Amgen Inc. Challenges $3.6 Billion Deficiency in Tax Court

AMGEN INC. & SUBSIDIARIES,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

PETITION

Amgen Inc. and Subsidiaries (“Amgen” or “Petitioner”) hereby petition for a redetermination of the deficiencies in income tax for the taxable years ended December 31, 2010 (“2010”), December 31, 2011 (“2011”), and December 31, 2012 (“2012”) (the “Years at Issue”), as determined by the Commissioner of Internal Revenue (“Respondent”) in a Notice of Deficiency dated April 27, 2021 (the “First Notice”), and a Notice of Deficiency dated June 29, 2021 (the “Second Notice”) (together, the First Notice and Second Notice are hereinafter referred to as the “Notices”). There is no material difference between the First Notice and the Second Notice, other than the date of issuance. Petitioner understands Respondent issued the Second Notice because of an administrative error related to the issuance of the First Notice. Respondent has not, however, rescinded the First Notice. This Petition seeks redetermination of the duplicate deficiencies set forth in the First Notice and Second Notice.

At issue under the Notices is the appropriate profit to Amgen Manufacturing, Limited (“AML”), a subsidiary of Amgen Inc. that operates in the U.S. territory of Puerto Rico, and the party primarily responsible for the manufacture of Amgen's life-saving products for “every patient, every time.” During the Years at Issue, Petitioner priced AML's intercompany agreements consistent with the pricing of comparable agreements Amgen entered into with unrelated parties. These agreements reflect the value of AML's biopharmaceutical manufacturing expertise, the multi-billion-dollar investment necessary for AML to manufacture medicines to meet the needs of millions of patients, and the risks AML bore related to the manufacture and commercialization of life-saving products in a highly regulated industry. Respondent's income allocations fail to account for these critical value drivers. Respondent's income allocations under Internal Revenue Code (the “Code”) section 482 are arbitrary, capricious, or unreasonable.

As a basis for its request for redetermination, Amgen alleges as follows:

1. Petitioner. Petitioner is a corporation organized under the laws of the State of Delaware. Petitioner's principal place of business is located at One Amgen Center Drive, Thousand Oaks, CA 91320. Petitioner timely filed its federal income tax returns for 2010, 2011, and 2012 electronically.

2. Notices of Deficiency. The First Notice (a copy of which is attached) was mailed to Petitioner on or about April 27, 2021 and received by counsel on May 1, 2021. The Second Notice (a copy of which is attached) was mailed to Petitioner on or about June 29, 2021 and received by counsel on July 2, 2021. The Notices were mailed by the Office of Appeals of the Internal Revenue Service at 300 North Los Angeles Street, MS LA-8000 Room 3054, Los Angeles, CA 90012.

3. Amount in Dispute. In the Notices, Respondent determined deficiencies in the following amounts:

Tax Year Ended	Deficiency: Increase in Tax
December 31, 2010	$1,090,155,925
December 31, 2011	$1,202,347,206
December 31, 2012	$1,281,480,982

The entire amounts of the deficiencies are in dispute.

The Court's determinations with respect to the assignments of error alleged in paragraph 4, infra, will require redetermination of various correlative and computational adjustments made in the Notices in accordance with Tax Ct. R. 155.

4. Assignments of Error. Respondent's determination of deficiencies for 2010, 2011, and 2012, as set forth in the Notices, is based upon the following errors:

4.a. ADJUSTMENTS RELATED TO INTERCOMPANY PRICING.

4.a.1. Beginning in 2002, Amgen Inc. and later Immunex Corporation (“Immunex”) licensed certain intellectual property (the “Licensed IP”) to AML.¹ Under the Intercompany License, Amgen Inc. and Immunex granted AML the rights to use the Licensed IP to manufacture and commercialize certain lifesaving biopharmaceutical products (the “Amgen Products”). In exchange for these licensed rights, AML paid arm's-length royalties to Amgen Inc. and Immunex.

4.a.2. Since 2002, AML and Amgen USA Inc. (“Amgen USA”), a subsidiary of Amgen Inc., have been parties to a distribution agreement whereby AML engaged Amgen USA to distribute and sell the Amgen Products within the U.S. (the “U.S. Distribution Agreement”). Similarly, AML has been a party to numerous distribution agreements with foreign affiliates (the “Amgen Foreign Distributors”) for the distribution and sale of the Amgen Products outside of the U.S. (the “Foreign Distribution Agreements”). Since 2002, Amgen USA and the Amgen Foreign Distributors received a guaranteed profit for their performance of services under the U.S. Distribution Agreement and Foreign Distribution Agreements, respectively.

4.a.3. During the Years at Issue, AML manufactured the Amgen Products. AML also entered into agreements with Amgen Inc. and Immunex to perform additional drug substance manufacturing related to certain Amgen Products (the “Bulk Agreements”). The Bulk Agreements are described in paragraph 5.a.l7 below.

