GlaxoSmithKline Petitions for Relief From $1.9 Billion Deficiency

Petitioner intends to request consolidation of this matter with Docket No. 005750-04, which was filed by Petitioner on April 2, 2004, and involves issues substantially similar to those raised in this petition. In the petition filed in Docket No. 005750-04 (the "1989-1996 Petition"), Petitioner challenged the Commissioner's proposed adjustments under section 482 of the Internal Revenue Code ("I.R.C.") for Petitioner's 1989 through 1996 taxable years, as set forth in a notice of deficiency (the "1989-1996 Notice") dated January 6, 2004. In this matter, Petitioner challenges one notice of deficiency proposing section 482 adjustments for Petitioner's 1997 through 2000 taxable years based on theories similar to those proposed in the 1989-1996 Notice, and two other notices of deficiency proposing withholding tax assessments as secondary adjustments to the section 482 adjustments for both the 1989-1996 and 1997-2000 taxable years.

As used herein, the term "Petitioner" refers to the current Petitioner and its predecessors. As the basis for its case, Petitioner alleges as follows:

a. Petitioner is the wholly-owned United States subsidiary of GlaxoSmithKline plc ("GSK") and the common parent of the federal income tax consolidated group through which GSK currently conducts the United States portion of its global pharmaceutical business, which is headquartered in the United Kingdom. GSK is a United Kingdom-based company listed on the London Stock Exchange and was formed pursuant to the December 2000 merger between Glaxo Wellcome plc ("Glaxo Wellcome") and SmithKline Beecham plc ("SmithKline Beecham"). Glaxo Wellcome had been formed pursuant to Glaxo Holdings plc's 1995 acquisition of Wellcome plc.

b. Petitioner is the successor to Glaxo Wellcome Americas Inc. ("GWAI"). GWAI's taxpayer identification number was 59-2151995. Prior to the December 2000 merger between Glaxo Wellcome and SmithKline Beecham, GWAI was the common parent of the federal income tax consolidated group now headed by Petitioner and through which Glaxo Wellcome conducted the United States portion of its global pharmaceutical business, which was headquartered in the United Kingdom.

c. GWAI, in turn, was the successor to Glaxo Americas, Inc. ("GAI" -- taxpayer identification number 59-1935592), formerly known as Glaxo Enterprises, Inc., following Glaxo Holdings plc's 1995 acquisition of Wellcome plc. GAI, like its successor GWAI, was the common parent of the federal income tax consolidated group now headed by Petitioner and through which Glaxo Holdings plc conducted the United States portion of its global pharmaceutical business, which was headquartered in the United Kingdom.

d. As used herein, the term "Glaxo" refers to the worldwide operations of Glaxo Wellcome (and GSK from December 27, 2000) and their respective affiliates, including operations in the United States. The term "Glaxo U.K." refers to the portion of these operations conducted in the United Kingdom by Glaxo Wellcome (and GSK from December 27, 2000) and their U.K. subsidiaries. The term "Glaxo Group" refers to the worldwide operations of Glaxo Wellcome (and GSK from December 27, 2000) excluding the United States operations conducted by Petitioner. The term "Glaxo U.S." refers to Petitioner and the United States operations of the federal income tax consolidated group that it and its predecessors have headed. The term "Glaxo Heritage Products" refers to products based on chemical entities discovered by Glaxo Group prior to the acquisition of Wellcome plc in 1995. All of the transfer-pricing adjustments in this case relate to Glaxo Heritage Products.

b. On January 25, 2005, the IRS issued the Notice of Deficiency for the 1989 through 1996 taxable years attached hereto as Exhibit B (the "1989-1996 Withholding Tax Notice"). This notice proposes an increase in Petitioner's withholding tax based on an assertion that it paid constructive dividends attributable to the section 482 adjustments proposed in the 1989-96 Notice. This proposed adjustment is an alternative to the constructive loans proposed as secondary adjustments in the 1989-1996 Notice. The 1989-96 Withholding Tax Notice was issued and sent by certified mail to Petitioner on behalf of IRS Commissioner Mark Everson by Ronnie Brannon for Scott E. Irick of the IRS at Greensboro, North Carolina. All of the proposed adjustments in the 1989-1996 Withholding Tax Notice are in dispute. The 1989-1996 Withholding Tax Notice states that the last date for filing a petition in this Court is April 25, 2005.

