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Drug Company's Transactions Lacked Economic Substance, Government Says

JUL. 12, 2019

Perrigo Co. et al. v. United States

DATED JUL. 12, 2019
DOCUMENT ATTRIBUTES

Perrigo Co. et al. v. United States

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

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

The Hon. Robert J. Jonker

DEFENDANT'S REPLY TO PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT


TABLE OF CONTENTS

I. Introduction

II. Prior to February 20, 2008, LLC could not and did not assume risks or perform obligations under the Dexcel Contract.

A. The material facts regarding the “assignment” are undisputed

B. Plaintiff's false assertion that UK Finco “stood ready to fund all of LLC's obligations” is immaterial to the Court's evaluation of the substance of the “assignment.”

C. LLC's lack of capacity to assume risk is not excused merely because it was not organized as an insurance company

D. The Performance Guaranty constitutes further evidence that the “assignment” was a sham

E. Plaintiff's subjective intentions are immaterial if the “assignment” had no “practicable economic effects.”

III. Legal fees paid for drafting Paragraph IV Notices and defending Paragraph IV lawsuits must be capitalized.

A. There are no material facts in dispute regarding Plaintiff's Paragraph IV Notices and Paragraph IV lawsuits.

B. The plain meaning of Treasury Regulation § 1.263(a)-4 requires that Plaintiff capitalize the legal fees at issue.

C. Plaintiff seeks to rewrite Treasury Regulation § 1.263(a)-4 to its liking and ignores the plain meaning of key defined terms.

D. Plaintiff misconstrues the origin-of-the claim doctrine.

E. Plaintiff misstates the import of Hatch-Waxman legislation.

F. Plaintiff ignores the distinction between costs incurred to protect income-producing assets and costs incurred in disputes arising out of the creation or acquisition of new assets.

G. Paragraph IV defense costs arise out of a series of steps taken to obtain a capital asset and not from the defense of income-producing lines of business.

H. Equitable considerations are irrelevant where, as here, controlling authority requires the capitalization of costs incurred as part of “a series of steps carried out as part of a single plan” to obtain FDA approval.

IV. Conclusion

TABLE OF AUTHORITIES

Cases

A.E. Staley Mfg. Co. v. Commissioner, 119 F.3d 482 (7th Cir. 1997)

American Stores Co. v. Commissioner, 114 T.C. 458 (2000)

American Stores Co. v. Commissioner, 170 F.3d 1267 (10th Cir. 1999)

AstraZeneca Pharm. v. Apotex Corp., 669 F.3d 1370 (Fed.Cir. 2012)

Bartlik v. U.S. Dep't of Labor, 62 F.3d 163 (6th Cir. 1995)

Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir. 2006)

Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985)

Commissioner v. National Alfalfa Dehydrating, 417 U.S. 134 (1974)

Davis v. Commissioner, 585 F.2d 807 (6th Cir. 1978)

Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977)

Eli Lilly v. Medtronic, Inc., 496 U.S. 661 (1990)

F. Meyer & Brother Co., 4 B.T.A. 481 (1926)

Hauge v. Commissioner, T.C. Memo. 2005-276

Hawk v. Commissioner, 924 F.3d 821 (6th Cir. 2019)

Higgins v. Smith, 308 U.S. 473 (1940)

Humana Inc. v. Commissioner, 881 F.2d 247 (6th Cir. 1989)

Illinois Tool Works Inc. v. Commissioner, T.C. Memo. 2018-121

In re Arctic Exp. Inc., 636 F.3d 781 (6th Cir. 2011)

INDOPCO v. Commissioner, 503 U.S. 79 (1992)

Kerman v. Commissioner, 713 F.3d 849 (6th Cir. 2013)

Kornhauser v. United States, 276 U.S. 145 (1928)

Lincoln Savings, 403 U.S. 345 (1971)

Mahoney v. Commissioner, 808 F.2d 1219 (6th Cir. 1987)

Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835 (6th Cir. 1995)

Meade's Estate v. Commissioner, 489 F.2d 161 (5th Cir. 1974)

Montana Power Co. v. United States, 232 F.2d 541 (3d Cir. 1956)

Nat Harrison Assocs. v. Commissioner, 42 T.C. 601 (1964)

Nestlé Holdings, Inc. v. Commissioner, 152 F.3d 83 (2d Cir. 1998)

Northern Indiana Public Service Co. v. Commissioner, 105 T.C. 341 (1995)

Northern Indiana Public Service Co. v. Commissioner, 115 F.3d 506 (7th Cir. 1997)

PLIVA, Inc. v. Mensing, 564 U.S. 604 (2011)

Rassenfoss v. Commissioner, 158 F.2d 764 (7th Cir. 1946)

Richardson v. Commissioner, 509 F.3d 736 (6th Cir. 2007)

Roberto v. United States, 518 F.2d 1109 (2d Cir. 1975)

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

Schering Corp. v. Geneva Pharm, Inc., 275 F.Supp.2d 534 (D.N.J. 2002)

Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017)

United Parcel Service v. Commissioner, 254 F.3d 1014 (11th Cir. 2001)

United States v. Gilmore, 372 U.S. 39 (1963)

United States v. Hilton Hotels Corp., 397 U.S. 580 (1970)

Urquhart v. Commissioner, 215 F.2d 17 (3d Cir. 1954)

Welch v. Helvering, 290 U.S. 111 (1933)

Wellpoint, Inc. v. Commissioner, 599 F.3d 641 (7th Cir. 2010)

Wellpoint, Inc. v. Commissioner, T.C. Memo. 2008-236

Winter v. Commissioner, T.C. Memo. 2002-173

Statutes

21 U.S.C. § 355(j)(2)(B)(i)

26 U.S.C. § 263 21

35 U.S.C. § 271(e)(2)

Regulations

Treas. Reg. § 1.482-9

Treas. Reg. § 1.263(a)-4

Other Authorities

H.R. 98-857, 1984 WL 37417


I. Introduction

Tax shelters, especially those designed by professional advisors, always appear to generate economic activity. Upon close examination, however, those appearances are nothing more than a Potemkin village. See Richardson v. Commissioner, 509 F.3d 736, 742 (6th Cir. 2007). At trial, Defendant intends to expose Plaintiff's insertion of LLC into its supply and distribution arrangement with Dexcel as such an illusion, lacking economic effects or a profit motive throughout the tax years at issue.

