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Perrigo Seeks to Turn Back Government’s Sham Doctrine Arguments

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.

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

Honorable Robert J. Jonker

PLAINTIFF'S REPLY BRIEF IN SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT

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

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

Edward J. Bardelli (P53849)
Warner Norcross & Judd LLP
111 Lyon Street, Ste. 900
Grand Rapids, Michigan 49503
(616) 752-2165

Attorneys for Plaintiff


TABLE OF CONTENTS

INTRODUCTION

LAW AND ARGUMENT

I. The Undisputed Facts Establish that Perrigo's Offshore Entities and Their Transactions Are Not Shams

II. PITLP/LLC Are Valid Entities For Tax Purposes When Moline Is Applied to the Undisputed Facts

III. The Assignment Had Practical Economic Effects and Business Purpose Apart from Tax Benefits; It Was Not an Economic Sham

IV. Defendant's Sole Basis for Assessing and Collecting Tax from Perrigo Arises under Section 482

CONCLUSION

TABLE OF AUTHORITIES

Cases

ACM P'ship v. Commissioner, 157 F.3d 231 (3d Cir. 1998)

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

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

Bennett Paper Corp. v. Commissioner, 78 T.C. 458 (1982), aff'd, 699 F.2d 450 (8th Cir. 1983)

Billy F. Hawk, Jr., GST Non-Exempt Marital Tr. v. Commissioner, 924 F.3d 821 (6th Cir. 2019)

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

Consol. Edison Co. of N.Y. v. United States, 703 F.3d 1367 (Fed. Cir. 2013)

Continental Oil Co. v. Jones, 113 F.2d 557 (10th Cir. 1940)

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

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

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

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

Lyon, Inc. v. Commissioner, 127 F.2d 210 (6th Cir. 1942)

Medieval Attractions N.V. v. Commissioner, T.C. Memo. 1996-455

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

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

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

Pacific Management Group v. Commissioner, T.C. Memo. 2018-131

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

Rubin v. Commissioner, 429 F.2d 650 (2d Cir. 1970)

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

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

Statutes

26 U.S.C. § 482


On May 31, 2019, Perrigo1 filed a motion for partial summary judgment (“Perrigo's Motion”) seeking to streamline this case by eliminating defendant's common-law “sham entity” and “sham transaction” challenges; to do so would focus the trial on the appropriate allocation of income under 26 U.S.C. § 482 (“section 482”), which provides a comprehensive transfer pricing and economic substance regime for intercompany transactions. On the same date, defendant filed a motion for partial summary judgment (“Defendant's Motion”) seeking a ruling that PITLP/LLC was a sham until February 2008, when its parent, UK Finco, first injected capital. On June 28, 2019, defendant filed its response to Perrigo's Motion (“Defendant's Response”). As shown below, the undisputed material facts of record and the applicable law entitle Perrigo to determinations in its favor on both Perrigo's Motion and Defendant's Motion. While Defendant's Response attempts to raise genuine issues of material fact, in reality those issues are not disputes about the actual facts. They are, instead, a string of highly charged adjectives reflecting defendant's desired interpretation of the undisputed facts.

INTRODUCTION

Defendant's Response offers no serious challenge to, and provides no actual facts contradicting, the material facts set forth in Perrigo's Motion. Instead, Defendant's Response resorts to pejorative buzzwords, such as labeling Perrigo's transactions a “scheme” (e.g., PageID.2655 and repeated over 20 times), “accounting chicanery” (PageID.2655), and a “charade” (PageID.2663). Defendant's labels are irrelevant. Based solely on established case law and the undisputed material facts of this case, the Court can conclude that, at all relevant times, PITLP and LLC were valid legal entities for tax purposes and that their transactions involving the Dexcel Contract and eventual distribution and sale of omeprazole to United States customers were valid business transactions imbued with non-tax economic substance.

Defendant's Response also mischaracterizes the relevant legal standards for applying the “sham entity” and “sham transaction” doctrines. In its sham entity arguments, defendant brushes aside Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), the seminal Supreme Court case that established the standard for recognition of a corporation as a separate taxable entity. Instead, defendant invokes two cases decided prior to Moline that have little if any relevance to this case. The numerous cases that have applied Moline over the last 75 years to recognize entities engaged in activities comparable to (or lesser than) those of PITLP/LLC demonstrate that, on the undisputed facts, those entities were not shams.

Likewise, defendant's sham transaction attack relies upon “tax shelter” decisions on transactions devoid of any business connection that created artificial tax losses or other tax benefits, in contrast to the case law applicable here, supporting the common-sense notion that businesses may legitimately arrange their core profit-seeking business activities so as to minimize their taxes. The tax shelter cases have no application to the facts of this case, which involve Perrigo's core pharmaceutical-business activities. In the UPS case, the Eleventh Circuit explained this distinction while rejecting the IRS's sham arguments in favor of a section 482 pricing analysis:

A “business purpose” does not mean a reason for a transaction that is free of tax considerations. Rather, a transaction has a “business purpose,” when we are talking about a going concern like UPS, as long as it figures in a bona fide, profit-seeking business. See ACM P'ship v. Commissioner, 157 F.3d 231, 251 (3d Cir. 1998). This concept of “business purpose” is a necessary corollary to the venerable axiom that tax-planning is permissible. See Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267, 79 L. Ed. 596 (1935) (“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”). The Code treats lots of categories of economically similar behavior differently. For instance, two ways to infuse capital into a corporation, borrowing and sale of equity, have different tax consequences; interest is usually deductible and distributions to equity holders are not. There may be no tax-independent reason for a taxpayer to choose between these different ways of financing the business, but it does not mean that the taxpayer lacks a “business purpose.” To conclude otherwise would prohibit tax planning.