c. On January 25, 2005, the IRS issued the Notice of Deficiency for the 1997 through 2000 taxable years attached hereto as Exhibit C (the "1997-2000 Withholding Tax Notice"). This notice proposes an increase in Petitioner's withholding tax based on an assertion that it paid constructive dividends attributable to the section 482 adjustments proposed in the 1997-2000 Notice. This proposed adjustment is an alternative to the constructive loans proposed as secondary adjustments in the 1997-2000 Notice. The 1997-2000 Withholding Tax Notice was issued and sent by certified mail to Petitioner on behalf of IRS Commissioner Mark Everson by Edward R. Sigmond of the IRS at Philadelphia, Pennsylvania. All of the proposed adjustments in the 1997-2000 Withholding Tax Notice are in dispute. The 1997-2000 Withholding Tax Notice erroneously states that the last date for filing a petition in this Court is April 25, 2004. The correct last date for filing a petition in this Court is April 25, 2005.

                     Unagreed Income    Unagreed Credit

c. The 1997-2000 Notice proposes to further adjust Petitioner's section 41 credits based upon a reclassification of rebates paid with respect to certain product sales, resulting in a total adjustment to Petitioner's section 41 credits as reflected in the table in paragraph 3.a, above. This additional proposed adjustment to Petitioner's section 41 credits is erroneous. Petitioner understands that the IRS National Office will soon publish guidance that is expected to provide a basis for resolving this matter.

d. Excluding imputed loan interest, the proposed income adjustments in the 1997-2000 Notice represent an increase of $850,794,949 from the IRS's proposed income adjustments in the Revenue Agent's Reports ("RARs"). This is an increase of thirty-eight percent (38%) over the RARs and reflects a departure from the theories that the IRS espoused during the administrative consideration of this case, including competent authority.

e. Based on his proposed adjustments to Petitioner's income, the Commissioner proposes, in the 1989-1996 Withholding Tax Notice, withholding tax deficiencies in the following amounts:

    Taxable Year Ended       Income Adjustment      Tax Deficiency

f. Based on his proposed adjustments to Petitioner's income, the Commissioner proposes, in the 1997-2000 Withholding Tax Notice, withholding tax deficiencies in the following amounts:

    Taxable Year Ended       Income Adjustment         Tax Deficiency

a. The Commissioner's adjustments are inconsistent with the requirements of I.R.C. section 482.

b. The Commissioner erroneously asserts as his primary adjustments that related amounts for cost of goods sold, sample expenses, and royalties charged by Glaxo Group to Petitioner for the taxable years ended December 31, 1997, through December 31, 2000, exceeded the amounts that would have been charged at arm's length.

c. As a consequence of his error, the Commissioner erroneously allocates to Petitioner over eighty percent (80%) of Glaxo's total worldwide profits on sales and distribution in the United States of Glaxo Heritage Products by (1) limiting Glaxo Group to a contract manufacturing markup of approximately twenty-four percent (24%) on manufacturing costs, and (2) allowing Glaxo U.K. only fixed royalties of up to fifteen percent (15%), depending upon the product. These adjustments effectively push Petitioner's gross margins after royalties above seventy-six percent (76%) on its United States sales. After taking into account ongoing interest income on the constructive loans asserted by Respondent as a secondary adjustment, Respondent seeks to tax Petitioner on more than one hundred percent (100%) of the worldwide income earned from sales of Glaxo Heritage Products in the United States for the 1997-2000 period.

d. An erroneous assumption implicit in the Commissioner's adjustments is that the 1987 distributor license agreement between Glaxo U.K. and Petitioner constituted a full grant of patent rights for covered products. This is a new theory that the IRS had never previously advanced during the administrative consideration of this case, including consideration by the U.S. Competent Authority.

e. The Commissioner erroneously ignores the royalty rate adjustments agreed and paid from time to time between Glaxo U.K. and Glaxo U.S. with respect to the Glaxo Heritage Products, improperly asserting that any rates above the original rates exceed the amounts that would have been charged at arm's length.

f. The Commissioner erroneously disregards the 1999 restructuring of trading arrangements and the consequent termination in 1999 of the 1987 distributor license agreement. After the restructuring, similar gross margins for Petitioner were maintained, but all compensation to Glaxo Group was included in product prices, rather than being divided between product prices and royalties.

g. The Commissioner erroneously disregards amounts paid by Petitioner with respect to products for which certain patents had expired to the extent that the purchase prices (including royalties paid) exceeded the cost of manufacture plus a cost-based markup.

