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Drug Company Wants to Limit Refund Suit to Transfer Pricing Issues

JUN. 5, 2019

Perrigo Co. et al. v. United States

DATED JUN. 5, 2019
DOCUMENT ATTRIBUTES
  • Case Name
    Perrigo Co. et al. v. United States
  • Court
    United States District Court for the Western District of Michigan
  • Docket
    No. 1:17-cv-00737
  • Cross-Reference

    Related coverage.

  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-22147
  • Tax Analysts Electronic Citation
    2019 TNT 110-22
    2019 WTD 110-29

Perrigo Co. et al. v. United States

PERRIGO COMPANY AND SUBSIDIARIES,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

Hon. Robert J. Jonker

BRIEF IN SUPPORT OF PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT LIMITING THE CASE TO SECTION 482 TRANSFER PRICING ISSUES AND ELIMINATING COMMON LAW CHALLENGES TO THE RECOGNITION OF PERRIGO'S FOREIGN AFFILIATE OR THE ECONOMIC VITALITY OF ITS RELATED PARTY TRANSACTIONS 

John B. Magee
Alex E. Sadler
Daniel M. Sosna
Drew A. Cummings
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave. NW
Washington, D.C. 20004

Thomas V. Linguanti
Jason D. Dimopoulos
Morgan, Lewis & Bockius LLP
77 West Wacker Drive
Chicago, IL 60601

Edward J. Bardelli (P53849)
WARNER NORCROSS & JUDD LLP
111 Lyon Street, Ste. 900
Grand Rapids, Michigan 49503
(616) 752-2165

Attorneys for Plaintiff


TABLE OF CONTENTS

INTRODUCTION

BACKGROUND

I. Perrigo's Global Restructuring

II. Perrigo's Agreement With Dexcel

III. Formation Of Offshore Entities And Assignment Of The Dexcel Contract

IV. Commercialization Of Omeprazole

V. IRS Audits Of The Omeprazole Transactions

VI. Government's Position

ARGUMENT

I. PITLP/LLC Was Always A Legitimate Legal Entity, And Its Transactions Regarding Omeprazole Always Had Economic Substance

A. PITLP/LLC Was Legally And Validly Formed And Moline Dictates That PITLP/LLC's Existence Be Respected

B. PITLP/LLC And Its Transactions Satisfy the Economic Substance Doctrine Notwithstanding The Tax Efficiencies Created by Perrigo's Restructuring Of Its Omeprazole Business

II. Where The Government Urges The Application Of Common Law Doctrines To Transfer Pricing Relationships, The Courts Opt To Apply The Arm's Length Principles of Section 482

CONCLUSION


TABLE OF AUTHORITIES

Cases

ACM P'ship v. Commissioner, T.C. Memo. 1997-115, 73 T.C.M. (CCH) 2189 (1997), aff'd in part and rev'd in part, 157 F.3d 231 (3d Cir. 1998)

Am. Elec. Power Co. v. United States, 326 F.3d 737 (6th Cir. 2003)

Barenholtz v. United States, 784 F.2d 375 (Fed. Cir. 1986)

Bass v. Commissioner, 50 T.C. 595 (1968)

Chamberlin v. Commissioner, 207 F.2d 462 (6th Cir. 1953)

Countryside Ltd. P'ship v. Commissioner, T.C. Memo. 2008-3, 95 T.C.M. (CCH) 1006 (2008)

Dow Chem. Co. v. United States, 435 F.3d 594 (6th Cir. 2006)

Foglesong v. Commissioner, 621 F.2d 865 (7th Cir. 1980)

Gregory v. Helvering, 293 U.S. 465 (1935)

Hosp. Corp. of Am. v. Commissioner, 81 T.C. 520 (1983)

J&J Fernandez Ventures, L.P. v. United States, 84 Fed. Cl. 369 (2007)

Keller v. Commissioner, 77 T.C. 1014 (1981), aff'd, 723 F.2d 58 (10th Cir. 1983)

Kennedy v. Commissioner, 876 F.2d 1251 (6th Cir. 1989)

Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004), aff'd on different grounds, 150 F. App'x 40 (2d Cir. 2005)

Merck & Co. v. United States, 24 Cl. Ct. 73 (1991)

Moline Props. v. Commissioner, 319 U.S. 436 (1943)

In re Multiponics, Inc., 622 F.2d 709 (5th Cir. 1980)

Nat'l Carbide Corp. v. Commissioner, 336 US. 442 (1949)

Nat'l Inv'rs Corp. v. Hoey, 144 F.2d 466 (2d Cir. 1944)

N. Ind. Pub. Serv. Co. v. Commissioner, 105 T.C. 341 (1995)

N. Ind. Pub. Serv. Co. v. Commissioner, 115 F.3d 506 (7th Cir. 1997)

Paymer v. Commissioner, 150 F.2d 334 (2d Cir. 1945)

Rose v. Commissioner, 868 F.2d 851 (6th Cir. 1989)

Ross Glove Co. v. Commissioner, 60 T.C. 569 (1973)

Rubin v. Commissioner, 429 F.2d 650 (2d Cir. 1970), rev'g 51 T.C. 251 (1968)

Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46 (D. Mass. 2013)

Siegel v. Commissioner, 45 T.C. 566 (1966)

Strong v. Commissioner, 66 T.C. 12 (1976)

United Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d 1014 (11th Cir. 2001), rev'g and remanding T.C. Memo. 1999-268, 78 T.C.M. (CCH) 262 (1999)

Wells Fargo & Co. v. United States, 641 F.3d 1319 (Fed. Cir. 2011)

WFC Holdings Corp. v. Commissioner, 728 F.3d 736 (8th Cir. 2013)

Other Authorities

Fed. R. Civ. Proc. 56

I.R.C. § 482

I.R.C. § 6501

Treas. Reg. § 1.482-1(d)(3)(iii)(B)

Prepared Testimony of Douglas H. Shulman, Commissioner of Internal Revenue, Before the U.S. Senate Permanent Subcommittee on Investigations Hearing on Investments in Commodities by Regulated Investment Companies at 4, 2012 TNT 18-37 (Jan. 26, 2012)


INTRODUCTION

The tax years at issue in this tax refund action are 2009 to 2012.1 During those years, an Israeli foreign affiliate (“PITLP/LLC,” described below) of Plaintiff, Perrigo Company and Subsidiaries (“Perrigo”), purchased from Dexcel Pharma Technologies, Ltd. (“Dexcel”), an unrelated Israeli pharmaceutical manufacturer, a store brand, over-the-counter (“OTC”) omeprazole drug product. PITLP/LLC then resold the omeprazole product to a related U.S. Perrigo entity (“LPC,” described below) for distribution in the United States. PITLP/LLC's sales of OTC omeprazole to LPC during the tax years at issue were approximately $769 million, resulting in profits of approximately $219 million. (DeGood Decl. ¶ 25.)