4.a.4. Petitioner's intercompany pricing was and continues to be consistent with the pricing observed in comparable uncontrolled transactions between Petitioner and unrelated parties. Respondent's income allocations ignore this evidence and fail to appreciate critical value drivers in Petitioner's industry. AML's multi-billion-dollar facilities, thousands of skilled employees, and unique expertise in complex biologic manufacturing made it an irreplaceable partner in Petitioner's quest to provide its life-saving products to millions of patients year-after-year. Amgen Inc., Immunex, AML, Amgen USA, and the Amgen Foreign Distributors each received arm's-length returns during the Years at Issue.

4.a.5. Respondent erroneously increased Petitioner's income in the amounts of $3,102,221,027, $3,058,092,526, and $3,328,081,816 for 2010, 2011, and 2012, respectively. Respondent's income allocations limit AML to little, if any, profit share related to the Amgen Products during the Years at Issue. Respondent's income allocations violate the arm's-length standard of Code section 482 and the regulations promulgated thereunder. Respondent's income allocations are arbitrary, capricious, or unreasonable.

4.b. ADJUSTMENTS RELATED TO HEALTH CARE REFORM FEE REIMBURSEMENTS.

4.b.1. Section 9008(a)(1) of the Patient Protection and Affordable Care Act (“ACA”) imposes an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs (the “HCR Fee”). AML, Amgen Inc., and Immunex, as members of the same controlled group, were jointly and severally liable for the HCR Fee in 2011 and 2012. In 2011 and 2012, Amgen USA and Amgen Inc. paid the HCR Fee with respect to the Amgen Products. AML, as the licensee under the Intercompany License, reimbursed Amgen Inc. and Immunex for AML's share of the HCR Fee. Amgen Inc. also paid the HCR Fee on behalf of, and was reimbursed by, an unrelated pharmaceutical company, pursuant to an agreement between the unrelated party and Amgen Inc. and Immunex.

4.b.2. Respondent erroneously increased Amgen Inc.'s income in the amounts of $73,175,870 and $28,136,178 for 2011 and 2012, respectively. Respondent's Notices incorrectly characterize nontaxable reimbursements as taxable income to Amgen Inc. Alternatively, and with respect to the AML payments of $58,785,870 and $16,437,259 for 2011 and 2012 respectively, if AML's payments are not treated as nontaxable reimbursements excluded from Amgen Inc.'s income, then the payments are properly setoffs under Treasury Regulation (“Treas. Reg.”) section 1.482-1(g)(4) against any transfer pricing adjustment between AML, Amgen Inc., Immunex, or Amgen USA during the Years at Issue.

4.c. LEGAL SETTLEMENT REIMBURSEMENT.

4.c.1. AML, as the licensee under the Intercompany License, reimbursed Amgen Inc. $312,000,000 in 2011 and $13,560,000 in 2012, representing AML's share of amounts paid to resolve certain legal claims (“Legal Settlement Expense”). Respondent's Notices incorrectly characterize these nontaxable reimbursements as taxable income to Amgen Inc.

4.c.2. Alternatively, if the Court determines that the entire Legal Settlement Expense was Amgen Inc.'s and therefore the reimbursements are taxable income, then Amgen Inc. would be entitled to deduct an additional $264,299,950 as ordinary and necessary business expenses under Code section 162. Additionally, the full amount of AML's reimbursements would be treated as setoffs under Treas. Reg. section 1.482-1(g)(4) against any transfer pricing adjustment between AML and Amgen Inc. during the Years at Issue.

4.c.3. Petitioner filed an affirmative claim for an additional deduction of $9,331,721 for 2012, representing Amgen Inc.'s additional unreimbursed and deductible portion of the Legal Settlement Expense that the government identified and disbursed as relators' fees in 2015. The additional relators' fees reflect a deductible amount over and above the amount claimed as deductible in Petitioner's 2012 federal income tax return. While Respondent does not dispute the deductibility of these additional relators' fees, Respondent erroneously disallows the affirmative claim for a deduction in 2012.

4.d. CHARITABLE DEDUCTIONS FOR DONATIONS OF THERAPEUTIC INVENTORY.

4.d.1. During the Years at Issue, Amgen USA regularly donated Amgen Products to Code section 501(c)(3) non-profit organizations. Amgen USA deducted $25,476,462, $10,819,755, and $53,500,946 for 2010, 2011, and 2012, respectively, under Code section 170 for these charitable donations.

4.d.2. Respondent's primary position, under which Respondent disputes that Amgen USA is a limited risk distributor, does not challenge Amgen USA's Code section 170 deductions described in paragraph 4.d.1. As Respondent's alternative position, Respondent's Notices erroneously deny Amgen USA's Code section 170 deductions for 2010, 2011, and 2012. Amgen USA is entitled to its Code section 170 deductions for the Years at Issue.

4.e. COMPUTATIONAL ADJUSTMENTS.

4.e.1. Foreign Tax Credits. Respondent erred in decreasing Petitioner's foreign tax credit in 2010 by $3,176,213 and in increasing the foreign tax credits in 2011 and 2012 by $6,115,947 and $147,785, respectively, as a computational adjustment. Respondent also erred by disallowing a 2013 carryback of foreign tax credit of $18,107,829 in 2012.