h. The Commissioner erroneously asserts both that Glaxo U.S. owned, for tax purposes, the trademarks and other marketing intangibles associated with the Glaxo Heritage Products, and that the economic substance of the dealings between Glaxo U.S. and Glaxo Group with respect to the Glaxo Heritage Products permits the imputation to Glaxo U.S. of a royalty-free license or other transfer of the U.S. trademarks and other marketing intangibles at the time the Glaxo Heritage Products were first sold in the United States.

i. The Commissioner propounds an erroneous residual profit split methodology to support the proposed deficiency.

j. The Commissioner erroneously fails to properly apply the "commensurate with . . . income" requirement of I.R.C. section 482.

k. The Commissioner erroneously attributes to Petitioner seventy-five percent (75%) of the license fee received from Novopharm Limited for the taxable year ended December 31, 1997.

l. The Commissioner makes erroneous section 482 adjustments to cost-sharing buy-in payments by Petitioner and by Glaxo U.K. with respect to pre-existing intangible property for the taxable years ended December 31, 1997, through December 31, 2000.

m. The Commissioner erroneously determines that a loan from Petitioner to Glaxo Group arose from his adjustments and erroneously imputes interest income to Petitioner premised on the existence of that loan.

n. The Commissioner erroneously adjusts Petitioner's I.R.C. section 41 credits for the taxable years ended December 31, 1997, through December 31, 2000, based upon the cost-sharing buy-in adjustment described in paragraph 5.1 above.

o. The Commissioner erroneously adjusts Petitioner's I.R.C. section 41 credits for the taxable years ended December 31, 1997, through December 31, 2000, based upon a reclassification of rebates.

p. All of the proposed deficiencies based on the primary adjustments and the errors alleged in paragraphs a. through n. above (including any other section 482 adjustments not specifically enumerated above or within the Notice) are arbitrary and capricious and constitute an abuse of the Commissioner's discretion.

q. The errors on which the Commissioner bases his primary adjustments extend for the same reasons to his secondary adjustments and correlative computations, including the withholding taxes asserted in the 1989-96 Withholding Tax Notice and the 1997-2000 Withholding Tax Notice, which likewise are arbitrary and capricious and constitute an abuse of the Commissioner's discretion.

r. Petitioner asserts an affirmative claim for overpayment of income taxes (together with interest thereon as provided by law), on the basis that, at arm's length, Petitioner would have earned less taxable income than it reported from sales of Glaxo Heritage Products during its 1997-2000 taxable years, as follows:

                                  Reduction in

s. Petitioner asserts an additional affirmative claim for overpayment of income taxes (together with interest thereon as provided by law), on the basis that Petitioner underpaid Glaxo Group for intellectual property attributable to Glaxo Heritage Products because the payments owed were incorrectly calculated and were inconsistent with the terms of the qualified cost sharing agreement, as described in Paragraphs 6.u to 6.x and 7.c below. The erroneous reductions in amounts owed and the resulting overpayments were as follows:

      Tax Year       Incorrect Royalty Reduction        Overpayment

a. Throughout the years at issue, Glaxo operated a global pharmaceutical business headquartered in the United Kingdom that engaged in the research, discovery, development, manufacture, marketing, and sale of prescription pharmaceutical products.

b. Throughout the years at issue, Glaxo's pharmaceutical business in the United States included the local distribution of the Glaxo Heritage Products.

c. Glaxo U.S. was built up pursuant to a Glaxo U.K. strategy, conceived and directed by Glaxo's Chief Executive Paul (now Sir Paul) Girolami, to establish a substantial presence in the U.S. market using Glaxo Heritage Products. Glaxo commenced an active United States business with the acquisition of a small company in 1978.

d. In 1980, when Girolami became Chief Executive of Glaxo, Glaxo U.S. ranked 65th in the U.S. market by sales, had fewer than 300 employees selling mostly vitamins and minor products, had annual sales of approximately $13 million, and had a balance sheet net worth of $30.5 million. By 1994, when Girolami retired, Glaxo U.S. was the second largest pharmaceutical company in the United States by sales, had 6,500 employees selling Glaxo Heritage Products, had annual sales of approximately $3.7 billion, and had total assets of over $2.3 billion and a balance sheet net worth of over $1.6 billion. The growth of Glaxo U.S. continued through the year 2000, when its annual sales of Glaxo Heritage Products was $3.6 billion out of total sales of nearly $6.5 billion, it had total assets of over $11 billion, it had a balance sheet net worth of over $4.9 billion, and it employed a workforce of over 10,000.

