The U.S. Tax Court has ruled Medtronic (MDT), a medical device maker, should have used a higher royalty rate when allocating income between the company and its Puerto Rico subsidiary. The opinion increases the income allocated to the U.S. and consequently subject to additional U.S. tax in 2005 and 2006, the only years currently under IRS examination.

Expect additional financial fallout if the opinion is finalized and neither Medtronic or the IRS appeals. In its latest quarterly filing, Medtronic warned it anticipates the ruling will likely be applied for all years following fiscal year 2006.

Medtronic estimates a potential income tax charge, including interest, of up to $2.0 billion, which would result in a future cash payment of up to $2.5 billion.

Notably, the charge may already be reflected in Medtronic’s stock price as it was included in the company’s FY23 adjusted EPS guidance that was reiterated on August 23, 2022.