When a taxpayer neglects to finish building its Potemkin village until after the illusion is supposed to have commenced, the taxpayer risks an adverse determination, in whole or part, on motion. Plaintiff finds itself in such a position in this case. As discussed in Defendant's opening brief, and as summarized below, undisputed facts establish that the “assignment” of the Dexcel Contract did not generate practicable economic effects. This was true as of November 29, 2006, the effective date of the “assignment,” and it was true as a matter of undisputed fact through at least February 20, 2008.

The issue of whether Plaintiff must capitalize legal fees paid to prepare Paragraph IV Notices and defend Paragraph IV lawsuits (“ANDA Issue”) is also ripe for resolution on motion. Plaintiff offers no fact witnesses and has identified no disputes of material fact. Instead, Plaintiff offers opinion testimony from two lawyers. Their reports, submitted with declarations, recite undisputed truisms about the FDA's drug approval process and patent litigation procedure, along with improper conclusions of law. Neither report pays any attention to the particular facts and circumstances of Plaintiff's actual Paragraph IV Notices and Paragraph IV lawsuits giving rise to Plaintiff's legal costs.

Plaintiff's legal analysis on the ANDA issue is an exercise in misdirection and redefinition. Plaintiff ignores the plain meaning of the controlling authority on this issue, Treasury Regulation § 1.263(a)-4 (Amounts Paid to Acquire or Create Intangibles), and attempts to redefine the key terminology more to its liking. Plaintiff attacks Defendant's origin-of-the-claim analysis by framing the “artificial infringement” cause of action created under Hatch-Waxman as a mere continuation of prior patent law. Plaintiff also loads up its brief with a smorgasbord of policy and fairness arguments that have little to do with the application of controlling authority to the ANDA issue. For example, Plaintiff wrongly looks to the legislative history and purposes behind Hatch-Waxman to glean flawed insights into tax policy. And Plaintiff ignores longstanding, well-delineated distinctions in the case law between the treatment of costs incurred to defend income-producing assets (deductible) from costs incurred to defend legal disputes arising from the acquisition or creation of capital assets (not deductible). Based on the plain language of Treasury Regulation § 1.263(a)-4, Defendant is entitled to summary judgment on the ANDA issue. Defendant's position is further supported by a proper application of the origin-of-the-claim doctrine.

II. Prior to February 20, 2008, LLC could not and did not assume risks or perform obligations under the Dexcel Contract.

A. The material facts regarding the “assignment” are undisputed.

LLC lacked any means to assume risks or perform obligations associated with the Dexcel Contract prior to February 20, 2008. LLC had no employees. (Exhibit AG 84:10-85:17, PageID.2487). It had no facilities or operational capacity. (Id.) It had zero equity capital. (Exhibit AO, PageID.2517). The same was true of PITLP. (Id.) Plaintiff had to execute a Performance Guaranty, permitting Dexcel to look directly to Perrigo Company, rather than to LLC, before Dexcel would deal with this “paper company.” (Exhibit AD at ¶ 1(c), PageID.2467). Indeed, the Performance Guaranty bound Perrigo Company to “comply” with the provisions of Article 2 of the Dexcel Contract. (Id. at ¶ 2). These facts are not in dispute. Nor does Plaintiff dispute the belated execution of the “assignment” of the Dexcel Contract in May or June 2007 — well after November 29, 2006, and only as Plaintiff was learning of additional positive developments in the FDA approval process, as well as the potential for favorably settling the AstraZeneca litigation.1 (See Exhibit AK, PageID.2506; Exhibit AM, PageID.2512; Exhibit W, PageID.2447; Exhibit Z, PageID.2454; see also Exhibit T, PageID.2438 & Exhibit U, PageID.2439). Plaintiff does not dispute LLC's failure to open a bank account until after the AstraZeneca litigation settled. (See Exhibit A 279:3-25, PageID.2430; Exhibit AJ 242:6-244:13, PageID.2505). It is also undisputed that as of February 20, 2008, PITLP did not yet have a bank account. (See Exhibit AO, PageID.2518).2

The lack of a Subcontract between LLC and Perrigo-U.S. provides further evidence that the purported “assignment” of the Dexcel Contract had produced no practicable economic effects as of February 20, 2008. Without a Subcontract in place, the “assignment” had no substantive meaning or effect.

Further, the thing purportedly “assigned” to LLC was a contract with a third party — Dexcel. Dexcel refused to respect the assignment until Plaintiff agreed to execute the Performance Guaranty. This document was signed on December 10, 2007. (Exhibit AD, PageID.2468). Similarly, Dexcel did not agree to modify the title transfer and risk of loss provisions in the Dexcel Contract — modifications needed by Plaintiff for its tax scheme — until December 10, 2007. (Exhibit AI, PageID.2500-2501). By then, AstraZeneca's Paragraph IV lawsuit had settled and the FDA had approved Dexcel's tablet for sale.

B. Plaintiff's false assertion that UK Finco “stood ready to fund all of LLC's obligations” is immaterial to the Court's evaluation of the substance of the “assignment.”

Plaintiff counters that another offshore affiliate, UK Finco, “stood ready to fund all of LLC's obligations. . . .” (PageID.2872-2873). The financial wherewithal of UK Finco, however, is irrelevant to the issue of whether LLC could, or did, assume risks or perform obligations under the Dexcel Contract prior to February 20, 2008.

Plaintiff intentionally selected a corporate structure for its omeprazole business that would supposedly wall off and shield other lines of its business from contingencies and “risks” associated with Dexcel Contract. It did so by assigning the contract to a limited liability company, LLC. (Exhibit AG 205:6-17, PageID.2496; see also PageID.2196-2197 (discussing “foreign base company income” and an exception for goods manufactured in the country of the entity's formation)). The scheme required that LLC (via PITLP) be an Israeli entity. (See id.) A British entity, like UK Finco, would not work. It was LLC, not UK Finco, that had to “earn” income under the contract. (See id.) And LLC, not UK Finco, had to “assume the financial risks associated with” the Dexcel Contract. (See PageID.2867; see also Exhibit I at PageID.2396) (arrangement between Perrigo-U.S. and LLC a “means to reduce financial risk”).