4.e.2. General Business Credit. Respondent erred in decreasing Petitioner's general business credit by $87,993,993 in 2012 as a computational adjustment.

4.e.3. Other Computational Adjustments. Respondent erred in all other unagreed computational adjustments that affect income, taxes, and credits included in the Notices.

5. Supporting Facts. Petitioner relies on the facts described below as the basis for this proceeding. Petitioner also incorporates by reference into this paragraph 5 all facts described above in paragraph 4.

5.a. AML'S MANUFACTURE AND COMMERCIALIZATION OF THE AMGEN PRODUCTS.

Amgen and the Biopharmaceutical Industry

5.a.1. Petitioner's Business. Petitioner's mission is to serve patients with serious medical conditions. Petitioner seeks to fulfill this mission through its commitment to unlock the potential of biology in the development and manufacture of innovative biopharmaceutical products (“Biologies”). Petitioner's medicines help millions of people worldwide fight cancer, heart disease, kidney disease, rheumatoid arthritis, osteoporosis, and other serious and life-threatening illnesses.

5.a.2. Biologies. Biologies are complex therapeutics formed within living cells that seek to replicate proteins and other substances on which the human body relies to stay healthy. The complexity of a Biologic makes manufacturing at the scale necessary to meet the needs of Amgen's patients extremely difficult. The living cells of a Biologic are sensitive to each step in the manufacturing process, of which there can be hundreds, as well as the physical conditions of the manufacturing plant. These sensitivities create a significant risk for quality deviations that would render the Biologic unfit for administration to humans. Petitioner's manufacturing philosophy is “Every Patient, Every Time” — reflecting its commitment to reliably and consistently manufacture the Amgen Products for each patient without failure, and at the highest levels of quality. During the Years at Issue, AML was at the center of this commitment.

5.a.3. Overview of Petitioner's Industry. The biopharmaceutical industry is highly regulated, with Petitioner subject to strict oversight from the Federal Drug Administration (“FDA”) and similar regulators in foreign jurisdictions. This level of regulation applies to the development of Petitioner's life-saving medicines, as well as the manufacturing processes and quality controls that are necessary through the production and delivery of a product. Where a manufacturer's product has an adverse impact on a patient, the results can have dire human consequences. The FDA and similar regulatory agencies therefore inspect and approve all biopharmaceutical manufacturing facilities, the manufacturing processes that each facility performs, and the expansion of manufacturing operations to new products. This regulatory review continues after initial approval and throughout the lifetime of a manufacturing facility. For manufacturing facilities that fail to satisfy safety and quality requirements, the FDA can force a product recall or a manufacturing shutdown. Product recalls and forced shutdowns have had catastrophic effects on patients and companies in the industry.

5.a.4. Industry Collaborations. It is common among participants in the biopharmaceutical industry to work with each other through various types of business relationships, such as a license, collaboration, or services agreement. These agreements can relate to every aspect of the supply chain, including the right to use intellectual property, clinical development of a Biologic, manufacturing, supply chain logistics, detailing, marketing, and distribution. These agreements also describe how the parties share in the costs and risks related to the transaction. Over the years, Petitioner has entered into numerous such agreements with third parties, including agreements related to certain of the Amgen Products.

5.a.5. The Amgen Products. During the Years at Issue, the Amgen Products provided critical life-saving treatment for millions of patients worldwide. The Amgen Products were sold under the brand names Epogen®, Neupogen®, Aranesp®, Neulasta®, Enbrel®, Vectibix®, Prolia®, Xgeva®, Sensipar®, and Mimpara®. These products were used to help patients fight cancer,heart disease, kidney disease, rheumatoid arthritis, osteoporosis, and other serious and life-threatening illnesses.²

Biologic Manufacturing

5.a.6. Overview. Generally, Biologic manufacturing includes two distinct phases, each containing detailed processes and procedures. First, the manufacturer uses living cell cultures to produce the Biologic (i.e., protein) that achieves the desired pharmacological activity (the “Drug Substance”). Second, the manufacturer converts the drug substance into a final dosage form and presentation, such as a prefilled syringe or vial, for administration to humans (“Drug Product”). Both Drug Substance and Drug Product manufacturing require significant investment and expertise, particularly at the scale necessary to manufacture the Amgen Products.

5.a.7. Drug Substance Manufacturing. Drug Substance manufacturing necessitates technical expertise, stringent testing, and precise manufacturing conditions. AML manufactured Drug Substance during the Years at Issue through two kinds of living cell cultures: mammalian (i.e., proteins developed through cell cultures using cells from mammals) and microbial (i.e., proteins developed through cultures of bacterial cells). Drug Substance manufacturing requires the manufacturer to harvest proteins from these cell cultures by separation and purification. Because each Biologic is made within a living cell, the slightest variation in process can create deviations or impurities that affect the quality of the product. Deviations in Drug Substance manufacturing can impact patient safety, threaten supply, and have significant reputational and financial consequences to the manufacturer.

