer Pricing Dispute
In 2010, Facebook, Inc. ("Facebook US") entered into a series of agreements with its Irish affiliates ("Facebook Ireland") to share the costs and risks of developing Facebook's online platform technology. Under Facebook's cost sharing agreements, Facebook US granted Facebook Ireland a license to Facebook US's online platform technology, Facebook US's user base, and Facebook US's marketing intangibles—which granted Facebook Ireland development rights for the technology outside the U.S. and Canada—in return for a contingent annual payments set at arm's length amounts. The cost sharing agreement required the parties to split development costs based on their reasonably anticipated benefits, calculated using the net present value of gross profits over a three-year period.
In 2016, the IRS issued a notice of deficiency for the 2010 tax year, asserting that Facebook had significantly undervalued the licensed intangibles. Facebook US's valuation that underpinned its licensing arrangement with Facebook Ireland measured the assets at $6.3 billion. The IRS, however, initially valued the assets at $13.9 billion, later increased its estimate to $21.2 billion, and ultimately settled on $19.9 billion in its post-trial briefs. Applying the income method, the IRS treated Facebook US's transfer as a "package deal" and assumed Facebook US could replace Facebook Ireland entirely.
Facebook challenged the IRS's methodology, arguing that the income method was inappropriate, because Facebook US and Facebook Ireland were both making valuable, nonroutine platform contributions that reduced the value of the intangibles. Instead of the income method, Facebook asserted at trial that the best method for valuing its assets was an alternative "unspecified method" (i.e., a transfer pricing method not specifically contemplated by the Treasury Regulations). Facebook also argued that, even if the income method was the best method for valuing the licensed intangibles, the IRS's application of the method was unreasonable.
Tax Court's Decision in Facebook v. Commissioner
On May 22, the U.S. Tax Court ultimately held that IRS's preferred method, the income method, was the best method for valuing Facebook US's licensed intangibles. It further agreed with the IRS that the transaction should be treated as a package deal.
However, the Court found that the IRS's application of the income method was flawed. In particular, it found that the IRS's assumption that Facebook US could replace Facebook Ireland entirely was unsupported by the record at trial. The Court further concluded that certain inputs used in the IRS's model for the income method were unreasonable, which meant that the IRS had abused its discretion adjusting Facebook's transfer pricing.
Rather than substitute its own methodology though, the Court "sifted through the record" to identify more reliable inputs and directed the parties to recalculate Facebook's tax liability using those inputs. This approach marked a significant departure from the Court's earlier decision in Medtronic v. Commissioner, where it had taken a more active role in crafting and applying a new methodology, ultimately opining on what it deemed an arm's length royalty rate.
The Medtronic v. Commissioner Litigation
The Medtronic litigation has spanned over a decade, with two major rounds of appeals to the Eighth Circuit that are set to dramatically shape the contours of transfer pricing jurisprudence.
The dispute centers on the royalty rates paid by Medtronic's Puerto Rico manufacturing subsidiary (MPROC) to Medtronic US under a licensing agreement for Medtronic's sophisticated and unique medical device intangibles. The IRS applied the comparable profits method ("CPM") in that case, while Medtronic relied on a comparable uncontrolled transaction ("CUT") method based on a third-party licensing agreement.
The Tax Court rejected both approaches: the IRS's CPM was deemed arbitrary and capricious, and Medtronic's CUT method required too many adjustments to be reliable. Unlike in Facebook, the Tax Court in Medtronic performed its own analysis, starting with the third-party licensing agreement and adjusting it to reflect what it believed was an arm's-length result.
The case was appealed to the Eighth Circuit by both parties. While the appellate court did not overturn the Tax Court's ruling, it remanded the case for a more thorough explanation of how the Tax Court arrived at its royalty rates. This remand was significant because it signaled that appellate courts expect a high degree of transparency and rigor in transfer pricing analyses, especially when courts deviate from the methodologies proposed by the parties.
In its second opinion, the Tax Court again rejected both the IRS's CPM and Medtronic's CUT method. Instead, it adopted an unspecified method, which it derived from Medtronic's post-trial briefing. The Court concluded that a single blended 48.4% royalty rate for all the intangibles reflected an arm's-length result. This decision was notable not only for its methodological creativity, but also for its attempt to balance competing economic narratives set forth by Medtronic and the IRS.
Both parties appealed the Tax Court's second opinion to the Eight Circuit, highlighting the controversy surrounding the Tax Court's decision to come up with its own method. The IRS argues that the Tax Court's unspecified method cannot be the "best method" under the Treasury Regulations, particularly because it relies on the third-party licensing agreement involving different types of intangible property than those licensed under the MPROC agreement. Medtronic, on the other hand, has defended its original CUT method and argues that the Tax Court erred in its profit allocation under its unspecified method. Medtronic maintains that the comparable third-party licensing agreement, with certain adjustments, provides a more accurate benchmark for valuing its medical device intangibles. Alternatively, Medtronic argues that even if the unspecified method is accepted, the Court's allocation of profits was flawed and should be revised.
Implications of the Facebook Decision
The Tax Court's more cautious approach in Facebook could be a signal of a shift in approach among its judges post-Medtronic. Unlike in Medtronic, where the Tax Court crafted its own methodology, the Tax Court declined to do so in Facebook—even after rejecting the IRS's application of the income method. Instead, it limited its role to identifying more reliable inputs from the record. By declining to substitute its own method and instead directing the parties to recalculate using more reliable inputs from the record, the Tax Court signaled a preference for adjudicating the reasonableness of existing methodologies rather than crafting new ones.
This pivot in Facebook may stem from a desire to avoid appellate reversal like it faced in Medtronic. The Tax Court going forward may prefer to limit its role to one of oversight rather than economic arbitration—ensuring that the chosen method aligns with regulatory standards and is applied consistently, rather than imposing its own view of what constitutes an arm's-length result. Such a shift would underscore the importance of presenting well-supported, internally consistent analyses that can withstand judicial review without relying on the Court to fill in methodological gaps.
The pivot may also stem from a desire from the Tax Court for taxpayers and the IRS to resolve transfer pricing disputes on their own. In Medtronic, the Tax Court crafted its own transfer pricing analysis and concluded with what it deemed an arm's-length royalty rate. That approach, as we have seen, required more of the Court, and opened the door for reversal and further review from both the Tax Court and the Eighth Circuit. In Facebook, however, the Tax Court expressed its opinion on the best method and determined what it thought to be reliable inputs. But the Tax Court placed the burden back into the hands of the parties to then apply the Court's opinion. Taxpayers and the IRS may be more likely to resolve transfer pricing disputes amicably if litigation is less likely to ultimately conclude the dispute.
Facebook and Medtronic (alongside Coca-Cola's and 3M's own pending appeals) are likely to have an outsized effect on transfer pricing in the coming years, in future audits as well as litigation before IRS Appeals and the Tax Court. The Trump administration continues to focus on reducing the IRS's resources for enforcement, and it also appears to have a limited appetite for new regulations. These cases therefore will likely shape how taxpayers and the IRS approach intangible valuation and cost sharing arrangements, at least through 2028.
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