intangibles they're licensed by a u s corporation to its foreign subsidiary by relying on transactions that simply are not comparable in response to congress this mandate the treasury department revised its regulations and  promulgated the regulations that are issue in this case this regulations were designed to tighten the standards for a line on a comparable and controlled transaction method which the parties refer to as the cut please excuse the acronyms and to provide alternative methods for pricing such transfers when there is not a comparable including the comparable to its method utilized by the commissioner here which the part that conflict with the regulations and in doing so we believe that the court undermined congress's intent in treasury's remedial efforts by treating a transactions comparable that's essential nothing like that in our company licenses and great expense and time obtaining these required regulatory approvals and under prior tax court precedent the g d sterile decision transaction with regulatory approvals was not comparable to a transaction that lack regulatory approvals the tax court should have reached the same conclusion in this case the tax court also failed to consider the different circumstances of the two transactions the case later greenman was the litigation settlement of course in the pod decision the fact that a transaction was a litigator litigation settlement precluded it from being entered into under comparable circumstances to be used to cut the fact that litigation settlements  sometimes relevant and kept medication to not mean that they sat they are entered into under comparable circumstances under the transfer pricing regulations and we do want to point out that even with the feds federal circuit with litigation settlement involves across licens even there it's not relevant again the court just failed to engage in this regulatory analysis the tax court also failed to account for the fact t transactions had different consideration the regulations require comparison of significant contractual terms including whether there are any quadrille transactions or the consideration in each here the pa later agreement had lump sum payment seventy five million dollars it also had a cross license again in prior tax court precedent such consideration would preclude a transaction from being considered comparable to a transaction like that in or company licenses that did not include such such consideration the tax court also failed to engage in the required functional analysis it didn't analyze the functions place that or would have to engage and under it's transaction versus medtronic puerto rico and this is critical because the regulation spell out that the functional analysis is method is because there were differences and function and it didn't even analyze whether there are differences in functions under the cut even though it's particularly relevant there so this is another one of the flaws that allow the court to treat the pacesetter agreement a comparable the tax court also failed to analyze the profit potential of the two agreements and the regulations say that to use the cut method you must have intangible proper in must have comparable property subsidiary even though its economic contributions were far less than this if the court engaged in that required analysis we don't think that it would have reached the result that it reached here and certainly is not an a case takes place and we don't get the result that we want this is the first case to actually engage and analyzed the c p m method which is the method that that the treasury department in acted to apply where their product in functional  know why don't you respect that it's overriding concern is that intangibles were being priced at for at prices that were less than arm's length and that corporations were allocating more income to foreign than would be reflected by their economic contributions in this roads the u s tax base and that the way courts were doing this was because there were a line on transactions that were not comparable under the earlier in one nine hundred sixty eight regulations  test of similar intangibles under similar circumstance and if you didn't have a cut then there were certain factors that you would look to the price but the nine hundred ninety four regs which are the regulations are this issue in this case overhaul that there's no where in determining patent damages there there's often an effort to refer to a happy ferric all transaction that would have taken place when the infringement began or some of those factors  misunderstood you but is it is it the government's position that there is a hierarchy of methodology no there is no longer a hierarchy of methodology the cut method is not preferred method as it had been in the prior regulations in the end and then finally the standard or review here the the tax court rejected the c p m method application which was which was proposed and i guess we have to review that but is that going to be a clear clear error factual issue standard of review in your determination or court complained that the commissioners expert high art lied on the book value of the assets rather than their fair market replacement value and the regulations expressly provide that the book value can be utilized as even if the court were to disagree with what our view of the stand a review is even if it were a purely factual case that does not mean that this court rubber stamps that i appoint this court to the state of palmer case where it reversed a tax court determination that two types of property or substantially similar there the court had held that a single family home in a mansion or somewhere in this court said you know you're not somewhere and even as a matter of common sense and conclusion is did novo and that your real argument is that without citing these things to the nine digits that it takes to get to the to the section that really what you're telling me is that you know under forty to one  c and for eighty to one see that no facts were found by the tax court and no adequate explanation was given so that we can rationally understand the analysis now is that in fact the and again this invert the regulatory standards if you're the the court accepted the cut despite functional and product differences but rejected the c p m because a functional in product expenses and also ignoring the regulations which were summarized on page