The government's defense to Perrigo's refund action for the recovery of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”) related to Perrigo's transactions concerning omeprazole is based on three theories: (1) PITLP/LLC is a sham entity (United States' Answer to Second Amended Complaint (“Answer”), ¶ 29 and First Additional Defense, PageID.949, 974-975.); (2) the transactions occurring in the 2007 tax year,2 when PITLP/LLC first acquired the rights to distribute OTC omeprazole prior to Food and Drug Administration (“FDA”) approval of the product in the 2008 tax year,3 and the re-engagement of LPC to perform distribution services in the United States on behalf of PITLP/LLC, lack economic substance and should be disregarded (Answer, ¶ 32 and First Additional Defense, PageID.950, 974-975.); and (3) under section 482,4 LPC is entitled to the vast majority (if not all) of the profits earned by PITLP/LLC. (Answer, First Additional Defense, PageID.975.) The first two theories, jointly the “sham doctrines,” eliminate all of PITLP/LLC's sales and profits.

Pursuant to Federal Rule of Civil Procedure 56, Perrigo respectfully requests the Court to grant Perrigo's motion for partial summary judgment to eliminate from this case defendant's sham doctrines. The trial of this matter should then be restricted to the section 482 issue determining the proper amount of income to be reallocated from PITLP/LLC to Perrigo as a result of Perrigo's intercompany arrangements related to omeprazole during the 2009 through 2012 tax years.

This dispute arose following six and one-half years of nearly continuous audits of Perrigo in three separate cycles by the Internal Revenue Service, commencing with an audit of Perrigo's transactions and income related to omeprazole for Perrigo's 2007 and 2008 tax years. The IRS requested and received extensive documentation related to all aspects of Perrigo's omeprazole business, its relationship with Dexcel, and the intercompany transactions now at issue. (DeGood Decl. ¶¶ 32-34.) The IRS closed its audit without proposing any adjustments related to those transactions. (Answer, ¶ 53, PageID.957-958.) The statute of limitations on assessment of income tax under section 6501(a) has now lapsed for all tax years prior to the 2009 tax year. (Answer, ¶ 63, PageID.961.)

After the closure of the audit of Perrigo's 2007 and 2008 tax years, the IRS changed its mind about the omeprazole transactions during the audit cycles for the 2009 and 2010 tax years and 2011 and 2012 tax years. It proposed the adjustments to Perrigo's omeprazole income disputed here and assessed tax, interest, and penalties based on the sham doctrines and, alternatively, its section 482 position. (Answer, ¶ 56, PageID.959-960.)

The government's assertion of sham doctrines stretches these common law doctrines beyond their breaking point. The events and transactions in pre-2009 tax years, which form the basis of defendant's sham doctrine position, satisfied all the requirements for entity recognition and economic substance. Moreover, transactions in years closed under section 6501(a) have no bearing on whether the existence and activities of PITLP/LLC should be disregarded during the tax years at issue. Long-standing precedent establishes that PITLP/LLC's existence as a separate entity must be recognized and its contractual undertakings respected for tax purposes. The contracts actually existed, and the accounting books and records of the Perrigo entities reflected the reality of those contracts. (DeGood Decl. ¶ 28.) Likewise, by the 2009 tax year, PITLP/LLC was engaged in substantive business activities: PITLP/LLC held the contract to acquire omeprazole; arranged for Perrigo to distribute the product in the United States; and paid royalties to a third party based on hundreds of millions of dollars in sales.

Because PITLP/LLC's existence and transactions during the tax years at issue satisfy the legal standards to merit respect under the tax law, the government's sham doctrines cannot be sustained as a matter of law. Accordingly, trial in this matter should be restricted to determining arm's length prices for Perrigo's related party transactions under section 482.

BACKGROUND

I. Perrigo's Global Restructuring

In 2005, Perrigo engaged Ernst & Young (“E&Y”) to provide advice and assistance to implement an efficient international operating structure for Perrigo's increasingly global business. As E&Y described at the time:

Under Perrigo's existing organizational and operational structure, IP ownership resides within the geographical location of its creation, not necessarily where the greatest market opportunities exist. This segmentation of IP ownership hinders Perrigo's ability to integrate its two primary businesses, the historical Agis and Perrigo businesses, and impairs the Company's ability to exploit and deploy its IP globally in order to achieve the full synergies of the combined operations. Perrigo wishes to utilize its worldwide cash to develop new products and to manufacture and distribute those products in the location which makes the most economic sense (i.e., has capacity, ability, etc.). The older operating structure of developing, manufacturing, and marketing a product all in the same geographical location does not allow Perrigo to utilize its worldwide capacity and abilities.

(DeGood Decl., Exhibit 1 at PER_WDM00012256.)

As part of that larger global restructuring project, E&Y reviewed multiple third-party contracts that Perrigo had entered into regarding various products for transfer to an offshore structure. (DeGood Decl. ¶ 5.) The goal of the exercise was to identify third-party contracts involving products in the early stages of development whose remaining contingencies made them candidates for ownership by offshore Perrigo affiliates. (Id.) Those affiliates would then acquire the contracts and assume the risks associated with the products at issue, as part of a more efficient international operating structure. Only three contracts were transferred, including the contract (described below) with Dexcel for the sale of omeprazole. (DeGood Decl. ¶¶ 12-14.)

II. Perrigo's Agreement With Dexcel

In August 2005, L. Perrigo Company (“LPC”), a domestic Perrigo subsidiary responsible for distribution of Perrigo products in the OTC store brand market, entered into a Supply and Distribution Agreement, effective as of August 15, 2005, with Dexcel, an unrelated Israeli pharmaceutical company (the “Dexcel Contract”). (DeGood Decl. ¶ 6, Exhibit 2.) Under the Dexcel Contract, if Dexcel successfully developed an OTC omeprazole product and obtained FDA approval for that product, LPC would distribute the product in the United States, and the parties would divide net profits from the product sales.

III. Formation Of Offshore Entities And Assignment Of The Dexcel Contract

In accordance with Perrigo's larger global restructuring efforts and the plan developed by E&Y, in November 2005 Perrigo formed Perrigo UK Finco Limited Partnership (“UK Finco”), a partnership organized under the laws of England, but treated as a corporation for U.S. tax purposes. (DeGood Decl. ¶ 8, Exhibit 1 at PER_WDM00012257 and Exhibit 3.) Also in accordance with E&Y's advice, in June 2006 Perrigo formed Perrigo Israel Trading Limited Partnership (“PITLP”), a partnership organized under the laws of Israel, but treated as a corporation for U.S. tax purposes. (DeGood Decl. ¶ 9, Exhibit 1 at PER_WDM00012258 and Exhibit 4.) Finally, in November 2006, Perrigo formed Perrigo Israel LLC (“Perrigo LLC”),5 a Delaware limited liability company disregarded for U.S. tax purposes and treated as part of PITLP. (DeGood Decl. ¶ 10, Exhibit 1 at PER_WDM00012258 and Exhibit 5.) As Perrigo intended that Perrigo LLC be disregarded for U.S. tax purposes, all of the assets, liabilities, and activities of Perrigo LLC were to be treated as the assets, liabilities, and activities of PITLP (jointly, “PITLP/LLC”).