Having selected its Israel-based-entity structure for tax purposes, Plaintiff must live with it. “'[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not . . . and may not enjoy the benefit of some other route he might have chosen to follow but did not.'” Don E. Williams Co. v. Commissioner, 429 U.S. 569, 579-80 (1977) (quoting Commissioner v. National Alfalfa Dehydrating, 417 U.S. 134, 148-49 (1974)); see Montana Power Co. v. United States, 232 F.2d 541, 544 (3d Cir. 1956); Higgins v. Smith, 308 U.S. 473, 477 (1940); Nestlé Holdings, Inc. v. Commissioner, 152 F.3d 83, 87 (2d Cir. 1998).

Plaintiff is, in substance, seeking to restructure its transaction so that UK Finco serves as the assignee for economic purposes. But Plaintiff chose to “assign” the Dexcel Contract to LLC, purportedly “ceding a stream of income” to LLC (PageID.2876) and purportedly shifting “significant remaining risks and contingencies” to LLC (PageID.2865). Plaintiff cannot now reconfigure this structure because it failed to build out its Potemkin village prior to February 20, 2008. If, prior to February 20, 2008, the vehicle selected by Plaintiff to mitigate and absorb contract risks, LLC, had no capacity to do so, then an “assignment” to LLC prior to that date must be a sham.

Plaintiff weakly attempts to justify ignoring the corporate boundaries between LLC and UK Finco by analogizing to inapposite authority. (See PageID.2876 (citing Treas. Reg. § 1.482-9(l)(3)(v); Illinois Tool Works Inc. v. Commissioner, T.C. Memo. 2018-121, at *50) (debt instrument lacking covenants); & OECD Report on Transfer Pricing)). The transfer pricing regulation cited by Plaintiff, § 1.482-9(l)(3)(v), has no bearing on whether a controlled taxpayer bears or has the capacity to bear a risk, and certainly does not allow a taxpayer to re-wire its corporate structure on a whim. Illinois Tool Works, involving repatriation-of-cash issues, is not relevant here and does not support Plaintiff's contention. Finally, the OECD report paragraphs cited by Plaintiff more appropriately support disregarding the “assignment” from Perrigo-U.S. to LLC as opposed to a blurring of lines between UK Finco and LLC. These “authorities” cannot mask Plaintiff's inconsistency in advocating strenuously for separate corporate identities as between Perrigo-U.S. and LLC, while arguing for the opposite as between UK Finco and LLC.

Plaintiff's contention that UK Finco “stood ready to fund all of LLC's obligations” is not only irrelevant, it is also false. Prior to February 20, 2008, and, notably as of November 29, 2006, UK Finco had not funded “all of LLC's obligations.” UK Finco had not funded LLC's “purchase” of third party contracts; rather, Perrigo's U.S.-based affiliates had received purported “demand notes” from LLC. (Exhibit AO, PageID.2516). Another U.S. affiliate, PRD, and not UK Finco, funded litigation costs due under the Dexcel Contract. (Exhibit AG 124:3-125:10, PageID.2494).

Although UK Finco “loaned” LLC approximately $1.2 million during the final months of 2007, that loan covered “management” services performed by Plaintiff's U.S.-based affiliates. (See Exhibit AO, PageID.2516). UK Finco also “loaned” LLC $12 million to advance to Dexcel in January 2008. (PageID.2962; PageID.3016). But these “loans” were not available for LLC's use to cover contingencies; rather, they pushed LLC further into debt. Moreover, the $12 million advance agreement with Dexcel was signed by Jeff Needham, who was not an officer of LLC, calling into question whether LLC exercised control over those “loan” proceeds. (Exhibit AU 40:9-41:9, PageID.2710). In short, as of February 20, 2008, LLC had no funds or wherewithal to satisfy risks or contingencies, much less its $877,832 obligation to Perrigo-U.S. or to Dexcel for legal fee reimbursements.

Nor did UK Finco execute any guaranty to LLC's creditors or otherwise enter into any agreement to cover LLC's debts and contingencies.3 To the contrary, it was the U.S. parent, Perrigo Company, that issued a Performance Guaranty in favor of Dexcel.

C. LLC's lack of capacity to assume risk is not excused merely because it was not organized as an insurance company.

Plaintiff wrongly seeks to limit the import of the Sixth Circuit's determination in Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835, 840 (6th Cir. 1995), to captive insurance arrangements. (PageID.2874-2875). It does so because LLC's role in Plaintiff's scheme has striking similarities to the sham offshore affiliate in Malone & Hyde. Both offshore affiliates are “propped up” by guarantees of a parent, and both lack adequate capital. 62 F.3d. at 840-841.

Plaintiff argues that, outside the context of captive insurance cases, taxpayers are free to shift risks between affiliates on paper, even if the affiliates purporting to absorb those risks have no capacity to do so. This defies Sixth Circuit precedent. There is no special version of the economic substance test that applies only to insurance companies. This is clear from Malone & Hyde itself:

We believe the tax court put the cart before the horse in this case. It should have determined first whether Malone & Hyde created Eastland [insurance affiliate] for a legitimate business purpose or whether the captive was in fact a sham corporation.

Id. at 840.

In this circuit, courts ignore mere paper-shuffling and look “to the economic realities of the business deal” when evaluating the substance of a transaction, regardless of the industry. See Summa Holdings, Inc. v. Commissioner, 848 F.3d 779, 785 (6th Cir. 2017). If an affiliate purports to insure against risk on paper but lacks financial capacity to do so and is being “propped up” by a corporate parent, then it is a sham. See Malone & Hyde, 62 F.3d at 840. Similarly, where parties to a tax scheme involving commodities options paid little attention to margins, account balances, and risks associated with the trades, the transactions were shams. Mahoney v. Commissioner, 808 F.2d 1219, 1220 (6th Cir. 1987). In short, if a transaction fails to actuate “real change in the economic relation of the [taxpayers] to the income in question,” it must be disregarded. See Richardson, 509 F.3d at 741 (quotation marks omitted). The Court must assess “what happened in fact, not what happened on paper.” Hawk v. Commissioner, 924 F.3d 821, 829 (6th Cir. 2019).