e. A principal source of Glaxo U.S.'s profits during the 1997-2000 period was the Glaxo Heritage Products. The Commissioner's theory that Glaxo Group followed a policy of under-compensating Petitioner for selling Glaxo Heritage Products is completely inconsistent with both the intent and the results of Glaxo U.K.'s business strategy for its U.S. subsidiary.

f. Eight of the Glaxo Heritage Products (the "Principal Products") account for approximately ninety-six percent (96%) of the proposed income adjustments in the 1997-2000 Notice. The Principal Products at issue include the six products identified as "Principal Products" in the 1989-1996 Petition as well as two presentations based on fluticasone propionate, Flovent and Flonase. The chemical names, descriptions, and discovery and launch dates of the Principal Products are as follows:

                                                    Glaxo       First

h. Collectively, the Principal Products reflect an extraordinarily productive research function in a business in which only a very small fraction of discovered compounds ever reaches the market.

i. Glaxo Group discovered all of the products through its research;

ii. Glaxo Group patented all of the products;

iii. Glaxo Group conducted virtually all pre-clinical development on all of the products;

iv. Glaxo Group first introduced each of the products into humans;

v. Glaxo Group led the design of clinical trials on the products, and Glaxo Group scientists and non-U.S. clinical trials provided substantial scientific information and data to support U.S. approvals by the Food & Drug Administration ("FDA");

vi. Glaxo Group invented the technology for the manufacture of the active ingredient (primary manufacturing) and conducted all primary manufacturing for the products;

vii. Glaxo Group invented and implemented, or contributed significantly to, the secondary manufacturing technology for the products;

viii. Glaxo Group obtained regulatory approval for all of the products outside the United States before the products were approved in the United States;

ix. Glaxo Group designed the worldwide marketing platforms for the products;

x. Glaxo Group first launched all of the products outside the United States;

xi. Glaxo Group selected or approved, and owned, the applicable trademarks and trade names for the products;

xii. Glaxo Group generally led the development of new drug indications following the initial launch of the products;

xiii. Glaxo Group directly reimbursed virtually all U.S. development expenses through approximately 1984, covering the FDA approvals of Ventolin and Zantac, among other drugs;

xiv. Glaxo Group directly reimbursed substantial amounts of U.S. marketing and launch expenses through approximately 1986, encompassing the years in which Glaxo U.S. launched Ventolin and Zantac, among other drugs.

i. Petitioner provided development assistance for FDA approvals;

ii. Petitioner commenced secondary manufacturing in 1984 using secondary manufacturing technology installed by Glaxo U.K.;

iii. Petitioner applied to the U.S. market central marketing platforms and strategies established by Glaxo U.K.;

iv. Petitioner introduced the products in the United States; and

v. Petitioner conducted selling activities, principally using a sales force to detail the products to physicians.

vi. The commencement of cost-sharing on July 1, 1995, did not alter Petitioner's functions as the distributor of presentations and indications of Glaxo Heritage Products, with the exception of certain product line extensions covered under the amended cost sharing agreement, as described in paragraph 6.w, below.

k. Pursuant to FDA regulatory requirements, communications by drug detailers to physicians are restricted by a product's clinically proven attributes and other information reflected in the FDA-approved package insert for that product.

l. Petitioner followed standard industry practices in promoting the products in accordance with FDA regulations. It did not employ unusual or extraordinary local selling tactics or methods or achieve market penetration for the products that was significantly different from the penetration achieved by Glaxo Group in major markets outside the United States.

n. In the case of Petitioner, the margins allowed were more than those that would have been allowed under arm's length pricing.

o. Pursuant to Glaxo U.K.'s strategy for debt-free growth of the U.S. company, Petitioner had an overall gross margin on the portfolio of Glaxo Heritage Products, after royalties, of approximately fifty- five percent (55%) for the years at issue. The Commissioner's position seeks to increase that figure to over seventy-six percent (76%).

p. To the extent that valuable marketing intangibles contributed to United States sales of the Glaxo Heritage Products, those intangibles were owned and/or developed by Glaxo Group. To the extent that Petitioner assisted in the development of any marketing intangibles in the United States, it was more than adequately compensated through its gross margins.

q. Prior to 1986, when Glaxo U.S. first became profitable without reimbursements from Glaxo Group, Petitioner's gross margins were accomplished solely through product prices adjusted periodically under Glaxo Group trading arrangements.

r. By 1986/1987, it was recognized that without some adjustments Petitioner would earn, at the expense of Glaxo U.K., the inventor, excessive levels of profit on U.S. sales of the Glaxo Heritage Products then on the market, considering Petitioner's functions and risks.

