Merck Can’t Dodge Tax Penalty of $473 Million

     PHILADELPHIA (CN) – Pharmaceutical giant Merck owes the U.S. government nearly $473 million in taxes after investing its foreign subsidiaries’ profits in U.S. holdings about 20 years ago, the 3rd Circuit affirmed.

     A three-judge panel of the federal appeals court also denied Merck’s bid for a new trial.
     Before acquiring Merck and adopting that corporate name, Schering-Plough had moved money from two of its Swiss subsidiaries, Scherico and Limited, to invest in their U.S.-based properties, making the money subject to U.S. tax. The company used a procedure known as interest-rate swaps to move the money, and reported the transaction to the government as a sale instead of a loan.
     After a 2004 audit, the Internal Revenue Service assessed a $472.8 million tax liability against the company for deficiencies in the tax years 1989, 1991 and 1992.
     Schering-Plough argued that the penalty was unfair as other large corporations have not been fined for similar transactions.
     A federal judge disagreed in April 2010, finding that the pharmaceutical giant had exploited a loophole to avoid paying U.S. taxes on the earnings.
     A three-judge panel of the federal appeals court affirmed Monday, saying that the lower court had “correctly found that the transactions were in substance loans, not sales.”
     There is significant evidence that Schering-Plough itself believed that it was crafting a loan rather than a sale, according to the ruling authored by Judge Julio Fuentes, who added that all taxpayers have a “legal obligation” to follow the law when filing their tax forms.
     The IRS does not have to treat all taxpayers the same, according to the ruling. “If taxpayers could routinely challenge tax assessments by pointing to others who had not been compelled to pay under similar circumstances, the IRS would be swamped by collateral litigation of this kind rather than being able to focus on whether the taxpayer actually complied with the law,” Fuentes wrote.
     In a statement reported by the Associated Press, Merck said: “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.”

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