A federal court has denied a $473 million tax refund to Schering-Plough after the drug maker sought to avoid taxes on $690 million in profits it repatriated from offshore subsidiaries into the U.S. through some dubious transactions.
In 1991 and 1992, Schering-Plough entered into Strippable Increasing Principal Swaps transactions created by its financial advisor, Merrill Lynch. The transactions involved interest rate swap agreements, with much of the money assigned to Schering-Plough's controlled Swiss subsidiaries.
Judge Katherine S. Hayden of the U.S. District Court in Newark, N.J., found Schering-Plough owed tax because the STRIP transactions form a purported sale of the stream of income payments under the swaps was inconsistent with the substance, a loan from the subsidiaries to Schering-Plough that triggered taxation. As a result, the court ruled, Schering-Plough was not entitled to the tax treatment it sought.
The court found instead that the transactions lacked economic substance, did not have a genuine business purpose, and were designed to avoid tax. Judge Haydens opinion noted that the Tax Code does not leave room for corporate taxpayers to avoid their obligations.
A report prepared for Schering-Ploughs Finance and Audit Committee confirmed that the swap-and-assign transactions effectively repatriated $728 million while deferring U.S. tax. The company's auditor, Deloitte, concurred, stating that the transactions were used as a means of repatriating money from Europe without having it taxed as a dividend.
"This victory for the United States should serve as another warning to taxpayers of all sizes and sophistication who consider attempting to circumvent the federal tax laws and their duty to pay their fair share," said D. Patrick Mullarkey, the acting deputy assistant attorney general of the Justice Departments Tax Division.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access