At the conclusion of E&Y's review of the agreements that Perrigo had with third parties, E&Y determined that contracts for three drugs, including omeprazole, were appropriate for transfer to offshore Perrigo affiliates.6 LPC assigned its rights and obligations under the Dexcel Contract to Perrigo LLC for a demand note (the “Demand Note”) in the amount of $877,832 plus interest by an assignment agreement that the parties treated as effective on November 29, 2006. (DeGood Decl. ¶¶ 12-13, Exhibits 7 and 8.) Perrigo reported the consideration received by LPC for the assignment of the Dexcel Contract on its federal income tax return for the 2007 tax year. (DeGood Decl. ¶ 12.) Perrigo also recorded the assignment of the Dexcel Contract in its accounting system before the end of the 2007 tax year. (Magee Decl., Exhibit A at 79:18-80:23.)

IV. Commercialization Of Omeprazole

In December 2007, the FDA granted Dexcel final approval for its omeprazole product. (Answer, ¶ 39, PageID.952.) This permitted Dexcel and Perrigo to begin selling omeprazole to customers in the United States.

In February 2008, UK Finco, a 99% owner of PITLP/LLC, capitalized PITLP/LLC with approximately $3.1 million. PITLP/LLC used approximately $940,000 of that amount to satisfy the obligation owed by Perrigo LLC to LPC under the Demand Note, including interest. (DeGood Decl. ¶¶ 15-16, Exhibit 9.) Prior to its contribution of capital, UK Finco was able to meet the financial demands of PITLP/LLC under the Assignment Agreement. (DeGood Decl. ¶ 15.)

Omeprazole sales to U.S. customers began shortly thereafter. LPC distributed the product on behalf of PITLP/LLC in accordance with an intercompany agreement (the “Sales and Distribution Agreement”) that the parties treated as being effective in November 2006. (DeGood Decl. ¶¶ 17-18, Exhibit 10.) The Sales and Distribution Agreement provided LPC with a guaranteed return on its distribution activities and a percentage of the residual profits from the sales of omeprazole.

During the 2009 through 2012 tax years, PITLP/LLC was responsible for the following activities: (1) purchasing omeprazole from Dexcel (an unrelated party) under the Dexcel Contract and selling the product to LPC for distribution to customers in the United States under the Sales and Distribution Agreement; (2) earning profits on those sales; (3) making loans; and (4) distributing profits to UK Finco (and other Perrigo entities) as dividends. (DeGood Decl. ¶¶ 19-23.) PITLP/LLC also made royalty payments to Dexcel as required under the Dexcel Contract. (DeGood Decl. ¶ 24.) In addition, PITLP/LLC entered into a commercial agreement on its own behalf with another unrelated party regarding the drug product fexofenadine. (DeGood Decl. ¶ 26.)

In pursuing its profit-seeking activity, PITLP/LLC did not employ people directly. Instead, like many corporate entities, it relied on employees of its affiliates to provide services on its behalf. (DeGood Decl. ¶ 27.)

V. IRS Audits Of The Omeprazole Transactions

In the course of its audit of Perrigo's 2007 and 2008 tax years, the IRS assigned an international examiner to audit Perrigo's tax reporting of its international operations and transfer pricing positions. (Answer, ¶¶ 50 and 51, PageID.956-957.) As part of its audit, the IRS sought information from Perrigo regarding omeprazole and Perrigo's relationship with Dexcel and PITLP/LLC. (Answer, ¶ 52, PageID.957.) The IRS requested and Perrigo provided Perrigo's transfer pricing documentation regarding the assignment of the Dexcel Contract from LPC to Perrigo LLC during the 2007 tax year and the allocation of income between Perrigo and PITLP/LLC related to sales of omeprazole during the 2008 tax year. (DeGood Decl. ¶ 33.) In addition, the IRS issued to Perrigo a lengthy Information Document Request (“IDR”) regarding multiple aspects of Perrigo's omeprazole business. This IDR requested, among other things, information concerning: (1) PITLP/LLC's activities and assets and employees; (2) PITLP/LLC's business purpose; (3) the determination of the lump sum purchase price for the assignment of the Dexcel Contract; (4) how the price for omeprazole was established under the Sales and Distribution Agreement between LPC and Perrigo LLC; (5) services provided by Perrigo to PITLP/LLC; and (6) the risks borne by PITLP/LLC. (DeGood Decl. ¶ 34, Exhibit 11.)

At the conclusion of its audit of Perrigo's 2007 and 2008 tax years, the IRS did not challenge Perrigo's omeprazole transactions. Specifically, the IRS did not propose an adjustment to Perrigo's income regarding the price for the assignment of the Dexcel Contract, the allocation of income between Perrigo and PITLP/LLC related to United States sales of omeprazole, or any of PITLP/LLC's transactions or activities. (Answer, ¶ 53, PageID.957-958; DeGood Decl. ¶ 35.)

The IRS conducted subsequent audits of Perrigo's 2009 and 2010 tax years and 2011 and 2012 tax years. The IRS again issued IDRs related to omeprazole and Perrigo's dealings with Dexcel and PITLP/LLC. (DeGood Decl. ¶¶ 36-38, 40.) This time, at the conclusion of its audits, the IRS identified purported deficiencies and assessed tax with respect to Perrigo's omeprazole business. (Answer, ¶ 56, PageID.959-960.) Relying on the “sham doctrines” described above, the IRS disregarded the existence of PITLP/LLC and its intercompany transactions with Perrigo in their entirety and allocated all of the income from the U.S. sales of omeprazole to Perrigo. (Answer, ¶ 70, PageID.963-964.) In the alternative, the IRS allocated nearly all of the income from sales of omeprazole to Perrigo under section 482. (Answer, ¶ 70, PageID.963-964.)

Perrigo paid the assessed amounts of tax and interest for the 2009 to 2012 tax years based on the IRS's primary “sham doctrines” position, but paid a larger penalty based on the IRS's alternative section 482 theory. (Answer, ¶¶ 71 and 77, PageID.964 and 966.)

VI. Government's Position

The government's primary position during its audit of the 2009 to 2012 tax years and here is that: (1) PITLP/LLC was upon its formation and remains today a “sham” entity that should not be respected; and (2) the intercompany transactions in which PITLP/LLC engaged regarding omeprazole lacked economic substance. (Answer, First Additional Defense, PageID.974-975.) The government's sham doctrines arguments rely, however, primarily on events that occurred in the 2007 and 2008 tax years, which are closed to assessment under section 6501(a) and are not before the Court.

ARGUMENT

Taxpayers are entitled to structure and conduct their businesses in the most tax-efficient manner possible.7 Taxpayers with international operations in particular face complex circumstances in managing their total tax burdens. So long as the taxpayer's entities are properly formed and execute the functions that they have been empowered to perform (i.e., the entities and the functions that they execute are real), then, as a matter of long-standing law, those entities and those transactions must be respected. For tax purposes, then, the only remaining question is whether the commonly controlled, related parties priced their transactions in the manner that unrelated parties would have done (i.e., in accordance with the “arm's length standard”).

Here, PITLP/LLC was properly and legally formed in the 2007 tax year as part of Perrigo's overall international restructuring. PITLP/LLC was created for the legitimate business purpose of being the assignee of the then contingent Dexcel Contract and consistent with Perrigo's desire for third-party contracts with companies outside the United States to be held by offshore Perrigo affiliates. PITLP/LLC was established in accordance with the applicable legal requirements in the United States and Israel, and executed actual contracts with LPC, and those contracts were reflected on the books and records of the parties.

