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Merck Loses $473M Tax Appeal in Schering Case

From Associated Press (June 20, 2011)

TRENTON, N.J. -- A three-judge federal appeals court panel on Monday rejected an attempt by drug maker Merck & Co. to win a refund of nearly $500 million in taxes assessed two decades ago.

The Third Circuit Court of Appeals ruled Merck's Schering-Plough unit was not entitled to a refund of $473 million in taxes, affirming the April 2010 ruling of U.S. District Judge Katherine S. Hayden. Merck, of Whitehouse Station, N.J., had appealed that ruling.

Schering-Plough had argued that funds it received through two transactions involving foreign subsidiaries and a Dutch bank were not immediately taxable in full as proceeds of loans.

Schering-Plough, which became part of Merck in November 2009, also argued that the U.S. Internal Revenue Service had not assessed taxes on another taxpayer who engaged in similar transactions.

"We are disappointed with the court's decision denying our request for a new trial. We are reviewing the court's decision and considering our options," Merck said in a statement Monday.

The case involves Swiss subsidiaries, Scherico and Limited, owned by Schering-Plough in the early 1990s. They conducted significant manufacturing in Ireland, which then had a favorable corporate income tax, and had earnings of roughly $1 billion not yet been taxed in the U.S.

According to the appeals court ruling, Schering-Plough executed a complex "scheme involving interest-rate swaps" over multiple years among Schering, the Scherico subsidiary and then a third one called Essex Chemie AG, and a Dutch bank. Schering-Plough later reported the transactions as sales and repatriated about $690 million from its subsidiaries.

After a 2004 audit, the IRS assessed Schering-Plough for underpaying nearly $473 million in taxes for 1989, 1991 and 1992, ruling those transactions were loans, not sales.

Monday's ruling, by Judges Fuentes, Smith and Greenberg, concluded the federal court "correctly found that the transactions were in substance loans, not sales."

The 30-page ruling also rejected Schering-Plough's contention that it was unfair for the IRS to treat it differently than another corporate taxpayer.

"To the extent that the IRS pursued Schering-Plough more vigorously because Schering-Plough had a history of failing to comply with the tax laws, this represents commendable agency diligence in the light of past experience, not some kind of impermissible bias against Schering-Plough," the appellate judges wrote.


Posted: June 2011