Notwithstanding its effort to distinguish insurance cases, Plaintiff seeks support for its scheme in a predecessor insurance case to Malone & Hyde, Humana Inc. v. Commissioner, 881 F.2d 247, 257 (6th Cir. 1989). Plaintiff argues that Humana stands for the proposition that risk shifting between brother-and-sister affiliates is not subject to a sham analysis, (PageID.2874 n.8), and argues that Perrigo-U.S. and LLC have a brother-sister relationship. The Sixth Circuit opinion in Humana, however, is just as fatal to Plaintiff as is Malone & Hyde. Humana is analyzed at length in the later Malone & Hyde opinion. Malone & Hyde, 62 F.3d at 838-42. A brother-sister subsidiary risk-shifting arrangement is a sham where the relationship involves undercapitalization or indemnification. See id. at 842-43 (construing Humana, 881 F.2d 254 n.2)

Without case support in the Sixth Circuit, Plaintiff is left to look elsewhere. There is none to be found. Plaintiff nevertheless improperly cites to Northern Indiana Public Service Co. v. Commissioner, 115 F.3d 506 (7th Cir. 1997) (“NIPSCO”); Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985), aff'd, 811 F.2d 1297 (9th Cir. 1987) and United Parcel Service v. Commissioner, 254 F.3d 1014 (11th Cir. 2001) (“UPS”).4

In NIPSCO, the Seventh Circuit distinguished the taxpayer's transactions in that case from captive insurance cases; however, it also stated:

Those cases allow the Commissioner to disregard transactions which are designed to manipulate the Tax Code so as to create artificial tax deductions. They do not allow the Commissioner to disregard economic transactions, such as the transactions in this case, which result in actual, non-tax-related changes in economic position.

115 F.3d at 512. The offshore affiliate in NIPSCO borrowed funds in the Eurobond market at lower rates than available domestically. Id. at 513. It had a business purpose: Eurobond investors did not want to transact with U.S.-based affiliates due to withholding taxes assessed on interest. Northern Indiana Public Service Co. v. Commissioner, 105 T.C. 341, 343, 352-53 (1995). The same cannot be said of LLC, which was a drain on Plaintiff's finances and designed to shift the lion's share of income earned in the United States offshore.

Plaintiff also cites to UPS and NIPSCO for the proposition that the mere formality of “assigning” the Dexcel Contract to LLC is itself enough to make real the “ceding of a stream of income” to LLC, as well as LLC's “assumption” of obligations. Although the taxpayers prevailed in both cases, neither serves Plaintiff's purpose of eviscerating the economic substance doctrine. NIPSCO is discussed above. UPS is also inapposite.

In UPS, a case involving an offshore insurance affiliate, the affiliate was capitalized at formation. 254 F.3d at 1016. A third-party insurer was apparently subject to the credit risk of the new foreign subsidiary. Id. at 1018. And even assuming that a mere “ceding a stream of income” can constitute a “practicable economic effect,” in UPS the parent lost access to an income stream because most of the shares in the offshore affiliate had been distributed to UPS's shareholders. Id. at 1016, 1019. Finally, UPS is inconsistent with the Sixth Circuit's requirement that a transaction generate real economic consequences. See Kerman v. Commissioner, 713 F.3d 849, 864-66 (6th Cir. 2013); Malone & Hyde, 62 F.3d at 841-43; Davis v. Commissioner, 585 F.2d 807, 812-13 (6th Cir. 1978). Cf. Black & Decker Corp. v. United States, 436 F.3d 431, 442 (4th Cir. 2006).

In summary, Plaintiff offers no valid reason or controlling authority for ignoring the economic realities of LLC's lack of capital and Perrigo's Performance Guaranty. These shortcomings are not ancillary to Plaintiff's Potemkin village; they are its foundation. Plaintiff claims that “the entire purpose” of its tax scheme entailed the transfer of contracts offshore while those contracts carried with them “significant remaining risks and contingencies.” (PageID.2865; see also Exhibit I at PageID.2396) (arrangement between Perrigo-U.S. and LLC a “means to reduce financial risk”). If no risks shifted as a matter of economic reality, the assignment should be disregarded.

D. The Performance Guaranty constitutes further evidence that the “assignment” was a sham.

Plaintiff's further contention that the Performance Guaranty is irrelevant to an economic substance analysis because “LLC was still independently obligated to Dexcel to perform the Dexcel Contract and could be required to provide redress if it failed to do so,” (PageID.2877), misses the point. The issue is whether the “assignment” changed Plaintiff's economic position by shifting purported “risk” offshore. It did not. Dexcel could continue to look directly to Perrigo Company for performance.

Nor is there a basis for Plaintiff's contention that that the existence of the Performance Guaranty should not matter outside the captive insurance context. There is simply no reason to ignore economic realities. Plaintiff's reliance on Nat Harrison Assocs. v. Commissioner, 42 T.C. 601, 615-16 (1964) is misplaced. There, the affiliate was not an empty box; rather, it had employees and performed real work. See 42 T.C. at 610-611, 618.

E. Plaintiff's subjective intentions are immaterial if the “assignment” had no “practicable economic effects.”

Plaintiff alleges a dispute of fact surrounding Perrigo's “intent that the Assignment was to be effective on November 29, 2006.” (PageID.2879). But such a dispute is immaterial. A taxpayer's subjective intent is relevant only if a transaction has practicable economic effects. See, e.g., Rose v. Commissioner, 868 F.2d 851, 853 (6th Cir. 1989) (“This court will not inquire into whether a transaction's primary objective was for the production of income or to make a profit, until it determines that the transaction is bona fide and not a sham.”) (citations omitted).5 Accordingly, Perrigo's intentions are not material to Defendant's motion.

III. Legal fees paid for drafting Paragraph IV Notices and defending Paragraph IV lawsuits must be capitalized.

A. There are no material facts in dispute regarding Plaintiff's Paragraph IV Notices and Paragraph IV lawsuits.

Plaintiff claims that a trial is needed to ascertain whether its legal fees should be capitalized or currently deducted. (PageID.2906-2908). Plaintiff identifies two attorneys through which it will offer evidence at trial: Mr. Bradshaw and Mr. Figg. But the “facts” that Mr. Bradshaw and Mr. Figg will offer are either not in dispute or constitute improper legal conclusions. For example, Mr. Bradshaw will indicate that the FDA “does not analyze or construe” patents. (See PageID.2907). That is undisputed. In contrast, Mr. Bradshaw's contention that “infringement litigation does not influence the FDA's review process,” (id.), is, at least in part, a disputed legal conclusion. The statement turns on Mr. Bradshaw's line-drawing talents. To the extent he is excluding the issuance of approval letters from the “review process,” then his statement is undisputed. On the other hand, to the extent that Mr. Bradshaw implies that the drug approval process, as a whole, is not influenced by infringement litigation, he has veered into interpreting the law — in a manner that conflicts with Congress' understanding of the effect of Hatch-Waxman on the approval process for Abbreviated New Drug Applications (“ANDAs”). See H.R. 98-857, 1984 WL 37417 at *9-10 (Aug. 1, 1984) (explaining how Hatch-Waxman restricts and modifies the FDA approval process)).6