The reality of PITLP/LLC's existence and business operations during the tax years in issue is indisputable. PITLP/LLC purchased OTC omeprazole from Dexcel and resold it to LPC for distribution pursuant to its ownership of the Dexcel Contract and its re-engagement of LPC for distribution in the United States. PITLP/LLC's sales of OTC omeprazole to LPC during the tax years at issue were approximately $769 million, resulting in profits of approximately $219 million. (DeGood Decl. ¶ 25.)

The government's sham doctrines should be rejected as a matter of law. The sole proper (and thus only remaining) question is whether, under section 482, the price PITLP/LLC paid for the rights to the Dexcel Contract and the amounts LPC received for its distribution of omeprazole on behalf of PITLP/LLC in the United States during the 2009 to 2012 tax years were in accordance with the arm's length standard. This question under section 482 presents triable issues and are not the subject of this motion for partial summary judgment.

I. PITLP/LLC Was Always A Legitimate Legal Entity, And Its Transactions Regarding Omeprazole Always Had Economic Substance

A. PITLP/LLC Was Legally And Validly Formed And Moline Dictates That PITLP/LLC's Existence Be Respected

The law recognizes two types of economic shams — sham-in-fact and sham-in-substance.8 While these sham doctrines can apply to both entities and their transactions, neither iteration applies to disregard PITLP/LLC's existence here.

“Factual shams are 'transactions' that never actually occurred.”9 Here, in contrast, both PITLP and Perrigo LLC are real entities. PITLP was formed as a partnership in Israel in June 2006, and Perrigo LLC was formed as a limited liability company in Delaware in November 2006. There is no dispute that both entities were properly organized and established pursuant to the laws of Israel and Delaware. Therefore, the sham-in-fact doctrine has no application whatsoever to PITLP/LLC as an entity.

When applying the sham-in-substance doctrine to an entity, the place to start is the Supreme Court's decision in Moline Properties, Inc. v. Commissioner.10 In Moline, the Supreme Court held that a corporation is respected as a separate entity for tax purposes if it was either formed for a business purpose or conducts business activity.11 This standard applies whether the corporation is domestic or foreign.12 Further, the separate taxability of a corporation does not at all depend on the degree of the corporation's independence from its parent.13

The courts have described the quantum of business purpose or activity necessary to satisfy Moline as “extremely low”14 and “rather minimal.”15 For example, even a transfer of property to a corporation in anticipation of a bona fide business transaction is sufficient “business activity” to be respected under Moline.16

Under the Moline standard, there is no basis for invalidating PITLP/LLC as a “sham.” Perrigo established PITLP/LLC in the 2007 tax year as part of Perrigo's global restructuring efforts, in response to Perrigo's business needs, and pursuant to E&Y's advice. (DeGood Decl., Exhibit 1 at PER_WDM00012256.) PITLP/LLC was created to facilitate Perrigo's utilization of its worldwide cash to develop new products and to manufacture and distribute those products in the global location that made the most economic sense (Id.) — in this case, an Israeli-based entity responsible for an Israeli-sourced product, the OTC omeprazole developed by Dexcel. This is, by definition, a legitimate “business purpose.” The assignment of the Dexcel Contract in the 2007 tax year from LPC to Perrigo LLC, further, was in anticipation of bona fide commercial activity17 and therefore constitutes sufficient “business activity” for PITLP/LLC to be respected under Moline as having economic substance.18

During the tax years at issue, and after the launch of the OTC omeprazole product in approximately March 2008, PITLP/LLC continued to satisfy Moline's requirements in a highly robust way. Specifically, during the 2009 through 2012 tax years, PITLP/LLC purchased product from Dexcel and resold it to LPC, an activity on which it earned profits. This fact alone is sufficient to recognize the existence and separateness of PITLP/LLC for tax purposes.19 Furtherin the course of pursuing its profit-seeking activity, PITLP/LLC collected income, paid expenses (including royalty payments to Dexcel), signed contracts (including an agreement with an unrelated party regarding fexofenadine), made loans, and distributed profits.20 Thus, the totality of substantive commercial activity in which PITLP/LLC engaged during the tax years at issue far surpasses the “extremely low” or “rather minimal” thresholds the law requires to satisfy the Moline standard.

From formation through the tax years at issue, PITLP/LLC thus was the entity that Perrigo determined (on the advice of E&Y) to be the best suited to perform under the Dexcel Contract. The law is clear that a parent corporation is free to establish subsidiaries and to decide which among its subsidiaries will earn income.21 Moreover, and as discussed further below, any attendant tax benefits that Perrigo obtained by organizing PITLP/LLC as an offshore entity are immaterial in a sham entity analysis.22

The government's position, in contrast, is that, upon formation in the 2007 tax year, PITLP/LLC was a sham entity and that this forever “taints” the substance and economic vitality of PITLP/LLC in all future years, including the tax years at issue (i.e., “once a sham, always a sham”). Long ago, the Second Circuit (Judge Learned Hand) was faced with this precise question: can an entity of perhaps questionable existence at formation develop into an entity that must be respected in later years? In Paymer v. Commissioner,23 the Second Circuit answered this question “yes.”

In Paymer, two partners organized two corporations in 1932 that were granted broad powers to own, manage, and dispose of real estate. At the time of their formation, neither of the corporations elected any officers, had any offices or bank accounts, or collected any income.24 Over the next six years, one of the two corporations did nothing in respect to the property held in its name from inception until the taxable year at issue (1938).25 The other corporation, by contrast, obtained a loan in 1938 and assigned to the lender all of the lessor's rights, profits, and interest in two leases on the property.26 The petitioners included the 1938 income from the property held by both corporations in their own partnership information return for that year.27 They then contended that both corporations were mere “dummies” to be disregarded for income tax purposes.28

The Second Circuit affirmed the Tax Court's decision that the latter corporation  which had performed the sole business activity of obtaining a loan — had demonstrated sufficient business activity to overcome its previous status as a sham.29 The court reversed, by contrast, the lower court's decision regarding the former corporation, which it instead found to be at all times “a passive 'dummy' which did nothing but take and hold the title to the real estate convened to it.”30 As both the Tax Court and the Second Circuit have held, thus, the fact that an entity may have been a “sham” in an earlier year does not operate to prevent that same company from engaging in sufficient business activity in a later year to make it a separate taxable entity worthy of legal respect. Implicit in the Second Circuit's reasoning, further, is that the latter corporation's business activity of obtaining a loan had true economic substance, in contrast to its former passive activity of deterring creditors.