5.a.8. Drug Product Manufacturing. Drug Product manufacturing, also known in the industry as formulation, fill, and finish, requires the manufacturer to transform Drug Substance into final product in an aseptic environment. This process includes formulating the Drug Substance with a mixture of inert excipients, which ensures efficacy and stability. The manufacturer must then create batches of the formulated drug in precise dosage specifications and fill the product in its final form, such as a prefilled vial or syringe. This presents significant challenges for a Biologic because each product requires a unique process and, similar to Drug Substance, the slightest variation in process can create quality deviations or impurities. Like Drug Substance manufacturing, quality deviations can impact patient safety, threaten supply, and have significant reputational and financial consequences to the manufacturer.

5.a.9. The Critical Role of Manufacturing and Supply Chain Reliability. Recent events surrounding the COVID-19 pandemic have demonstrated the criticality of manufacturing and supply chain reliability in the biopharmaceutical industry. For example, manufacturing and supply chain disruptions impacted, and continue to impact, the distribution of certain COVID-19 vaccines. Similar disruptions related to other Biologies have caused financial and reputational harm to their manufacturers.

5.a.10. History of Biologic Manufacturing in Puerto Rico. For decades, the U.S. territory of Puerto Rico and the biopharmaceutical industry have invested in the development of infrastructure and a workforce skilled to meet the needs of global biopharmaceutical companies like Amgen. This investment has resulted in dozens of higher education centers in Puerto Rico that contribute to a growing talent base of graduates with degrees in science, technology, engineering, and mathematics. The University of Puerto Rico at Mayagüez, for example, has partnered with Amgen to develop educational programs focused on biopharmaceutical engineering. The workforce in Puerto Rico has also benefited from a wide range of organizations dedicated to the bioscience industry. These factors have helped to make Puerto Rico one of the most significant locations for Biologic manufacturing in the world.

Parties to the Intercompany Agreements

5.a.11. Amgen Inc. Amgen Inc. is a Delaware corporation and the U.S. parent company of the Amgen worldwide affiliated group of companies. Since 1980, Amgen Inc. has discovered and developed life-saving medicines for patients in need. During the Years at Issue, Amgen Inc. was the legal owner or a licensee (licensing rights from an unrelated party) of the Licensed IP related to Epogen®, Neupogen®, Neulasta®, Aranesp®, Prolia®, Xgeva®, Sensipar®, and Mimpara®. Amgen Inc. licensed the rights to commercialize these products to AML under the Intercompany License.

5.a.12. Immunex. In July 2002, Amgen Inc. acquired Immunex, a company that discovered and developed life-saving medicines for people in need. During the Years at Issue, Immunex was a wholly owned subsidiary of Amgen Inc. and the legal owner or a licensee (licensing rights from an unrelated party) of the Licensed IP related to Enbrel® and Vectibix®. Immunex licensed the rights to commercialize these products to AML under the Intercompany License.

5.a.13. AML. Since 1995, Petitioner has operated a manufacturing facility in Juncos, Puerto Rico through AML (and its predecessor legal entity). During the Years at Issue, AML manufactured Drug Product for each of the Amgen Products, as well as Drug Substance for Epogen®, Neupogen®, Aranesp®, Neulasta®, Prolia®, and Xgeva®.

AML's Manufacturing for Every Patient, Every Time

5.a.14. AML's Multi-Billion-Dollar Investments. AML has invested billions of dollars and hired thousands of U.S. citizens in Puerto Rico tobuild and expand its Biologic manufacturing, quality, and supply chain operations. As part of this investment, AML developed and expanded world-class Drug Substance and Drug Product manufacturing capabilities, hired and trained scientists and engineers to be experts in Biologic manufacturing, and increased its technological capabilities to ensure its therapeutics meet regulatory and quality standards. During the Years at Issue, AML had facilities spanning 1.7 million square feet, employed approximately 2,000 individuals in the U.S. territory of Puerto Rico, and manufactured Drug Substance and Drug Product for Biologies that accounted for almost 90% of Petitioner's global product sales.

5.a.14.1. AML's State-of-the-Art Facilities. Between 2001 and 2006, AML invested over $1 billion to construct two new Drug Substance manufacturing plants, along with other site improvements. Between 2006 and 2012, AML invested nearly $2 billion to expand its Drug Substance and Drug Product manufacturing facilities, improve manufacturing capabilities, and add new technologies.

5.a.14.2. AML's Robust Operations. During the Years at Issue, AML's leadership team featured senior level management to oversee site operations, Drug Substance manufacturing, Drug Product manufacturing, and product quality. Of AML's approximately 2,000 employees, around 400 focused on Drug Substance manufacturing, 600 focused on Drug Product manufacturing, 450 focused on product quality, and 130 focused on process development. AML was the largest operation in Amgen's manufacturing network and one of the largest Biologic manufacturing operations in the world.

5.a.15. Biologic Manufacturing Design, Scale-up, and Validation. Biologic manufacturing at commercial scale requires the design, development, and validation of a commercial scale manufacturing process. Commercial scale manufacturing is far more complicated and challenging than smaller scale manufacturing (e.g., clinical scale), and requires scientists and engineers to customize processes and related procedures that include hundreds of steps. Once a product receives regulatory approval, the manufacturing site must continue to manufacture the Biologic at the same quality and consistency batch-after-batch and year-after-year in accordance with FDA and foreign regulatory agency requirements.