Mr. Figg will offer statements that are similarly ambiguous. He will contend that “§ 271(e)(2) litigation is separate and distinct from the FDA review process.” The fact that the FDA is not a party in Paragraph IV litigation is undisputed. But by implying that Paragraph IV litigation is not part of the ANDA approval process created under Hatch-Waxman, Mr. Figg is drawing a legal conclusion, and one that conflicts with Eli Lilly v. Medtronic, Inc., 496 U.S. 661, 678 (1990) (purpose of § 271(e)(2)and (e)(4) is to “enable the judicial adjudication upon which the ANDA and paper NDA schemes depend”). This is nothing more than sophistry offered to bolster Plaintiff's legal argument.

Plaintiff exhibits similar sophistry in pointing to the recently tried, but not yet decided, case of Mylan v. Commissioner, No. 26976-16 (U.S. Tax Court), in support of its contention that material facts are in dispute. Plaintiff notes that Mr. Bradshaw and Mr. Figg testified as experts in that case, which concerned the deductibility of legal fees paid by Mylan for preparing Paragraph IV Notices and defending Paragraph IV lawsuits. The facts of Mylan, however, are not before the Court. And it is clear from even a cursory review of the Bradshaw and Figg reports that they do not analyze the particulars of Perrigo's Paragraph IV Notices or Perrigo's Paragraph IV litigation filings. (See PageID.3043 (Bradshaw report); PageID.3074 (Figg report)).

The facts material to this issue, none of which are in dispute, are found at PageID.2598-2600 and PageID.2613 of Defendant's opening brief. Manufacturers of branded drugs must file with the FDA a list of the patents that protect those drugs. The FDA publishes this list in the “Orange Book.” A drug company that seeks to manufacture a generic version of a drug may file an ANDA. If the Orange Book contains an entry showing that the brand drug at issue is protected by a patent, then the ANDA applicant must inform the FDA that (a) the patent is expired, (b) the applicant is not seeking approval until after the patent expires, or (c) the ANDA applicant's drug does not infringe on the patent or the patent is invalid. Option (c) is referred to as a “Paragraph IV” certification, after the section of the statute in which it appears.

The filing of an ANDA with a Paragraph IV certification is a “highly artificial act of infringement,” creating a statutory basis for a patent holder to bring suit against the ANDA filer and to obtain an order preventing the ANDA from being approved prior to patent expiration. See Eli Lilly, 496 U.S. at 678; see also 35 U.S.C. § 271(e)(2) & (e)(4)(a). As part of the submission of an ANDA to the FDA, the applicant must represent to the FDA that it will notify the brand holder of its ANDA filing, and then must do so within 20 days. 21 U.S.C. § 355(j)(2)(B)(i), (ii). The brand company may then file a lawsuit alleging patent infringement within 45 days pursuant to § 271(e)(2), (5) (“Paragraph IV litigation”), at which point FDA approval cannot be made effective for thirty months, unless the generic company wins or settles the case before that time.

None of this is disputed. Nor are variations on the basic fact pattern, such as what happens when the thirty-month stay expires, the FDA approves a drug, but a patent holder later prevails in its Paragraph IV lawsuit. (See PageID.2892) (FDA approval withdrawn and converted to tentative approval, which does not permit sale of the drug, pending patent expiration). Indeed, none of this could be disputed — it is simply a recitation of relevant statutory provisions.

B. The plain meaning of Treasury Regulation § 1.263(a)-4 requires that Plaintiff capitalize the legal fees at issue.

The question before the Court on this issue is whether Section 263 of the Internal Revenue Code, as interpreted by Treasury Regulation § 1.263(a)-4, requires Perrigo to capitalize amounts paid to prepare Paragraph IV Notices and defend Paragraph IV lawsuits. Other statutes and cases are relevant only to the extent that they inform the application of these authorities.

The starting place for the analysis is Treasury Regulation § 1.263(a)-4, entitled “Amounts Paid to Acquire or Create Intangibles.” In the Sixth Circuit, regulations are to be construed in a “straightforward and commonsense manner.” Bartlik v. U.S. Dep't of Labor, 62 F.3d 163, 165-66 (6th Cir. 1995) (quotations and citation omitted). Courts look first to the plain and unambiguous meaning of the regulation, if any. In re Arctic Exp. Inc., 636 F.3d 781, 791 (6th Cir. 2011) (citations omitted).

The first step in determining whether the legal costs must be capitalized is to ascertain if the relevant assets fall within the scope of the regulation. Here, the underlying assets are rights to sell generic drugs in the United States. Plaintiff sought to obtain rights with respect to the drugs by submitting ANDAs to the FDA. (See Exhibit AP, PageID.2519). Amounts paid to obtain licenses or other similar rights must be capitalized. See Treas. Reg. § 1.263(a)-4(b)(1)(ii) (requiring capitalization of created intangibles identified in paragraph (d)); see also id. § 1.263(a)-4(d)(5) (addressing licenses and similar rights).

The Court must next determine how the regulation classifies costs incurred in connection with the creation of an intangible asset. According to the regulation, a taxpayer must capitalize:

An amount paid to facilitate (within the meaning of paragraph (e)(1) of this section) an acquisition or creation of an intangible described in paragraph (b)(1)(i), (ii), (iii) or (iv) of this section.

Id. § 1.263(a)-4(b)(v).

Since an approval to sell a drug falls within the scope of paragraphs (b)(1)(ii) and (d), the next step in the analysis is to ascertain the meaning of the term “facilitate” under paragraph (e)(1). That subsection states in relevant part:

[A]n amount is paid to facilitate the acquisition or creation of an intangible (the transaction) if the amount is paid in the process of investigating or otherwise pursuing the transaction. Whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances. In determining whether an amount is paid to facilitate a transaction, the fact that the amount would (or would not) have been paid but for the transaction is relevant, but is not determinative. . . .