The Second Circuit's analysis shows why Perrigo is entitled to judgment as a matter of law on the government's sham doctrine position. Here, even assuming arguendo that events in the 2007 tax year were insufficient for PITLP/LLC to be respected as a separate entity  i.e., that PITLP/LLC's formation lacked a legitimate business purpose or that it did not engage in business activity  that does not answer as a matter of law how PITLP/LLC should be treated under Moline during the 2009 through 2012 tax years. Indeed, under Paymer, as well as under Moline and its progeny, the facts and circumstances of the 2007 tax year would have no bearing on the question of whether PITLP/LLC had such a purpose or engaged in sufficient business activity during the tax years at issue. In other words, to the extent there is any doubt (or genuine issue of material fact) with regard to PITLP/LLC's substance in pre-2009 tax years, PITLP/LLC had clearly cured that “taint” by the tax years at issue.

As the assignee of the Dexcel Contract, PITLP/LLC possessed the legal obligations and responsibilities to perform under that contract. How it met its obligations and how it performed its responsibilities are irrelevant in a “sham” dispute. The only question, particularly in the context of a multinational enterprise, is whether PITLP/LLC was formed for a business purpose or engaged in business activity. During the tax years at issue, and even before, PITLP/LLC satisfied this standard. Accordingly, PITLP/LLC satisfies Moline, and, therefore, the law requires that it be recognized and respected as a separate entity.

B. PITLP/LLC And Its Transactions Satisfy the Economic Substance Doctrine Notwithstanding The Tax Efficiencies Created by Perrigo's Restructuring Of Its Omeprazole Business

If a transaction actually occurred, as Perrigo's and PITLP/LLC's omeprazole transactions did here, then the sham-in-fact doctrine cannot apply to disregard an entity's transactions. However, the economic substance (i.e., sham-in-substance) doctrine may still provide a basis on which a court may disregard a transaction if it appears that it had “no economic substance but was simply a tax-avoiding contrivance.”31

“The proper standard in determining if a transaction is a sham is whether the transaction has any practicable economic effects other than the creation of income tax losses.”32 “If the transaction has economic substance, 'the question becomes whether the taxpayer was motivated by profit to participate in the transaction.'”33

It is well-established that taxpayers may structure their real business transactions in ways that produce tax savings.34 Put differently, the mere existence of tax savings does not convert an otherwise legitimate entity or its real business transactions into an “economic sham.” This principle is reflected in case law that establishes the right of taxpayers to use corporations to obtain a tax benefit so long as the corporation (whether domestic or foreign)35 engages in real business activity, even if the sole reason for using the corporation is to obtain a tax benefit.

In Bass v. Commissioner,36 for example, a United States taxpayer transferred a working interest in a U.S. oil and gas lease to a newly formed Swiss corporation. The shareholder's Swiss lawyers, who had no experience in the oil and gas industry,37 managed the Swiss corporation. The IRS argued that the sole purpose for the Swiss corporation's formation was to avoid taxes and that its existence should be ignored — i.e., that the Swiss corporation was a sham entity.38

The Tax Court, however, concluded that the Swiss corporation conducted substantive business activity and, therefore, merited recognition.39 In reaching its conclusion, the court discussed the business activities carried out by the corporation with respect to the management of the U.S. oil and gas interest, including signing contracts related to the management of the leases, collecting income and depositing money in its bank account, paying business expenses, investing excess funds in securities, and filing tax returns.40 The court thus refused to ignore the Swiss corporation's separate corporate identity, even though the taxpayer had no business purpose for using a Swiss entity to hold the U.S. oil and gas interest other than the tax savings it allowed.41 The court also disregarded as irrelevant the fact that the taxpayer made all of the business decisions for the Swiss corporation, noting that whether an “owner [of a corporation] retains direction of its affairs down to the minutest detail makes no difference tax wise.”42

In this case and in others like it  and presumably in light of authorities like Bass43 — the government has attempted to shift the focus in its disputes by arguing that it is “respecting” the separate viability of corporate entities while at the same time disregarding the corporation's activities. The courts have routinely rejected this “creative” approach.

In Northern Indiana Public Service Co. v. Commissioner,44 for example, the U.S. taxpayer (“NIPSCO”) wanted to borrow money from lenders in the Eurobond market. Rather than borrowing that money directly, however, NIPSCO established a wholly owned subsidiary in a treaty country for the sole purpose of avoiding U.S. withholding tax on interest paid. The subsidiary loaned the money it borrowed from Eurobond lenders to NIPSCO at a slightly higher interest rate.45 NIPSCO unconditionally guaranteed timely repayment of interest and principal on the subsidiary's notes. Citing Bass, Hospital Corp. of America, and other similar cases,46 the Tax Court refused to disregard the subsidiary's participation in the transaction despite the tax-avoidance motives underlying the subsidiary's formation because the subsidiary had engaged in real business activity that generated “profits” (i.e., the minor spread earned from borrowing from unrelated parties and relending to its U.S. parent).47 The court, thus, ruled that the subsidiary was not a “sham” entity.

On appeal, the government argued that the issue was not whether the subsidiary per se was a “sham,” but rather whether the “transactions” between the taxpayer and its subsidiary should be disregarded for tax purposes — i.e., that the transactions themselves lacked economic substance.48 The Seventh Circuit rejected the government's approach:

The Commissioner's argument is creative, but unpersuasive. Regardless of the words the Commissioner uses to make her argument, in substance, the Commissioner is asking us to disregard Finance and to deem the interest payments made by Taxpayer as having gone directly to the Euronote holders. . . . However, it is unnecessary, and we think inappropriate, for us to sever a corporation from its transactions in analyzing a case, such as this one, where the corporation was formed with the intent of structuring its economic transactions to take advantage of laws that afford tax savings. . . . All of this is to say that the Tax Court was entitled to rely on Moline Properties, Hospital Corp., Ross Glove, Bass, and Nat Harrison. These cases engender the principle that a corporation and the form of its transactions are recognizable for tax purposes, despite any tax-avoidance motive, so long as the corporation engages in bona fide economically-based business transactions.49

Because the subsidiary had earned profits on its business activity,50 the Seventh Circuit concluded that both the subsidiary's existence and its business transactions were recognizable under the law, notwithstanding that NIPSCO's sole motivation for the arrangement was to avoid U.S. withholding tax.

Here, Perrigo restructured its global operations, including the formation of PITLP/LLC, to implement an efficient international operating structure. Like the offshore subsidiary in Northern Indiana, PITLP/LLC engaged in “bona fide economically-based business transactions” — the purchase of omeprazole from Dexcel for sale to LPC  on which it earned profits. And similar to the offshore subsidiary in Bass, PITLP/LLC engaged in other substantive business activity, including collecting income, paying expenses (including royalty payments to Dexcel), distributing profits, making loans, and entering into commercial agreements on its own behalf with other parties (i.e., the agreement with a third party regarding fexofenadine).

As the law permits, Perrigo made the decision to effect a portion of its business through a separate subsidiary.51 As established by Bass, Northern Indiana, and other similar cases, because PITLP/LLC engaged in real business activity, both it and its real transactions merit respect, irrespective of the ancillary tax benefits created by Perrigo's business restructuring. Thus, Perrigo's structuring of its omeprazole transactions in a manner that legally reduced its tax obligations does not turn PITLP/LLC or its transactions into a sham — in fact or in substance.