s. Consistent with the policy of adjusting prices to achieve appropriate gross margins, Glaxo U.K. and Petitioner undertook to reduce Petitioner's excess profits through royalties charged under a distribution license agreement between Glaxo U.S. and Glaxo U.K., covering U.S. sales of the Glaxo Heritage Products (the "1987 License"). The 1987 License was terminable on Six months' notice.

t. The royalties charged under the 1987 License were in addition to Petitioner's continued payment of product prices for active ingredients, which it was required to purchase from Glaxo Group; and both royalty rates and product prices were adjusted by the parties from time to time to achieve appropriate gross profit marvins for Petitioner. The 1987 license was terminated on July 1, 1999. Upon termination of the 1987 License, royalty-equivalent amounts were added to the product prices and the gross profit margins remained similar to those charged (after royalty) prior to the termination of the license.

v. Under the QCSA, Glaxo U.S. owned the U.S. rights to the fruits of cost-shared R&D, and Glaxo Group owned all other rights.

w. Because they had been discovered and developed under the developer-assister regime that governed Glaxo's research and development prior to July 1, 1995, Glaxo Heritage Products (including the Principal Products) launched before that date were excluded from cost sharing. However, product line extensions (new indications and new presentations) of Glaxo Heritage Products that had not been approved for sale in any market before July 1, 1995 ("Qualifying PLEs"), were cost-shared under the QCSA.

i. In order to provide Glaxo U.S. with an appropriate recovery of cost-shared development attributable to Qualifying PLEs, Glaxo U.S. received, pursuant to a study conducted according to the terms of the QCSA, reductions in transfer prices for the Existing Products for which Qualifying PLEs were launched, and these reductions in transfer price were computed until 1999 as royalty rate reductions ("RRRs") that effectively reduced or offset the royalties otherwise due to Glaxo U.K. with respect to the Existing Product to which the Qualifying PLE related.

ii. In 1999, the trading arrangements between Glaxo Group and Glaxo U.S. were restructured to eliminate the payment of royalties by Glaxo U.S. to Glaxo U.K. and to adjust appropriately transfer prices to maintain gross margins and thereby conform trading arrangements with Glaxo U.S. to those for most other local operating subsidiaries of Glaxo. See paragraph 6.t above.

iii. Following this restructuring, the RRRs continued to be applied in the form of reductions in transfer prices for Glaxo Heritage Products with Qualifying PLEs.

x. Respondent's adjustments for Qualifying PLEs derive from his application in the cost-sharing calculations of his primary adjustment of the amounts due to the Group for Glaxo Heritage Products. Respondent does not otherwise contest the assumptions or formula used to determine the required RRR for a PLE.

y. Four new Glaxo products were first launched during the 1997- 2000 period -- Ultiva, Naramig, Tritec, and Lotronex.

i. Development of these products began before July 1, 1995, and therefore the compensation properly due to the owner of the fruits of the R&D effort was divided, pursuant to a study conducted according to the terms of the QCSA, between the pre-cost-sharing developer and the owner under the QCSA of the geographic rights to exploit the products.

ii. For Naramig, Tritec, and Lotronex, Glaxo U.S. was obligated to make a buy-in payment for technology developed before the effective date of the QCSA.

iii. For Ultiva, Glaxo U.K. was obligated to make a buy-in payment to Glaxo U.S. for the use of Glaxo U.S.'s previously developed technology in the rest of the world.

iv. Amounts actually due to the owner of technology used in these four products are subject to adjustment under the commensurate- with-income standard of section 482. See paragraph 6.aa below.

z. Respondent's recalculation of the buy-in payments due for the four new products is based on the assumption that only 25% of residual net present value is properly allocable to manufacturing intangibles. This recalculation does not permit the developer of a product to recoup research and development costs and earn a reasonable return thereon and is based on the faulty assumptions that marketing of pharmaceutical products involves high-value nonroutine intangible property apart from the patent rights and scientific knowledge developed in the research and development process and that research efforts should not be compensated for the risk that the effort will fail.

aa. Independent of, but consistent with, product price and royalty adjustments applied to Petitioner's activities under Glaxo Group trading arrangements, the "commensurate with . . . income" standard of I.R.C. section 482 requires moderation of Petitioner's profit levels to reflect the income commensurate with Glaxo Group's intangible contributions to U.S. sales of the Glaxo Heritage Products. Increases in royalty rates and/or transfer prices, both before and during the term of the 1987 License and pursuant to the trading arrangements in place following their restructuring in 1999, were consistent with the commensurate-with-income principle.