Under this paragraph, an amount facilitates “creation of an intangible (the transaction) if the amount is paid in the process of . . . pursuing the transaction.” As discussed in Part III.C, below, it is at this stage of its analysis of the regulation that Plaintiff begins to substitute its own definitions and preferences for the plain meaning of the text. In fact, Plaintiff ignores the reference to the term “transaction” in § 1.263(a)-(4)(e)(1)'s definition of the verb “to facilitate.”

The term “transaction” is defined in paragraph (e)(3):

[T]he term transaction means all of the factual elements comprising an acquisition or creation of an intangible and includes a series of steps carried out as part of a single plan.

(Emphasis added).

The regulation provides several examples that apply these defined terms. Two examples in paragraph (e)(5) merit discussion. In Example 3, legal fees incurred in the process of creating an intangible right to use property facilitate the creation of an asset and must be capitalized. In Example 6, which concerns legal fees paid by the owner of a copyright who sues an infringer for lost profits, the regulation distinguishes between legal fees incurred to protect income producing assets (deductible) and legal fees brought to defend or perfect title to intangible property. The latter type of legal fees must be capitalized because they “facilitate the creation of an intangible described in paragraph (d)(9)” of the regulation, which requires capitalization of payments made to defend or perfect title to intangible property.

Applying these provisions to Plaintiff's legal costs, it follows that the “series of steps carried out as part of a single plan” (i.e., the “transaction” that creates the right to sell a particular generic drug) includes filing an ANDA with a Paragraph IV Certification (which includes representing to the FDA that Plaintiff would notify patent holders of its ANDA filing), preparing and serving Paragraph IV Notices on patent holders, and defending any ensuing Paragraph IV lawsuit seeking to bar the FDA from approving the ANDA prior to patent expiration.

Plaintiff correctly observes that once its FDA application triggers patent litigation under § 271(e)(2), the internal FDA review process proceeds apace without regard to the progress of patent litigation, except that during the 30-month stay the patent suit dictates when (or if) the FDA may approve the ANDA. But the fact that Plaintiff's effort to obtain rights to sell a drug entails the pursuit of two overlapping steps is not problematic, either in terms of the plain meaning of the regulation or case law requiring capitalization of expenses in connection with obtaining an asset. See United States v. Hilton Hotels Corp., 397 U.S. 580, 583-84 (1970) (requiring capitalization of expenses incurred both in conveying title to property and in litigation over price of property); see also Meade's Estate v. Commissioner, 489 F.2d 161, 167-68 (5th Cir. 1974) (legal expenses incurred in a civil antitrust claim must be capitalized because they were part of “transactions not consummated until the [antitrust] claim had been settled”).

Once the transaction has been defined, the remaining question is simply whether the legal costs at issue were incurred in “pursuing the transaction.” If so, then, by definition, the costs were incurred “to facilitate” the creation of the intangible asset and must be capitalized. Here, Perrigo filed ANDAs with Paragraph IV certifications, issued Paragraph IV Notices, and defended ensuing Paragraph IV lawsuits in order to obtain FDA approval to sell generic drugs as soon as possible. In doing so, Plaintiff was following the steps in an integrated path to market created by Hatch-Waxman. As one of Plaintiff's executives acknowledged, it “was a good thing” to be sued by the patent holder. (Exhibit F 262:13-264:21, PageID.2372).

C. Plaintiff seeks to rewrite Treasury Regulation § 1.263(a)-4 to its liking and ignores the plain meaning of key defined terms.

Plaintiff does not contend that the regulation is invalid or inapplicable. Instead, it claims that legal fees paid to defend Paragraph IV lawsuits do not “facilitate” FDA approval of its ANDAs.7 But its arguments all start with the same infirmity: Plaintiff has ignored the plain text of the regulation, which defines the terms “to facilitate” and “transaction” more broadly than Plaintiff cares to admit. Plaintiff never addresses the definition of “transaction” in paragraph (e)(3) of the regulation.

Plaintiff argues, through its experts, that FDA review and Paragraph IV litigation are “different processes conducted by different bodies for different purposes. . . .” (PageID.2901). This is true, up to a certain point, but it is irrelevant. Perrigo's series of steps were taken as part of “a single plan” to obtain the right to sell a generic drug.

Perrigo conflates “facilitate” with “necessary,” arguing that Paragraph IV litigation does not facilitate ANDA approval because it is possible to obtain FDA approval without Paragraph IV litigation. (PageID.2902). This line of argument is at odds with a plain reading of the regulation and with logic, and it does not comport with the rule that expenses must be capitalized even if incurred after an asset is acquired, if the expenses arose out of the process of acquisition. Hilton Hotels, 397 U.S. at 584; see Winter v. Commissioner, T.C. Memo. 2002-173, at *4 (citing cases where capitalization of post-acquisition expenses was required). Just because it is possible to obtain FDA approval without Paragraph IV litigation does not mean that Paragraph IV litigation does not facilitate FDA approval. The regulation does not require but-for causation; it requires simply that the expenses at issue be incurred in pursuing the transaction.

That said, there is, in fact, a strong causal connection between FDA approval and Paragraph IV litigation that Plaintiff overlooks. An applicant filing an ANDA with a Paragraph IV certification cannot obtain FDA approval prior to the expiration of a patent without opening itself to litigation. If the applicant chooses not to defend a Paragraph IV lawsuit, FDA approval may be delayed for years. Of course, the goal is to obtain FDA approval as quickly as possible.

D. Plaintiff misconstrues the origin-of-the claim doctrine.

The controlling authority with respect to the ANDA issue is the regulation. But, as Defendant argued in its opening brief, the origin-of-the-claim doctrine, as well as general principles regarding the capitalization of costs, offer additional support for Defendant's position. (See PageID.2622-2625). Case law is clear that if an expense is incurred to achieve benefits in future years, the expense must be capitalized. See generally Wellpoint, Inc. v. Commissioner, 599 F.3d 641, 645-49 (7th Cir. 2010) (discussing general tax principles and the origin-of-the-claim doctrine).