Because taxpayers may structure their business transactions in tax-efficient ways, courts have generally applied the economic substance doctrine to transactions referred to commonly as “tax shelters.” That term generally describes cases involving pre-packaged, structured transactions or complicated artificial structures unrelated to the taxpayer's core business that purportedly produces a loss or deduction (i.e., a tax benefit) for U.S. tax purposes.52

In contrast, the omeprazole transactions here arose out of and aligned with Perrigo's core business of distributing OTC pharmaceuticals. In addition, the transactions formed part of Perrigo's global restructuring, undertaken by Perrigo to position its business for further global expansion. PITLP/LLC was merely the entity that, for business as well as tax-efficiency reasons, Perrigo and its advisors determined should be responsible for the Dexcel Contract. This is the antithesis of a tax shelter “product” unrelated to a taxpayer's ordinary business activities and marketed and entered into merely for the tax benefits it produces.

Indeed, outside of “tax shelter” transactions, courts have refused to wield the economic substance doctrine to disregard even tax-motivated business transactions involving related parties and minimal economic consequences. In United Parcel Service of America, Inc. v. Commissioner (“UPS”),53 the Eleventh Circuit respected a restructuring of UPS's package insurance program through Bermuda entities, where that restructuring offered significant tax benefits but had only a de minimis economic impact. While the Eleventh Circuit recognized that there was little change after the restructuring in “how the business operated at the retail level” and “how the excess-value program appeared to customers,”54 the court reversed the Tax Court's holding that UPS's business restructuring lacked economic substance: “[T]he tax court's narrow notion of business purpose . . . stretches the economic substance doctrine farther than it has been stretched.”55 Rather, when dealing with a “going concern,” the Eleventh Circuit explained that a transaction has adequate “business purpose” so long “as it figures in a bona fide, profit-seeking business,”56 noting further that a business purpose does not mean a reason “free of tax considerations.”57 This broader notion of business purpose is a “necessary corollary to the venerable axiom that tax-planning is permissible,” a principle that, according to the Eleventh Circuit, the economic substance case law reflects:58

Many of the cases where no business purpose appears are about individual income tax returns, when the individual meant to evade taxes on income probably destined for personal consumption; obviously, it is difficult in such a case to articulate any business purpose to the transaction. . . . Other no-business-purpose cases concern tax-shelter transactions or investments by a business or investor that would not have occurred, in any form, but for tax-avoidance reasons. . . . By contrast, the few cases that accept a transaction as genuine involve a bona fide business that — perhaps even by design-generates tax benefits. . . .

The transaction under challenge here simply altered the form of an existing, bona fide business, and this case therefore falls in with those that find an adequate business purpose to neutralize any tax-avoidance motive.59

Because UPS's restructuring “had both real economic effects and a business purpose,” the court concluded that it had “sufficient economic substance to merit respect in taxation,”60 and the case was remanded for consideration of transfer pricing issues associated with the restructuring.

Like the situation in UPS, the intercompany transactions here at issue involved real products (omeprazole) and real parties (including an unrelated party, Dexcel), and certainly had more than sufficient “practicable economic effects” to merit respect.61 The assignment of the Dexcel Contract in connection with the restructuring of Perrigo's omeprazole business shifted ownership of the Dexcel Contract from LPC to Perrigo LLC, a separate taxable entity. Thereafter, PITLP/LLC was the primary obligor under the Dexcel Contract with Dexcel, an unrelated party, with the rights and obligations associated with the Dexcel Contract. During the tax years at issue, PITLP/LLC, as the owner of the Dexcel Contract, purchased and resold omeprazole and earned profit on its business activity.62 The restructuring also resulted in Perrigo ceding a “stream of income” that it otherwise could have used for its own corporate purposes.63 All of these factors imbue Perrigo's intercompany transactions with sufficient objective economic substance for legal recognition.

The transactions, further, originated from Perrigo's plan to restructure its global operations to manage its non-U.S. businesses more efficiently, and, therefore, are infused with non-tax “business purpose” to require recognition. In contrast to marketed “tax shelter” type transactions, the transactions at issue here were part of Perrigo's everyday business operations as a “going concern” and figured into the company's plans as a “bona fide, profit-seeking business.” Although Perrigo's business transactions did not visibly change “how the business operated at the retail level” and may have achieved desired tax efficiencies, neither provides any basis for the government to invalidate PITLP/LLC's real business transactions. To impose a stricter requirement here would “stretch[ ] the economic-substance doctrine farther than it has been stretched” by any other court.64

II. Where The Government Urges The Application Of Common Law Doctrines To Transfer Pricing Relationships, The Courts Opt To Apply The Arm's Length Principles of Section 482

This dispute arises in significant part because the amount paid by PITLP/LLC to LPC for the assignment of the Dexcel Contract did not accord with arm's length principles. Perrigo acknowledges that the assignment price was too low and intends to introduce expert valuation evidence of a corrected price, based on the parties' intended compliance with section 482, converted to a royalty rate applicable to U.S. omeprazole sales for all open years. Because OTC omeprazole has significantly outperformed expectations, the inclusions to Perrigo's income from application of a royalty rate on actual sales during the tax years at issue will result in substantially more U.S. income than an increased lump-sum amount for the assignment of the Dexcel Contract in a closed tax year.

When faced with similar situations involving the intersection of the transfer pricing rules and common law doctrines, courts have opted to apply the more precise rules of section 482 and its regulations in lieu of common law doctrines.65 Only in connection with “transactions heavily freighted with tax motives which cannot be satisfactorily handled in other ways”66 are the common law doctrines, such as sham entity and economic substance, properly in play. However, those doctrines have “no place where, as here, there is a statutory provision adequate to deal with the problem presented,” such as section 482.67 Indeed, courts routinely reject the “all-or-nothing” approaches of the common law sham doctrines in favor of a transfer pricing analysis under section 482,68 particularly given that section 482 contains its own economic substance provision.69

Here, the precise pricing rules of section 482 and the regulations thereunder provide the entire analytical framework needed to evaluate Perrigo's intercompany transactions related to omeprazole during the tax years at issue, and those rules should be applied in lieu of common law doctrines. In the 2007 tax year, PITLP/LLC was formed and Perrigo began to implement the steps contemplated by the E&Y advice concerning the assignment of the Dexcel Contract. When the FDA approved the sale of Dexcel's omeprazole, LPC undertook the distribution as contemplated by the E&Y plan, purchasing the drug from PITLP/LLC. Although the government would like to avoid decades of case law by ignoring the vitality of these corporate entities and the existence of their related-party transactions, it is only entitled to utilize section 482 to reallocate to Perrigo the proper arm's length amounts of income that would have occurred between unrelated parties.

Further, though the government is generally entitled to recompute items from closed tax years in order to determine tax liability in open tax years,70 it is not entitled to use inapposite common law doctrines to “sham” PITLP/LLC's existence and dispute the economic substance of its transactions in the tax years at issue based on retroactive considerations of transactions in tax years closed under the statute of limitations. Attacking the substance of PITLP/LLC and its transactions in the tax years at issue is far afield from the government's “recomputation” authority. PITLP/LLC and its transactions must be adjudged on their merits in the 2009 through 2012 tax years only; the closed years are simply not determinative. The only potential “disputed issues of material fact” concerning PITLP/LLC's existence and the substance of its omeprazole transactions arise only in closed years and should be ignored.