5.a.15.1. AML's Scientists and Engineers Developed Critical Early-Stage Manufacturing Processes. Since 2002, AML's operations have included a group of scientists and engineers responsible for Drug Product and Drug Substance process development (the “AML Process Development Group”). This group's mission was to drive innovation, design AML's Drug Substance and Drug Product manufacturing processes at commercial scale, validate new technology, improve existing processes, and maximize quality and safety. For certain Amgen Products, the AML Process Development Group contributed to the Drug Substance and Drug Product manufacturing processes well before regulatory approval. AML's early stage process development also improved efficiency for the manufacturing of Petitioner's life-saving medicines.

5.a.15.2. AML Designed and Executed Drug Substance Manufacturing. AML designed, constructed, and expanded two facilities dedicated to the production of Drug Substance through mammalian and microbial cell cultures. During the Years at Issue, AML's Drug Substance manufacturing team grew millions of cells under both methods to produce the desired proteins. Operators sequentially transferred the cells to vessels that contained growth media. Throughout each step in the process, the manufacturing team maintained the cells in a controlled environment necessary for the cells to grow and reproduce. At the end of the Drug Substance production process, AML's manufacturing team isolated and purified the protein for harvest. This required operators to use sophisticated filtering technologies to isolate and purify the proteins based on their size, molecular weight, and electrical charge. Small changes in the environment can impact these cells and alter the desired proteins. The manufacturing team constantly monitored variables in temperature, acidity, nutrient concentration, oxygen levels, and many other metrics that could impact the Drug Substance. AML's manufacturing team also designed strict controls for each step in the process to prevent contamination related to bacteria, yeast, viruses, and other microorganisms.

5.a.15.3. AML Designed and Executed Drug Product Manufacturing. AML's Drug Product manufacturing team transformed Drug Substance into final product in an aseptic environment. This required the manufacturing team to combine the purified protein with inert excipients in a solution that ensured efficacy and stability in the formulation. AML followed strict protocols with respect to mixing intervals, speeds, and allowable temperatures. Operators then filled syringes and vials with specified doses of the finished Drug Product under precise aseptic procedures. Like Drug Substance manufacturing at AML, small changes in the Drug Product manufacturing environment can impact the living cells and cause deviations in quality. During the Years at Issue, AML manufactured over 230 million prefilled vials and syringes, each of which was thoroughly tested and inspected prior to distribution.

5.a.15.4. Quality at AML. During the Years at Issue, AML delivered to patients Amgen Products that met rigorous quality standards. AML's quality organization exercised its oversight of the manufacturing process primarily through four groups: quality control, quality assurance, quality systems, and quality compliance. AML's quality control group tested raw materials and components against product specifications to ensure compliance with quality standards (along with other business process owners at AML that sampled, tested, and approved raw materials, Drug Substance, manufacturing and laboratory equipment, and warehouse conditions). AML's quality assurance group oversaw the day-to-day execution of operations, which included manufacturing, packaging, storage, testing, and final product disposition for commercial use. The quality system group maintained controls related to process validation, management of deviations, quality engineering, environmental monitoring, and staff training. The quality compliance group performed independent auditing to ensure the site operated pursuant to good manufacturing practices.

5.a.15.5. AML's Regulatory Team. During the Years at Issue, AML employed a regulatory team (the “AML Regulatory Group”) whose members participated in the preparation of regulatory documents, including portions of the Biologies License Applications that Petitioner must file with the FDA to receive regulatory approval for the manufacturing processes related to each of its products. The AML Regulatory Group also interacted with various regulatory agencies to prepare for and facilitate regulatory site inspections. During the Years at Issue, AML was the subject of dozens of regulatory inspections, including five onsite FDA inspections, four on-site European Union inspections, and additional onsite inspections from regulators in Mexico, Brazil, Korea, Taiwan, Turkey, Russia, and Belarus. AML has never been subject to an FDA required product recall or forced shutdown. Notably, AML's reputation for excellence contributed to its selection by the FDA as a training site for FDA inspectors.

5.a.15.6. AML at the Center of the Amgen Supply Chain. AML manufactured hundreds of millions of units of its life-saving Amgen Products during the Years at Issue. This required an unwavering commitment to quality, as well as supply chain expertise to ensure (1) raw materials were available on time and in the right quantities; (2) Drug Substance and Drug Product were stored in the necessary conditions to maintain quality; and (3) Drug Product was delivered to the proper destination. AML's skilled supply chain experts (the “AML Supply Chain Group”) led this part of the manufacturing process. The AML Supply Chain Group also worked with marketers and distributors of the Amgen Products to deliver sufficient supply to numerous countries around the world.