Plaintiff engages creative line-drawing to characterize the Congressionally-created “artificial infringement” trigger in 35 U.S.C. § 271(e)(2) as a mere procedural device, rather than a statutory cause of action. (PageID.2903-2905). But the Federal Circuit stated in a 2012 opinion:

The Supreme Court has described § 271(e)(2) as creating “a highly artificial act of infringement” triggered upon submission of an ANDA containing an erroneous Paragraph IV certification. Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 678 (1990). We have further explained that § 271(e)(2) provided a new cause of action so that courts could promptly resolve infringement and validity disputes before the ANDA applicant had engaged in the traditional statutorily defined acts of infringement. Glaxo, 110 F.3d at 1569. By enacting § 271(e)(2), Congress thus established a specialized new cause of action for patent infringement.

AstraZeneca Pharm. v. Apotex Corp., 669 F.3d 1370, 1377 (Fed.Cir. 2012) (emphasis added); see also Schering Corp. v. Geneva Pharm, Inc., 275 F.Supp.2d 534, 536 (D.N.J. 2002).

Equally important is the nature of an action brought under § 271(e)(2). A Plaintiff in a Paragraph IV lawsuit is seeking to stop an ANDA applicant dead in its tracks. Thus, the ANDA applicant is defending against an attack on the creation or acquisition of an asset. See Wellpoint, 599 F.3d at 648.

Finally, it is of no import that a Hatch-Waxman plaintiff's legal expenses may be taxed differently than the ANDA filer's defense costs. Brand manufacturers are protecting a stream of income produced by an existing asset. Generic defendants are taking steps to create a new asset. Moreover, brand and generic drug manufacturers are subject to different statutory requirements, see PLIVA, Inc. v. Mensing, 564 U.S. 604, 626 (2011), and there is no reason to expect the brand-name plaintiff to have the same tax treatment as the generic-drug defendant.

Plaintiff cites United States v. Gilmore, 372 U.S. 39, 48 (1963), for the proposition that the origin of the claim doctrine was meant “to ensure that similarly situated litigants receive equal tax treatment.” (PageID.2905). Plaintiff takes the Gilmore analysis out of context: The Supreme Court was referring to defendants in similar lawsuits. See id. at 48. More generally, there is no support for the proposition that parties on two sides of a lawsuit, not similarly situated, are entitled to the same tax treatment for their litigation expenses.

E. Plaintiff misstates the import of Hatch-Waxman legislation.

Plaintiff's exercise in creative line drawing reaches its apex when it complains that Defendant has read changes in tax policy into Hatch-Waxman. Of course Hatch-Waxman has nothing to do with tax policy and nothing to say about whether litigation costs arising under § 271(e)(2) should be capitalized or deducted. Defendant nowhere suggests that Hatch-Waxman “transformed” business expenses into capitalized costs. (See PageID.2897). Rather, what Hatch-Waxman did was to establish a new drug approval pathway, new requirements on the drug approval process, and a new cause of action enabling a patent holder to stop an ANDA applicant from bringing an infringing product. Congress was not “rescinding” the deductibility of legal fees. It was creating a “new system for the approval of generic drugs. . . .” H.R. 98-857 at *5. And that new system, like any statutory mechanism, may have consequences for taxpayers. To determine how expenses incurred in Hatch-Waxman litigation are taxed, the Court must look to the Internal Revenue Code and its interpreting regulations.

F. Plaintiff ignores the distinction between costs incurred to protect income producing assets and costs incurred in disputes arising out of the creation or acquisition of new assets.

Tax law distinguishes between expenses incurred to create new assets and expenses incurred to defend existing assets. Expenses “that 'serve[ ] to create . . . a separate and distinct' asset should be capitalized under § 263.” INDOPCO v. Commissioner, 503 U.S. 79, 86 (1992) (quoting Lincoln Savings, 403 U.S. 345, 354 (1971)). Expenses “incurred in defending a business and its policies from attack are generally deductible as ordinary and necessary business expenses.” Winter, T.C. Memo. 2002-173, at *3.

Plaintiff provides a page of cases to support the contention that litigation expenses to defend business operations are deductible. (PageID.2895). Most involve defense of an ongoing business or asset. Three of the cases involve creation or acquisition of a new asset, or defense of title; all required capitalization. See Wellpoint, 599 F.3d at 647; American Stores Co. v. Commissioner, 114 T.C. 458, 468 (2000); Hauge v. Commissioner, T.C. Memo. 2005-276.8

Plaintiff's reliance on Urquhart v. Commissioner, 215 F.2d 17 (3d Cir. 1954), is misplaced. At issue was whether defending patents against an invalidity attack was the equivalent of defense of title to the patents, such that the litigation expenses must be capitalized. The key was that the patents at issue were already in use — indeed, royalties from the patents were the business's sole source of income. Id. at 18. “Infringement litigation is a far cry from removing a cloud of title, or defending ownership of property. Here, it arose out of and related directly to the exploitation of the invention embodied in the patent.” Id. at 20. Thus, “the litigation expenses were incurred to prevent (and recover) damage to their business, that is, to protect, conserve, and maintain their business profits.” Id. The case has no bearing on whether litigation costs in connection with the creation of a new asset must be capitalized.

Paragraph IV litigation differs from other patent litigation in that it is part of an effort to create a new asset. The tax treatment of legal costs thus differs commensurately.

G. Paragraph IV defense costs arise out of a series of steps taken to obtain a capital asset and not from the defense of income-producing lines of business.

Perrigo attempts to reframe its Paragraph IV defense costs as arising out of its overall business, rather than its pursuit of new intangible assets. (PageID.2896). The fallacy in this argument is that Perrigo does not enter into Paragraph IV litigation in the ordinary course of defending its business operations and profits. Rather, each Paragraph IV action arises in connection with its attempt to obtain approval for a particular ANDA — a capital asset — and at the time the action arises, the generic drug that Perrigo seeks to market is not yet generating any income. Nor does Paragraph IV litigation threaten Perrigo's existing business, any of its existing income-producing assets, or its general operations. Rather, the sole issue in Paragraph IV litigation is whether Perrigo can bring a new product to market. By contrast, in the cases Perrigo cites, the taxpayers were defending their overall business. See, e.g., A.E. Staley Mfg. Co. v. Commissioner, 119 F.3d 482 (7th Cir. 1997) (costs for fighting a hostile tender offer); Rassenfoss v. Commissioner, 158 F.2d 764 (7th Cir. 1946) (costs for opposing the dissolving of the business). Even the dicta Perrigo quotes from Welch v. Helvering, 290 U.S. 111, 113 (1933), regarding the deductibility of litigation expenses, addresses “[a] lawsuit affecting the safety of a business,” not the creation of a new asset. Indeed, in Wellpoint, the Tax Court explicitly rejected Perrigo's argument. The taxpayer in that case argued that the payments at issue “were necessary to defend its business” and thus were deductible. T.C. Memo. 2008-236 at *4, aff'd, 599 F.3d 641. The Tax Court rejected the argument. Id. Here too, Perrigo does not assert that Paragraph IV litigation would shut down its business if it lost; the expenses at issue concern a future benefit — an approved ANDA.