Because Perrigo acknowledges that section 482 here requires an adjustment to Perrigo's income during the tax years at issue, this should be the only issue before the Court. Accordingly, this Court should, as a matter of law, reject the government's “sham doctrines” and proceed with a trial focused on section 482 and the resulting arm's length pricing issues.

CONCLUSION

For the foregoing reasons, Perrigo respectfully requests that its motion be granted.

Dated: June 5, 2019

Respectfully submitted,

John B. Magee
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., NW
Washington, D.C. 20004
Telephone: (202) 739-3000
john.magee@morganlewis.com

FOOTNOTES

1 Specifically, Perrigo's fiscal years ending June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012 (the “2009 tax year,” “2010 tax year,” “2011 tax year,” and “2012 tax year,” respectively, and, collectively, “the tax years at issue”).

2 Perrigo's tax year ending June 30, 2007, is referred to as the “2007 tax year.”

3 Perrigo's tax year ending June 28, 2008, is referred to as the “2008 tax year.”

4 Unless otherwise noted, all “section” references herein are to the Internal Revenue Code of 1986, as amended and in effect for the tax years at issue.

5 In November 2007, Perrigo Israel LLC was renamed Perrigo LLC. (DeGood Decl. ¶ 10, Exhibit 6.)

6 The other products were desloratadine and coated nicotine gum. (DeGood Decl. ¶ 14.) Defendant has chosen not to challenge these transfers nor made any adjustments.

7 See, e.g., Gregory v. Helvering, 293 U.S. 465, 469 (1935) (“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”).

8 See generally Am. Elec. Power Co. v. United States, 326 F.3d 737 (6th Cir. 2003).

9 Id. at 745 (quoting In Re CM Holdings, Inc., 301 F.3d 96, 108 (3d Cir. 2002)). See also Kennedy v. Commissioner, 876 F.2d 1251 (6th Cir. 1989) (holding that the taxpayer's claimed deduction was a factual sham because the underlying transaction that lead to the claimed deduction had not occurred).

10 319 U.S. 436 (1943).

11 See id. at 438-39 (“Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.”) (footnotes omitted).

12 See, e.g., Siegel v. Commissioner, 45 T.C. 566, 576 (1966) (“The question before us is not to be clouded by the use of a foreign corporation, rather than a domestic corporation, to escape U.S. taxation, except as it may bear on the question whether that corporation was in fact formed for a substantial business purpose or actually engage[d] in substantive business activity.”) (internal punctuation omitted).

13 Nat'l Carbide Corp. v. Commissioner, 336 U.S. 442, 429 (1949) (“Complete ownership of the corporation, and the control primarily dependent upon such ownership . . . are no longer of significance in determining taxability.”).

14 Strong v. Commissioner, 66 T.C. 12, 24 (1976), aff'd, 553 F.2d 94 (2d Cir. 1977).

15 Hosp. Corp. of Am. v. Commissioner, 81 T.C. 520, 579 (1983).

16 Nat'l Inv'rs Corp. v. Hoey, 144 F.2d 466 (2d Cir. 1944) (transfer of stock to corporation in anticipation of merger transaction was sufficient business activity for the corporation to be respected as a separate entity).

17 In particular, the purchase by PITLP/LLC of omeprazole from Dexcel and the sale by PITLP/LLC of omeprazole to LPC for final distribution to United States customers.

18 See Nat'l Inv'rs Corp., 144 F.2d 466 (2d Cir. 1944).

19 See N. Ind. Pub. Serv. Co. v. Commissioner, 115 F.3d 506, 513 (7th Cir. 1997) (“Finance conducted recognizable business activity — concededly minimal activity, but business activity nonetheless. Significantly, Finance derived a profit.”).

20 See Bass v. Commissioner, 50 T.C. 595, 599-600 (1968) (substantive business activities of Swiss corporation included signing contracts, collecting income and paying expenses, and investing excess funds).

21 Merck & Co. v. United States, 24 Cl. Ct. 73, 88 (1991) (“A parent corporation may create subsidiaries and determine which among its subsidiaries will earn income.”).

22 See Hosp. Corp. of Am., 81 T.C. at 583 (“[T]he fact that petitioner intended to obtain tax advantages by organizing LTD in the Cayman Islands does not in and of itself require a holding that LTD is a sham corporation.”) (internal punctuation omitted).

23 150 F.2d 334 (2d Cir. 1945).

24 See id. at 336.

25 See id.

26 See id.

27 See id.

28 See 150 F.2d at 336

29 Id. at 336-37.

30 Id. at 337.

31 Santander Holdings USA, Inc. v. United States, 977 F. Supp. 2d 46, 49 (D. Mass. 2013).

32 Rose v. Commissioner, 868 F.2d 851, 853 (6th Cir. 1989).

33 Dow Chem. Co. v. United States, 435 F.3d 594, 599 (6th Cir. 2006) (quoting Illes v. Commissioner, 982 F.2d 163, 165 (6th Cir. 1992), cert denied, 507 U.S. 984 (1993)).

34 See, e.g., Chamberlin v. Commissioner, 207 F.2d 462, 468 (6th Cir. 1953) (“The general principle is well settled that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits; and that the taxpayer's motive to avoid taxation will not establish liability if the transaction does not do so without it.”) (internal citations omitted.); In re Multiponics, Inc., 622 F.2d 709, 723 (5th Cir. 1980) (“The mere fact that tax benefits are sought is not a proper ground for invalidating the business purpose nor for attributing any evil motive to the participants.”); Countryside Ltd. P'ship v. Commissioner, T.C. Memo. 2008-3, 95 T.C.M. (CCH) 1006, 1019 (2008) (explaining that “tax-motivated means” may be taken to achieve a “business-oriented end”).

35 Hosp. Corp. of Am., 81 T.C. at 582 (explaining that the court will not second-guess a taxpayer's choice to undertake non-U.S. business through a foreign subsidiary: “Respondent argues that petitioner could have negotiated and performed the contract for itself through one of its divisions or could have permitted a domestic subsidiary to negotiate and to perform the contract. . . . It was petitioner's business decision to use subsidiary corporations to operate and manage its own hospitals. . . . We will not second guess petitioner's business decision. . . .”).

36 50 T.C. 595 (1968).

37 Id. at 601 (“Respondent points to . . . the Swiss corporate directors' complete lack of knowledge of the industry, . . . asking us to conclude that Stantus had no independent business significance.”).

38 Id. at 600.

39 Id. at 599 (“Stantus A.G. was actually engaged in the business of a nonoperating oil and gas producer. It participated in the drilling and development of its properties, the sale of the production therefrom, and the receipt and expenditures of the proceeds thereof. Stantus A.G. is a taxable entity separate and apart from its shareholders.”).

40 See Bass, 50 T.C. at 599-600.

41 Id. at 601 (“[W]e infer that Stantus was created by petitioners with a view to reducing their taxes. . . . The test, however, is not the personal purpose of the taxpayer in creating a corporation. Rather, it is whether that purpose is intended to be accomplished through a corporation carrying out substantive business functions. If the purpose of the corporation is to carry out substantive business functions, or if it in fact engages in substantive business activity, it will not be disregarded for Federal tax purposes.”).