thirty one of our reply grades that make any differences between product and function less of a problem this case one could point before i try to save a council your honor is the government's briefing and the fact the oral argument just a moment ago all focus on what the tax court did not do and perhaps what the government believes the task or should have done so it seems useful perhaps to take a moment to focus on what actually the did and to focus on what it was in fact charged to do under the very regulations the government relies on what it is charged to do is under the fact under treasury regulations section forty two dash ones and in fact an unbroken string  that's what the court was charged to do was determine under the facts circumstances after six weeks of trial forty seven fact witnesses eleven expert witnesses by medtronic ten expert witnesses by the government to determine whether these competing methodology is under the facts and circumstances where the most reliable measure an arm's length result and the arm's length standard has been built into these crazy regulations through all these changes including the one nine hundred ninety four change the changes since  profits that's what the court was faced with and what the court found as a matter of fact not at all to rubber stamp it your honor but in order to consider what the tax court did with a task or said this does not reflect a kind of puerto rico's well it had to end because those were the facts the government's methodology required medtronic to come forward and say ok if you're going to value the relationship then you need to understand the relationships image kind of puerto rico has been manufacture implantable class three devices in puerto rico since one thousand nine hundred seventy four pacemakers implanted implantable cardio to figure later years more recently neuro stimulation of isis and that company has been doing it's been it's been a registered f d a facility for my tronic for nearly thirty years by the years of issue and the court looked at those facts and understood what were the contributions of metron of puerto rico to the relationships and the court found that the government's methodology simply under the facts manufacturing these things in puerto rico we don't have to at all although the reason they were in puerto rico your honor as is the same reason many companies earn port were in puerto rico back then because congress had an active what was then called section one thirty six of the eternal revenue code which encourage companies to go and build manufacturing facilities in puerto rico to build up and develop a skilled workforce and to congress's great credit that's exactly what happened so many tronic and a number ok well if so and who's there who's to protect the taxpayers i guess maybe that's our question our coach sure well but two things first of all that the question is profits are are as a result of prices so so that the transactions are for transactions in this case there is a transaction to purchase components the transactions come from the sales in this country obviously bushehr of absolutely true your honor but the regulations require going to regulations the government maintains a say you have to look at the transaction is do when price leads to under the licensing transaction a little less than fifty percent of the profits ending up in puerto rico but that's that's not unusual in fact that is the result that when the government looked at this the first time and entered into an agreement with the taxpayer as to what the correct royalty rates were and what the correct prophecy splits were they agreed that that was an arm's length result that was appropriate sharing our profits and it also the profits that resulted were typical of a license or a licensee transaction when like in this case medtronic puerto rico is the one charged with manufacturing they're not making children's toys here they're manufacturing class three implantable medical devices and a company that's manufacturing class three incredible might not last is the most highly regulated medical devices literally in the world expects to receive some share of the profits as a result it's priceless transactions because of what it incurs the out in this case it's its involvement in the development of devices its involvement in the overall success of the organization and frankly the risks it takes on because at the end of the day at the end of the day if medtronic puerto rico manufactures  bad device and it and it causes someone to die by trying to court rico is the last we want to touch that device they are the ones responsible so that's why the profits that result orks are commercially rational and make sense in light of the risk they take on the contributions that they have provided to make relationship to the royalty rates were forty four percent for devices and twenty six percent for lees that's what the government's perspective was and but the methodology they used was much different than the methodology that was used to trial th end up in puerto rico the approaches were much different interesting but in the tax court having done its own analysis having looked at different licenses and having had six weeks of trial came to a similar result looked at different expert witnesses different a different factual record and it's not i mean it's not unusual well in fact the sort tells you something when you go after the same question several different ways and they come to the same general conclusion i mean remember this is an arm things are just length and what respect well the arm's length standard requires that you price in this case the transactions as if the as if not that they are unrelated but as if they were unrelated and you look at the transaction that's dismissed as why it's such that the united states looked at these issues than the way other people look at these issues which is the arm like standard is a commercial way of looking at things what are two parties two unrelated party is not under compulsion to buy or sell how what kind of answer to they come to to the pricing of their transaction so so sheer the pricing of the transaction that satish you all timidly the technology license was in accordance with the arm's length standard and as a result as the government has admitted you determine the arm's length answer to be in this case forty four percent and twenty six percent or twenty two percent excuse me