bb. During the years at issue, Petitioner earned gross margins that exceeded an arm's length return, and Petitioner has overpaid federal income taxes accordingly.

cc. The inclusion of imputed loan interest in the 1997-2000 Notice's primary adjustment is inconsistent with the obligations and understandings of the parties, established IRS procedures and pronouncements, and the greater-than-arm's length compensation received by Petitioner. Neither Glaxo U.S. nor Glaxo Group intended any portion of Petitioner's product price or royalty payments as loans or advances of any kind.

dd. The residual profit split analysis, included in the 1997- 2000 Notice as asserted confirmation of the Commissioner's proposed primary adjustments, is a Basic Arm's Length Return Method ("BALRM") with profit split.

ee. The Commissioner's residual profit split analysis is flawed because:

i. It relies on markups on costs that are not supported by comparable data for the functions included; and

ii. It uses residual profit split percentages that are unsupported by comparable third-party profit splits or other analysis and vary inexplicably from year to year.

hh. For financial reporting and tax purposes, Petitioner properly treated rebates paid to state agencies and HMOs as reductions in its gross receipts (i.e., treated rebates as a return or allowance) to arrive at its net receipts.

ii. In the computation of the Credit for Increasing Research Activities described in I.R.C. section 41, Petitioner used net receipts to determine the Base Amount described in I.R.C. section 41(c) rather than incorrectly treating the rebates incurred as a deduction under I.R.C. section 162, as the Commissioner does in the 1997-2000 Notice.

a. Petitioner re-alleges paragraphs 5 and 6, above.

b. Petitioner is entitled to an affirmative adjustment to its income, and a refund of its overpayment of tax for the 1997 through 2000 taxable years in the amount of approximately $731 million, plus interest thereon, as set forth in paragraph 5.r above, because this amount results from the adjustments required under I.R.C. section 482 had Petitioner received returns for its functions and risks at the top of the third quartile of the interquartile ranges established by Petitioner's contemporaneous transfer pricing documentation studies under I.R.C. section 6662. This refund amount is consistent with the refund amount that would follow from the application of the standard in the Advanced Pricing Agreements ("APAs") between the IRS and SmithKline Beecham Corporation ("SBCorp") and, upon information and belief, between the IRS and other direct competitors of Petitioner as alleged in paragraphs 5.m and 7 of the 1989-1996 Petition.

c. For Qualifying PLEs, Glaxo U.S. paid a reduced royalty to Glaxo Group pursuant to a study conducted according to the terms of the QCSA. During the 1997 to 2000 taxable years, Petitioner paid reduced royalties and transfer prices to Glaxo Group for the Diskus presentations of Serevent and Flovent. The Diskus is a passive delivery device for the two drugs. These reductions of royalties and transfer prices were erroneous because neither of these product line extensions was a Qualifying PLE under the QCSA. Because both Flovent Diskus and Serevent Diskus had been approved elsewhere in the world before July 1, 1995, they were Existing Products rather than Qualifying PLEs, and therefore no adjustment with respect to either was proper upon its launch in the United States thereafter. Additionally, Flovent Diskus had not been launched in the United States by December 31, 2000, and therefore was not a Qualifying PLE in that year for this independent reason. Accordingly, Petitioner's taxable income should be decreased and refunds should be issued based upon these incorrect royalty rate and transfer price reductions, as reflected in paragraph 5.s above.

d. To the extent that the Court determines that the transfer prices and royalties paid by Petitioner for Glaxo Heritage Products during 1997 should be increased, then Glaxo Group's share of the Novopharm payment described in paragraph 6.ff should also be increased to reflect the revised division of income.

a. The Commissioner erroneously bases the alleged dividend income on underlying section 482 adjustments that are themselves erroneous, as asserted in paragraph 5 of the 1989-1996 Petition and in paragraph 5 of this petition.

b. All of the proposed deficiencies in the Withholding Tax Notices are arbitrary and capricious and constitute an abuse of the Commissioner's discretion.

9. WHEREFORE, Petitioner prays that this Court will hear the case and determine that:

a. The Commissioner erred as alleged in each assignment of error set forth in paragraph 5 and further demonstrated in paragraphs 6 through 7 above;

b. There is no deficiency in income taxes due from Petitioner;

c. Petitioner has made an overpayment of taxes and is entitled to a refund and interest thereon; and

d. Petitioner is entitled to such other and further relief as the Court may deem appropriate.