Bloomberg News

Merck Can’t Recoup $473 Million in U.S. Taxes, Court Rules

June 20, 2011

(Updates with excerpts from opinion from fourth paragraph.)

June 20 (Bloomberg) -- Merck & Co.’s Schering-Plough unit isn’t entitled to a new trial after a judge rejected its claim to $473 million of federal income tax refunds, a U.S. appeals court ruled.

Schering-Plough, which was acquired by Merck for $51 billion in November 2009, sued the Internal Revenue Service in federal court in Newark, New Jersey, in May 2005 to recoup the taxes, which the IRS assessed in 2004 after an audit.

Schering-Plough argued that funds it received as the result of two interest-rate swap transactions weren’t taxable as proceeds of loans from foreign subsidiaries and that the company was being treated unfairly by the IRS, which hadn’t demanded the same taxes from other companies that were in similar situations.

U.S. District Judge Katharine Hayden ruled after a five- week non-jury trial in 2008 that Schering-Plough failed to prove it deserved a refund, and in April 2010 she denied the company’s request for a new trial. The U.S. Court of Appeals in Philadelphia upheld Hayden’s ruling today, saying the transactions were loans and that the IRS may treat taxpayers differently.

“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,” Judge Juilo M. Fuentes wrote for a unanimous panel.

Merck, based in Whitehouse Station, New Jersey, said in a statement that it’s “disappointed” by the ruling. The company said it is reviewing the decisions and considering its options.

The case is Merck & Co. vs. U.S., 05-cv-02575, U.S. District Court, District of New Jersey (Newark).

--Editors: Fred Strasser, Michael Hytha

To contact the reporters on this story: David Voreacos in Newark at dvoreacos@bloomberg.net; Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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