The Intercompany Agreements and Pricing

5.a.16. Intercompany License. During the Years at Issue, the Intercompany License reflected a series of intercompany agreements between AML and Amgen Inc. and/or Immunex. AML and Amgen Inc. executed the first agreement in 2002 for the exclusive rights to the Licensed IP related to Epogen®, Neupogen®, Neulasta®, and Aranesp®. In 2004, AML entered into an agreement with Immunex for the rights to the Licensed IP related to Enbrel®. In 2010, AML amended and restated its agreement with Amgen Inc. to add the Licensed IP related to Prolia® and Xgeva®. In 2011, AML amended and restated its agreement with Immunex to add the Licensed IP related to Vectibix®. In 2012, AML furtheramended its agreement with Amgen Inc. to add the Licensed IP related to Sensipar® and Mimpara®.

5.a.16.1. Reimbursement Agreement. Since 2002, Amgen Inc. and Immunex have incurred certain expenses to commercialize the Amgen Products. As the licensee to the Intercompany License, AML reimbursed Amgen Inc. and Immunex for these expenses (the “Reimbursement Agreement”). Expenses subject to reimbursement were costs directly related to the Amgen Products based on U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), regardless of whether such expenses were deductible or nondeductible for U.S. federal income tax purposes (“Product Expenses”).

5.a.16.2. Comparable Transactions and the Profit Split. The Intercompany License granted AML, as the licensee, the exclusive rights to manufacture and commercialize the Amgen Products. Amgen Inc. and Immunex licensed the IP to AML and did not materially participate in the commercialization of the Amgen Products. This division of rights and responsibilities was comparable to the division of rights and responsibilities that Petitioner frequently observed in license agreements with unrelated parties. Since its founding, Petitioner has negotiated and entered into numerous license agreements and collaboration agreements with unrelated parties, including agreements related to the Amgen Products. To price the Intercompany License, Petitioner reviewed and identified agreements with unrelated parties most like the Intercompany License in terms of functions performed by each party, risks assumed, and assets employed. Petitioner used those agreements to benchmark the split of profit in the Intercompany License between AML, as the licensee, and Amgen Inc. and Immunex, as the licensors.

5.a.16.3. Royalty Payments to Amgen Inc, and Immunex. Pursuant to the Intercompany License, AML paid an average of approximately $3.0 billion in royalties per year to Amgen Inc. and Immunex during the Years at Issue.

5.a.17. Bulk Agreements. During the Years at Issue, AML manufactured the Drug Substance for certain Amgen Products. Pursuant to the Bulk Agreements, AML purchased what Drug Substance AML did not manufacture from Amgen Inc. and Immunex.

5.a.17.1. Comparable Transactions and Bulk Pricing. Through the Bulk Agreements, AML engaged Amgen Inc. and Immunex to manufacture Drug Substance. The Bulk Agreements were like other manufacturing agreements that Petitioner entered into with unrelated parties throughout its history. Petitioner relied on this experience to establish the price for Drug Substance covered in the Bulk Agreements. Specifically, Petitioner reviewed third-party agreements and identified those most like the Bulk Agreements, including agreements related to the Amgen Products, and used those agreements to set the price AML paid Amgen Inc. and Immunex for Drug Substance during the Years at Issue. Petitioner also usedthe same agreements to determine AML's compensation for manufacturing Drug Substance (i.e., Petitioner's transfer pricing treated AML, Amgen Inc., and Immunex the same). In audits of Amgen for its 2005-2006 and 2007-2009 tax years, the IRS agreed with Petitioner that the third-party comparable agreements Petitioner used to set the price for the Bulk Agreements reflected the arm's-length pricing of Drug Substance manufacturing.

5.a.17.2. Bulk Price Paid to Amgen Inc, and Immunex. Pursuant to the Bulk Agreements, AML paid an average of approximately $1.2 billion per year to Amgen Inc. and Immunex during the Years at Issue.

5.a.17.3. Respondent Erroneously Overstates its Income Adjustments. Respondent failed to provide Petitioner or this Court with an explanation for its income allocations, other than a scant reference to Code section 482. Upon information and belief, Respondent's income allocations are consistent with Respondent's position on audit. On audit, Respondent ignored significant profits related to the Bulk Agreements that were reported by Amgen Inc. and Immunex. As a result, Respondent erroneously overstates its income adjustments by approximately $500 million per year for the Years at Issue.

5.a.18. Intercompany Distribution Agreements. During the Years at Issue, Amgen USA and the Amgen Foreign Distributors were parties to the U.S. Distribution Agreement and Foreign Distribution Agreements, respectively.Pursuant to these agreements, AML reimbursed Amgen USA and the Amgen Foreign Distributors for all expenses incurred related to their activities. In addition to this reimbursement, Amgen USA and the Amgen Foreign Distributors received a guaranteed operating margin. Thus, even when an Amgen Product was not profitable, Amgen USA and the Amgen Foreign Distributors received a guaranteed profit. Amgen USA consistently received a guaranteed operating margin under the U.S. Distribution Agreement from 2002 forward.

5.a.18.1. Comparable Transactions and Returns. Petitioner also contracted with unrelated parties to perform sales and distribution services similar to the services Amgen USA and the Amgen Foreign Distributors performed for AML. Amgen USA and the Amgen Foreign Distributors received guaranteed operating margins consistent with those of unrelated parties.

