(Updates to add comment from company, background)
DOW JONES NEWSWIRES
A federal court in New Jersey denied Schering-Plough Corp. (SGP)
a $473 million refund in connection with two transactions in which
the drug maker allegedly sought to avoid taxation on $690 million
in profits it repatriated from offshore subsidiaries into the
U.S.
In response to the ruling, a spokesman said the drug maker
disagrees with the decision and is considering its options,
including an appeal.
Though U.S. companies generally pay annual taxes on all their
income worldwide, there normally is a broad exception for profits
"permanently" reinvested in overseas operations. Money moved back
to the U.S. gets taxed.
Prosecutors said that in 1991 and 1992, Schering-Plough entered
into Strippable Increasing Principal Swaps transactions created by
its financial adviser, Merrill Lynch & Co. The transactions
were designed to bring previously untaxed profits made by
Schering-Plough's foreign subsidiaries into the U.S. without paying
the tax owed on repatriation.
After the Internal Revenue Service questioned the swaps in 2001,
Schering-Plough made payments of $194 million for income tax and
$279 million for interest. The company then filed refund claims for
the tax and interest with the IRS. After the IRS denied the claims
for a refund, Schering-Plough sued for the refunds in 2005.
Judge Katherine S. Hayden ruled Friday that Schering-Plough owed
tax because the STRIP transactions' form, a sale of the stream of
income payments under the swaps, was inconsistent with the
substance, which was a loan from the subsidiaries to
Schering-Plough that triggered taxation.
Alternatively, the court said the transactions lacked economic
substance, did not have a genuine business purpose and were
designed to avoid tax.
"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, acting deputy
assistant attorney general of the Justice Departments Tax
Division.
Schering-Plough's shares fell 2 cents to $28.16 in after-hours
trading. The stock is up almost two-thirds this year.
Schering-Plough soon will be acquired by rival Merck & Co.
(MRK), whose shares closed Monday at $32.43, up 0.3%, and were
inactive after hours.
-By Kathy Shwiff, Dow Jones Newswires; 212-416-2357;
Kathy.Shwiff@dowjones.com