42 Id. at 601 (citing to Nat'l Carbide Corp. v. Commissioner, 336 U.S. 422, 433 (1949)).

43 See, e.g., Ross Glove Co. v. Commissioner, 60 T.C. 569, 589 (1973) (refusing to ignore Bahamian company's separate corporate existence (established for tax purposes) because the entity engaged in business activity, including the manufacture of gloves and accumulation of funds for foreign expansion); Hosp. Corp. of Am., 81 T.C. at 578-79, 584-86 (holding that Cayman company characterized by the IRS as a “mere skeleton” was a separate corporate entity because it engaged in “some minimal amount of business activity,” including investing funds, incurring expenses, and performing (with the taxpayer's assistance) under a management contract with an unrelated foreign party). See also Prepared Testimony of Douglas H. Shulman, Commissioner of Internal Revenue, Before the U.S. Senate Permanent Subcommittee on Investigations Hearing on Investments in Commodities by Regulated Investment Companies at 4, 2012 TNT 18-37 (Jan. 26, 2012) (stating that IRS private letter rulings reflect the “tax law principle that a taxpayer's choice of entity for conducting investment or business activity should generally be respected, and the tax law principle that if properly organized and managed, a corporation should generally be respected as separate from its shareholder for tax purposes.”).

44 115 F.3d 506 (7th Cir. 1997), aff'g 105 T.C. 341 (1995).

45 115 F.3d at 513.

46 N. Ind. Pub. Serv. Co. v. Commissioner, 105 T.C. 341, 347-48 (1995).

47 Id. at 348 (“Considering these principles and the fact that Finance engaged in the business of activity of borrowing and lending money at a profit, it would seem that Finance should be recognized as the recipient of interest paid to it by petitioner.”).

48 115 F.3d at 511.

49 Id. at 512.

50 Id. at 513 (“Finance conducted recognizable business activity-concededly minimal activity, but business activity nonetheless. Significantly, Finance derived a profit.”).

51 Merck & Co. v. United States, 24 Cl. Ct. 73, 88 (1991) (“A parent corporation may create subsidiaries and determine which among its subsidiaries will earn income.”); Hosp. Corp. of Am., 81 T.C. at 582 (“Respondent argues that petitioner could have negotiated and performed the contract for itself through one of its divisions or could have permitted a domestic subsidiary to negotiate and perform the contract. . . . It was petitioner's business decision to use subsidiary corporations to operate and manage its own hospitals. . . . We will not second guess petitioner's business decision. . . .”).

52 See, e.g., WFC Holdings Corp. v. Commissioner, 728 F.3d 736 (8th Cir. 2013) (disallowed capital loss attributable to “complex” contingent-liability tax-reduction strategy marketed by KPMG); Wells Fargo & Co. v. United States, 641 F.3d 1319 (Fed. Cir. 2011) (so-called “SILO” transactions lacked economic substance); Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122, 190 n.89 (D. Conn. 2004), aff'd on different grounds, 150 F. App'x 40 (2d Cir. 2005) (transaction described as a “one-time purchase of a tax product” and “different in almost every way” from the taxpayer's core business found to lack economic substance); ACM P'ship v. Commissioner, T.C. Memo. 1997-115, 73 T.C.M. (CCH) 2189 (1997), aff'd in part and rev'd in part, 157 F.3d 231 (3d Cir. 1998) (so-called “CINs” transaction lacked economic substance).

53 254 F.3d 1014 (11th Cir. 2001), rev'g and remanding T.C. Memo. 1999-268, 78 T.C.M. (CCH) 262 (1999).

54 Id. at 1019.

55 Id. (internal punctuation omitted).

56 Id. at 1019. See Long Term Capital Holdings, 330 F. Supp. 2d at 190 n.89 (describing the transaction before it as a “one-time purchase of a tax product . . . different in almost every way from Long Term's core investment business,” while noting that the transaction in UPS was a “restructuring served through sophisticated machinations to reduce the corresponding tax burden” on a “profit-seeking program of the going concern”).

57 254 F.3d at 1019.

58 58. Id.

59 Id. at 1019-20 (citations omitted).

60 Id. at 1020.

61 See Rose v. Commissioner, 868 F.2d 851, 853 (6th Cir. 1989).

62 But see Dow Chem. Co. v. United States, 435 F.3d 594, 600 (6th Cir. 2006) (describing negative pre-deduction cash flows generated by taxpayer's “COLI plan” a “hallmark[ ] of an economic sham”) (internal punctuation omitted).

63 See UPS, 254 F.3d at 1019.

64 Id.

65 See UPS, 254 F.3d at 1020 (rejecting application of the “economic substance” doctrine and remanding the case for consideration under section 482); Rubin v. Commissioner, 429 F.2d 650, 654. (2d Cir. 1970), rev'g 51 T.C. 251 (1968) (rejecting application of common law doctrines and remanding the matter for consideration under section 482); Hosp. Corp. of Am. v. Commissioner, 81. T.C. 520, 586 (1983) (rejecting application of “sham” doctrines and resolving matter under section 482).

66 Rubin, 429 F.2d at 653.

67 Id.

68 Id. (explaining that section 482 “provides greater flexibility than the all-or-nothing approach” of using common law tax doctrines); Keller v. Commissioner, 77 T.C. 1014, 1034 (1981), aff'd, 723. F.2d 58 (10th Cir. 1983) (“Section 482, and the regulations pursuant thereto, provide a detailed mechanism to deal with tax-avoidance problems which spur the assignment of income doctrine.”); Foglesong v. Commissioner, 621 F.2d 865, 872 (7th Cir. 1980) (“We believe that, where the issue is application of the assignment of income doctrine . . . an attempt to strike a balance between tax avoidance motives and 'legitimate' business purposes is an unproductive and inappropriate exercise. . . . Here there are other more precise devices [section 482] for coping with the unacceptable tax avoidance which is unquestionably present in this case. But there is no need to crack walnuts with sledgehammers.”).

69 See Treas. Reg. § 1.482-1(d)(3)(iii)(B) (“In general, the determination of which controlled taxpayer bears a particular risk will be made in accordance with the provisions of § 1.482-1(d)(3)(ii)(B). . . . Thus, the allocation of risks specified or implied by the taxpayer's contractual terms will generally be respected if it is consistent with the economic substance of the transaction.”).

70 See Barenholtz v. United States, 784 F.2d 375, 380-81 (Fed. Cir. 1986) (“It is well settled that the IRS and the courts may recompute taxable income in a closed year in order to determine tax liability in an open year.”); J&J Fernandez Ventures, L.P. v. United States, 84 Fed. Cl. 369, 370 (2007) (concluding that the government was “not barred from re-calculating items from closed years for purposes of assessing tax in open years”).

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    Perrigo Co. et al. v. United States
  • Court
    United States District Court for the Western District of Michigan
  • Docket
    No. 1:17-cv-00737
  • Cross-Reference

    Related coverage.

  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-22147
  • Tax Analysts Electronic Citation
    2019 TNT 110-22
    2019 WTD 110-29
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