5.a.18.2. Amgen USA's Operating Profit. Amgen USA received an operating profit of approximately $400 million per year during the Years at Issue for routine distribution and marketing services related to the Amgen Products.

5.a.19. Arm's-Length Returns. During the Years at Issue, AML, Amgen Inc., Immunex, and Amgen USA each received arm's-length returns under the relevant intercompany agreements.

5.b. HEALTH CARE REFORM FEES.

5.b.1. AML's Intercompany License with Amgen Inc, and Immunex. As described in paragraph 5.a.16 above, AML, Amgen Inc., and Immunex entered into the Intercompany License for the Amgen Products and associated Reimbursement Agreement. Under the Intercompany License, AML agreed to share profits and losses with Amgen Inc. and Immunex, and the Reimbursement Agreement ensured that AML, as a licensee for the Amgen Products, bore its share of Amgen Product Expenses.

5.b.2. Third Party Collaboration and Reimbursements. During the Years at Issue, Amgen Inc. and an unrelated party were parties to an agreement (“Co-Promotion Agreement”) related to one of the Amgen Products (the “CoPromoted Product”). Amgen Inc. and the unrelated party agreed to share equally all marketing expenses approved by the joint management committee consisting of members from both parties. “Marketing Expenses” included all commercial expenses relating to the Co-Promoted Product. As a commercial expense related to the Co-Promoted Product, the parties agreed that they would share equally the HCR Fee, pursuant to their obligations under the Co-Promotion Agreement.

5.b.3. HCR Statutory & Regulatory Framework. In 2011 and 2012, the ACA imposed an annual fee on each “covered entity.” A “covered entity” includes any manufacturer or importer with gross receipts from branded prescription drug sales. Amgen USA was an importer with gross receipts from branded prescription drug sales and therefore was a covered entity under the ACA.

5.b.4. Controlled Group Under the ACA. Under Section 9008(d) of the ACA, all members of a controlled group, as determined in accordance with Code section 52, are treated as a single covered entity. A controlled group may include foreign corporations. Pursuant to Code sections 52(a) and 1563(a), a controlled group means one or more corporations connected through their common parent. At least 50 percent of a corporation's vote or value must be owned by one of the other corporations, and the parent must own at least 50 percent vote or value of at least one of the other corporations. During the Years at Issue, Amgen Inc. directly owned 100 percent of Amgen USA and Immunex, and indirectly owned 100 percent of AML. Accordingly, Amgen Inc., Immunex, AML, and Amgen USA were members of a controlled group and, together, qualified as a single covered entity under the ACA. Members of a controlled group are jointly and severally liable for the HCR Fee.

5.b.5. Amgen USA and Amgen Inc. Payment of HCR Fees. In 2011 and 2012, Amgen USA and Amgen Inc., respectively, paid the HCR Fees related to the Amgen Products on behalf of Amgen Inc., Amgen USA, Immunex, AML, and the unrelated party, who were each obligated to reimburse the expenses pursuant to their respective commercial agreements.

5.b.6. AML HCR Fee Reimbursements. In 2011 and 2012, AML shared the HCR Fee pursuant to the Reimbursement Agreement using the profit split described above in paragraph 5.a.16.2.

5.b.7. Third Party HCR Fee Reimbursements. Pursuant to the Co-Promotion Agreement, Amgen Inc., Immunex, and the unrelated party agreed to share equally the 2011 and 2012 HCR Fee relating to the Co-Promoted Product. The unrelated party reimbursed Amgen Inc. its share of the HCR Fees imposed on the Co-Promoted Product.

5.b.8. Amgen Inc. Treatment of HCR Fees. Amgen Inc. treated the HCR Fees AML reimbursed as nontaxable reimbursements and excluded them from income. Amgen Inc. also treated the HCR Fees reimbursed from the unrelated party as nontaxable reimbursements and excluded them from income.

5.b.9. Respondent's Adjustments. Respondent treats the HCR Fee reimbursement payments to Amgen Inc. as income, increasing Amgen Inc.'s income in 2011 and 2012.

5.c. LEGAL SETTLEMENT REIMBURSEMENT.

5.c.1. AML's Reimbursement of its Share of Legal Settlement Expense. During the Years at Issue, Petitioner made payments to resolve certain legal claims with the federal government related to the sale of certain Amgen Products. In 2011, Amgen Inc. accrued Legal Settlement Expenses for U.S. GAAP purposes. In 2012, Amgen Inc. made payments to resolve the claims. In 2011 and 2012, AML reimbursed Amgen Inc. for its share of the Legal Settlement Expense pursuant to the Intercompany License and the associated Reimbursement Agreement described in 5.a.16 and 5.a.16.1 above.

5.c.2. Amgen Inc. Treatment of Legal Settlement Expense. Amgen Inc. treated the reimbursement of Legal Settlement Expense by AML as nontaxable reimbursements and excluded that amount from income.