then that's consistent with the so called commensurate income standard in this case the two are complementary  that this arm's length commercial term would be the way we judge how you tax companies it's not like in state taxation where you have an allocation between states in the house formulas that they apply and they decide how much income  state or another it's the arm's length standard your honor and that's what the court was charged to do and that's of the torque pack sorted here which is determine an arm's length result as i understand at least part of the argument by the government is that that when you got to the methodology that there was an inadequate explanation by the trial court of the actual factors that were used that acknowledges the differences between the pacesetter circumstances and the circumstances present in case that explained which ones were significant which ones were not in explained in detail how that methodology was being applied assuming that there was no comparable from which to work  license and by the way the government is wrong about the astra zeneca case and asked which said that there was a cross license and that patent dispute in the court decided that it was inappropriate that's wrong you look at if you look at the case there actually is a cross license and the court still matter the government may not like that answer but the court having sat through six weeks of trial till seven o'clock and most nights found that it didn't matter similarly they make a big deal as one of the factors of the seventy five million dollar lump sum was not taken into account because of the regulations require the should have been taken into account well i refer to the court to opinion page one thirty two to one thirty three and particularly one forty two dash one de three and several so paragraphs under that which talks about form of consideration the court was well aware of the cross of the lump sum payment and consistent with the expert testimony she made the determination which under the facts the circumstance of the government doesn't like that it doesn't matter right opinion page fifty eight opinion page one twenty one  you can tick through each one of the different suggestions the government has made and you will find that in the opinion the government may not like the answer but the government the court addressed each one of these factors will bring up a question of liking that was a tax course just wrong agree that the what the expert did was sufficient so what's the tax court to do it at this point where he will graham i look at the government's method under of facts and circumstances it's not the most reliable measure an arm's length result i've looked at the tax payers the method i determine tax court done on the facts and circumstances it's not the most reliable measure an arm's length result will now be trying the case again as much fun as that might be of course not what the court did as its charge to do with me as best judgement and what it did was said will take this the one real commercial transaction that we have where the testimony was same intangibles same markets same customers similar circumstances same similar profit to ten and i'm going to use this  setter license to build an arm's length result and i'll make adjustments to it and she did it some which we would agree with some which were not but none of which are clearly erroneous and she said i'm going to build from this royalty rate what i consider to be she rejects some of the things that your expert suggested relatively out of hand and somewhat dismissively and she rejected some of what the government's expert said somewhat dismissively and somewhat out of hand and it is one hundred  forty four page opinion you hate to say man it's got to be much longer but there is not when you look at the explanations actually offered as to why for example we find that the lump sum method doesn't really matter very much it just sort of is the done relying factual analysis isn't definite it isn't stated with any great particularities now i think what the government is arguing is essentially that once you decide on the method you have to explain that method it's ok just to reject out of hand both experts but that this particular explanation is in some way inadequate and i know you disagree with that and so i just want to give you a chance to fully and fairly sta why because they weren't relevant ultimately to hurt her opinion but but you take the government's complaints with conclusion and that's what they're saying they need to do their thing i would suggest that the real issue here then legally put aside the factual disagreement we have  judgment based on the facts as presented and not by the by the way it's the best method is not the ideal method is not the perfect method it's the best method based upon what's been presented to are right but the question is did she do enough in addition to the cases like him and others like that it's interesting we looked at some of the cases once we knew that that your honors are on the bench so while it did did any of you three deal with these kind of questions before as we do our due diligence there's a case called can taro which you may recall where judge eric two thousand and eleven and that's just an example just happens to be your honour's that were involved of many cases of them drawing that distinction between considerations and findings did the tax court consider all of the factors yes as is identified in one hundred forty four page opinion did she make sufficient that does make findings with regard each one of the paragraphs and sub paragraphs that perhaps she should have on reflection and she wanted to have a five hundred page opinion maybe she would have no but she made the finding she had to make thank you very much well you have two minutes and forty one seconds to persuade us to accept the siren song contributions and the tax when this case failed to analyze whether medtronic puerto rico's economic contributions you roast level of earnings almost fifty percent of the profit in this case into an agreement after audits agreed with the tax payers method of valuing something i think it was salvage value for depreciation purposes and agreed during the audit it was twelve percent but then said no it's actually sixty power in our thinking whether it will make that decision is your i don't know what anyway the case is submitted and we will take it under