Perrigo further argues that, in Paragraph IV litigation, “[b]oth parties . . . are protecting their businesses, generics by commercializing new non-infringing products and brand[s] by defending patent rights.” (PageID.2898-2899). This is inaccurate. A generic company that filed an ANDA is not yet commercializing a product; it is attempting to obtain FDA approval so that it can begin marketing a new product. It is this that distinguishes Paragraph IV litigation: the attempt to create a new, valuable asset that will produce income in the future. This is what requires capitalization.

H. Equitable considerations are irrelevant where, as here, controlling authority requires the capitalization of costs incurred as part of “a series of steps carried out as part of a single plan” to obtain FDA approval.

To avoid the application of the plain language of the regulation, Perrigo raises various equitable arguments, including that the IRS waited too long to enforce the regulation against generic drug companies. This is specious. Plaintiff has presented no evidence indicating that the IRS previously took a contrary position with respect to the deductibility of its legal fees. Moreover, the IRS is not foreclosed from making adjustments in one year simply because it failed to do so in a previous year. Roberto v. United States, 518 F.2d 1109, 1112 (2d Cir. 1975). In fact, it is well established that the IRS Commissioner is entitled to change his earlier interpretations of the law. American Stores Co. v. Commissioner, 170 F.3d 1267, 1278-79 (10th Cir. 1999).

At bottom, the legal fees at issue furthered Plaintiff's acquisition of capital assets. Moreover, Treasury Regulation § 1.263(a)-4 requires that the fees be capitalized. Plaintiff does not (and cannot) dispute these core facts:

  • Perrigo's filing of an ANDA with a Paragraph IV Certification is a statutory “artificial” act of patent infringement.

  • The filing of a Paragraph IV suit against Perrigo triggers a thirty-month stay, during which the FDA cannot generally approve an ANDA.

  • Perrigo can end the thirty-month stay early by winning or settling the Paragraph IV litigation.

  • Defending a Paragraph IV suit allows Perrigo the opportunity to obtain FDA approval much earlier than it otherwise would.

  • The sooner Perrigo receives FDA approval for a generic product, the more valuable that approval is.

It was part of Plaintiff's business model to circumvent existing patents to bring generic products to market. (Exhibit F 263:24-264:19, PageID.2372). That business model entailed budgeting substantial sums in anticipation of Paragraph IV litigation. (Exhibit G 305:8-16, PageID.2383). It is beyond dispute that Plaintiff's legal costs were incurred as part of “a series of steps carried out as part of a single plan” to obtain its ANDA approvals. See Treas. Reg. § 1.263(a)-4(e)(3). Accordingly, the legal fees must be capitalized.

IV. Conclusion

Defendant's motion should be granted.

Dated: July 12, 2019

THE UNITED STATES OF AMERICA

DAVID A. HUBBERT
Deputy Assistant Attorney General

JAMES E. WEAVER
Senior Litigation Counsel
ARIE M. RUBENSTEIN
STEVEN M. DEAN
RICHARD J. HAGERMAN
Trial Attorneys
Tax Division, Department of Justice
P.O. Box 55
Washington, D.C. 20044
Telephone: (202) 305-4929
Facsimile: (202) 514-5238
James.E.Weaver@usdoj.gov

Local Counsel:

ANDREW B. BIRGE
United States Attorney

RYAN D. COBB
Assistant United States Attorney
Western District of Michigan
330 Ionia Avenue, N.W.
Suite 501
Grand Rapids, Michigan 49503
Telephone: (616) 456-2404
Facsimile: (616) 456-2510
Ryan.Cobb@usdoj.gov

FOOTNOTES

1The Dexcel Contract had been largely de-risked long before November 29, 2006 (see Exhibit O, PageID.2425), but this is a matter for trial.

2Plaintiff even concedes that it delayed capitalizing LLC “in large part due to the significant uncertainty surrounding the potential approval of Dexcel's omeprazole product.” (PageID.2869). Yet Plaintiff's case is built on the idea that Perrigo-U.S. shifted risk associated with the Dexcel Contract to LLC as of November 29, 2006. (PageID.2865; PageID.2867 (offshore affiliates to “assume the financial risks associated with the contract”)).

3A UK Finco financial statement reveals no contingent liabilities or guarantees in favor of LLC and documents UK Finco's lack of investment in PITLP or LLC as of May 31, 2007. (See PageID.3031; PageID.3033 n.3).

4Clougherty does not support Plaintiff's argument. The case simply says that because the deduction in question concerns insurance, the only relevant issue is the shifting of insured risks. 84 T.C. at 957.

5Plaintiff's “intent” argument cannot be saved by reference to Nat Harrison. Although the Tax Court credited the taxpayer's undocumented intent to effect a transfer as of a particular date, it did not conduct an objective economic substance analysis. The Sixth Circuit rule on this point is unambiguous. Although Plaintiff's intent is immaterial for this motion, it is also worth noting that Plaintiff's excuse — that it executed the assignment document prior to the close of its 2007 fiscal year — overlooks changes in circumstances surrounding the Dexcel Contract between November 29, 2006 and the apparent execution date of June 11, 2007.

6Subsequent to the issuance of this House Report, Congress lengthened the period during which the FDA would not be permitted to approve an ANDA during Paragraph IV litigation to thirty months.

7Plaintiff is silent with respect to legal fees paid to prepare Paragraph IV Notices. Presumably it now concedes these costs must be capitalized.

8Perrigo asserts that the taxation of patent infringement litigation fees was settled by F. Meyer & Brother Co., 4 B.T.A. 481 (1926), and Kornhauser v. United States, 276 U.S. 145 (1928). F. Meyer does not even address the issue of capitalization. Kornhauser addresses whether an expense was a personal expense, and thus non-deductible, or else a business expense, and thus deductible — again, no question of capitalization.

END FOOTNOTES

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