5.c.3. Respondent's Adjustments. Respondent treats the Legal Settlement Expense AML reimbursed as taxable income, increasing Amgen Inc.'s income by $312,000,000 and $13,560,000 in 2011 and 2012, respectively.

5.c.4. Petitioner's Alternative Position. If the Court determines that the entire Legal Settlement Expense was Amgen Inc.'s and that the reimbursements are taxable income to Amgen Inc., then Amgen Inc. would be entitled to deduct an additional $264,299,950 as ordinary and necessary business expenses under Code section 162. Additionally, the full amount of AML's reimbursements would be treated as setoffs under Treas. Reg. section 1.482-1(g)(4) against any transfer pricing adjustment between AML and Amgen Inc. during the Years at Issue.

5.c.5. Relators' Fees. With respect to the same legal claims underlying the Legal Settlement Expense, relators filed suit against the government challenging the share of the Legal Settlement Expense that the government allocated as relators' fees. In 2015, the government settled the claims relating to relators' fees by increasing the share of the Legal Settlement Expense treated and paid as relators' fees, plus interest.

5.c.6. Amgen Inc. Treatment of the Relators' Fees. After the government agreed to increase the share of the Legal Settlement Expense paid to relators, Petitioner submitted to Respondent an affirmative claim for an additional deduction of $9,331,721 in 2012, representing additional deductible relators' fees that were not reimbursed by AML.

5.c.7. Respondent's Adjustments. Respondent has erroneously disallowed Petitioner's affirmative claim for the deduction of the Relators' fees.

5.d. RESPONDENT'S ALTERNATIVE POSITION RELATED TO INVENTORY DONATION CHARITABLE DEDUCTION.

5.d.1. Amgen USA Inventory Donations. During the Years at Issue, Amgen USA donated medicines to qualifying non-profit Code section 501(c)(3) organizations, a common practice in the biopharmaceutical industry so that patients can still receive their needed medication that they might not otherwise be able to afford. Effective January 1, 2009, Amgen USA and AML entered into a Distribution Side Letter Agreement. Pursuant to the Distribution Side Letter Agreement, the parties agreed that the therapeutic products Amgen USA donated would be valued at cost. In 2010, 2011, and 2012, Amgen USA deducted inventory donations of $25,476,462, $10,819,755, and $53,500,946, respectively.

5.d.2. Charitable Deduction Claims. During Respondent's examination of the Years at Issue, Respondent did not dispute that Amgen USA's donations satisfied all the requirements of Code section 170(e)(3)(A).

5.d.3. Respondent's Adjustments. Respondent's primary position allows Amgen USA the deductions for inventory donations. In the alternative to Respondent's Code section 482 allocations described in paragraph 4.a, Respondent denies Amgen USA's Code section 170 deductions on the basis that Amgen USA is a limited risk distributor. Code section 170 contains 17 subsections describing circumstances in which a charitable deduction will be denied. Risk is not listed in any of them.

5.e. COMPUTATIONAL ADJUSTMENTS.

5.e.1. Foreign Tax Credits. Petitioner claimed foreign tax credits during the Years at Issue. According to the Notices, Respondent adjusted Petitioner's foreign tax credit amounts in 2010, 2011, and 2012. The Notices state that this adjustment is a computational adjustment. The Notices provide no explanation or basis for Respondent's changes to Petitioner's foreign tax credits for 2010, 2011, and 2012. Petitioner claimed the correct amounts of foreign tax credits in 2010, 2011, and 2012.

5.e.2. General Business Credit. Petitioner claimed a general business credit in 2012. According to the Notices, Respondent reduced Petitioner's general business credit in 2012. The Notices state that this adjustment is a computational adjustment. The Notices provide no explanation or basis for Respondent's decrease in Petitioner's general business credit in 2012. Petitioner claimed the correct general business credit in 2012.

5.e.3. Other Computational Adjustments. Respondent errs in all other unagreed adjustments that affect income, taxes, and credits included in the Notices.

WHEREFORE, Petitioner requests that this Court hear this case and determine that: (1) the deficiencies asserted by the Commissioner for Petitioner's 2010, 2011, and 2012 tax years are erroneous; (2) there are no deficiencies in Petitioner's income taxes for its 2010, 2011, and 2012 tax years; and (3) Petitioner overpaid its income taxes for its 2010, 2011, and 2012 tax years. Petitioner further requests that this Court grant such other and further relief as this Court deems just and proper.

Date: July 26, 2021

Counsel for Petitioner

Andrew P. Crousore
T.C. No. CA0420

Scott H. Frewing
T.C. No. FS0327

Mark T. Roche
T.C. No. RM0548

Jonathan A. Welbel
T.C. No. WJ1267

Robert C. Hammill
T.C. No. HR1127

Christina M. Norman
T.C. No. NC0159

Tiffany Y. Chang
T.C. No. CT0444

Baker & McKenzie LLP
600 Hansen Way
Palo Alto, California 94304
(650) 856-2400

John A. Cise
T.C. No. CJ1720

Peter M. Price
T.C. No. PP0193

Amgen Inc.
One Amgen Center Drive
Thousand Oaks, CA
(805) 447-1000