Bausch & Lomb, Inc. v. Commissioner

Unknown CourtMarch 23, 1989Cited 53 times

Case Details

Judge(s): Korner
Status: Published
Procedural Posture: Tax court case involving transfer pricing adjustment by IRS Commissioner

Related Laws

No specific laws identified for this ruling.

Outcome

Court held that the IRS abused its discretion in determining the $7.50 sales price was not arm's-length under IRC Section 482, but also held the 5% royalty rate was not arm's-length, though the IRS's adjustment was unreasonable.

Excerpt

Petitioner and its subsidiaries engaged in the manufacture, marketing, and sale of soft contact lenses and related products in the United States and abroad. B&L Ireland was organized on Feb. 1, 1980, under the laws of the Republic of Ireland as a third tier, wholly owned subsidiary of petitioner. B&L Ireland was organized for valid business reasons and to take advantage of certain tax and other incentives offered by the Republic of Ireland. Pursuant to an agreement dated Jan. 1, 1981, petitioner granted to B&L Ireland a nonexclusive license to use its patented and unpatented manufacturing technology to manufacture soft contact lenses in Ireland and a nonexclusive license to use certain of its trademarks in the sale of soft contact lenses produced through use of the licensed technology worldwide. In return, B&L Ireland agreed to pay petitioner a royalty equal to 5 percent of sales. In 1981 and 1982, B&L Ireland engaged in the manufacture and sale of soft contact lenses in the Republic of Ireland. All of B&L Ireland's sales were made either to petitioner or certain of petitioner's wholly owned foreign sales affiliates at a price of $ 7.50 per lens. Held, respondent abused his discretion under sec. 482, I.R.C. 1954, when he determined that the $ 7.50 sales price did not constitute an arm's-length consideration for the soft contact lenses sold by B&L Ireland to petitioner. Held, further: The royalty contained in the Jan. 1, 1981, license agreement did not constitute an arm's-length consideration for the use by B&L Ireland of petitioner's intangibles. However, respondent's adjustment to the royalty rate was unreasonable. Sec. 1.482-2(d), Income Tax Regs., applied to determine an arm's-length consideration for use by B&L Ireland of petitioner's intangible property.CONTENTSPageI. Introductory Information529A. Petitioners529B. Bausch & Lomb Ireland, Ltd529C. The Business of B&L and its Subsidiaries530II. Historical Development of the Soft Contact Lens IndustryThrou

What This Ruling Means

**What happened:** Bausch & Lomb, the contact lens company, set up a subsidiary in Ireland in 1980 to take advantage of tax benefits offered by the Irish government. The IRS challenged how the company priced transactions between its U.S. operations and its Irish subsidiary, claiming Bausch & Lomb was manipulating prices to avoid paying U.S. taxes. Specifically, the dispute centered on whether a $7.50 sales price and a 5% royalty rate between the related companies reflected what independent companies would charge each other. **What the court decided:** The court delivered a mixed ruling. It found that the IRS overstepped its authority when it rejected Bausch & Lomb's $7.50 sales price as unreasonable. However, the court also determined that the company's 5% royalty rate was not appropriate, though it criticized the IRS's proposed alternative as unreasonable as well. **Why this matters for workers:** This case highlights how large corporations use overseas subsidiaries to reduce their tax burden. When companies successfully shift profits abroad, they pay less in U.S. taxes, which can affect government funding for public services that workers rely on. The ruling shows courts will scrutinize both corporate tax strategies and government enforcement actions.

This summary was generated to explain the ruling in plain English and is not legal advice.

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