United Parcel Service of America, Inc. v. Commissioner (“UPS”), 254 F.3d 1014, 1019 (11th Cir. 2001).

Defendant's real objections are that Perrigo transferred ownership of a potentially lucrative asset (the Dexcel Contract) to a foreign affiliate before resolution of the underlying risks and contingencies, and that the ultimate resolution of those risks and contingencies enabled the recipient (PITLP/LLC) to realize substantial foreign income. Perrigo agrees that the price for the transfer was too low. Defendant's sole redress, however, is based on section 482, as it was in UPS, rather than amorphous common-law doctrines that have no application to core business transactions structured in a tax-efficient manner.

LAW AND ARGUMENT

I. The Undisputed Facts Establish that Perrigo's Offshore Entities and Their Transactions Are Not Shams

Defendant does not challenge the essential material facts that support recognition of PITLP/LLC as valid entities and recognition of the Assignment and other intercompany dealings related to omeprazole as valid transactions. For example, it remains undisputed, notwithstanding defendant's blizzard of negative adjectives, that:

  • “Store-brand over-the-counter . . . generic drugs are an important component of Perrigo's business” (PageID.2598);

  • Perrigo hired E&Y to “explore a potential restructuring of its international business entities” (PageID.2658);

  • E&Y developed a detailed step plan that was the basis for the principal intercompany transactions related to Perrigo's omeprazole business (PageID.2866-67);

  • In August 2005, LPC entered into the Dexcel Contract. If Dexcel successfully developed an OTC omeprazole product and filed for and obtained FDA approval for that product, LPC would distribute the product in the United States (PageID.2209; PageID.2867);

  • Based on E&Y's advice, Perrigo identified the Dexcel Contract for potential transfer to a newly established foreign affiliate in Israel, where Dexcel is located (PageID.2658);

  • Based on E&Y's advice, Perrigo formed PITLP in June 2006 and LLC in November 2006 to hold, among other assets, the Dexcel Contract (PageID.2867-68);

  • Based on E&Y's advice, in 2005, Perrigo established UK Finco to serve as an “offshore bank” and to “centralize pooled resources” (PageID.2659);

  • The Assignment was executed prior to the end of Perrigo's June 30, 2007, fiscal tax year with an effective date of November 29, 2006, the date of LLC's formation (PageID.2593; PageID.2869);

  • In consideration for the Assignment, LLC issued a demand note to LPC for $877,832 based on a transfer-pricing study prepared by E&Y that acknowledged that the consideration paid to LLC had to be arm's length (PageID.2608; PageID.2611; PageID.2704 at 196:5-15);

  • UK Finco capitalized PITLP/LLC in February 2008 before omeprazole was commercialized in the United States (PageID.2612);

  • The note for the Assignment was paid off, with interest from November 29, 2006, from the capitalization proceeds (PageID.2261-63; PageID.2583);

  • PITLP/LLC relied on employees of other Perrigo affiliates to provide services on its behalf under intercompany agreements (PageID.2585);

  • Beginning in late February 2008, Perrigo's books of account demonstrate that LPC distributed omeprazole on behalf of PITLP/LLC in the United States consistent with their intercompany Sales and Distribution Agreement that was executed in 2010 and treated as effective beginning in November 2006, when LLC was formed (PageID.2663; PageID.2871);

  • During the tax years at issue, PITLP/LLC purchased omeprazole from Dexcel,2 resold the product to LPC, and received income on those sales; and

  • During the tax years at issue, PITLP/LLC loaned funds, distributed profits, and made royalty payments to Dexcel as required under the Dexcel Contract. (PageID.2559; PageID.2670.)

Defendant's use of deprecating adjectives to malign Perrigo's transactions and motivations do not disturb or attack these undisputed facts, but merely express defendant's desired characterizations. As a matter of law, no “sham entity” or “sham transaction” conclusion can result after application of the controlling law to foregoing undisputed facts. Rather, the sole question that should remain is the “price” that should have been paid by PITLP/LLC for the Assignment of the Dexcel Contract.

II. PITLP/LLC Are Valid Entities For Tax Purposes When Moline Is Applied to the Undisputed Facts

Defendant's Response disavows a position that the facts surrounding PITLP/LLC's formation in 2006 forever tainted that entity and precluded its recognition for tax purposes. (PageID.2677.) That is, defendant agrees that whether LLC was a sham at the time of its formation is irrelevant to whether it was a sham during the tax years at issue in this case. Accordingly, the parties agree that the evaluation of whether PITLP/LLC is a separate entity for tax purposes must reflect the totality of the facts and circumstances, including PITLP/LLC's undeniable activities during the tax years at issue before the Court (e.g., buying omeprazole, receiving profits, and making loans).

It is settled law that a corporation will be respected as a separate entity for tax purposes if it was either formed for a business purpose or conducts business activity. See Moline, 319 U.S. at 438-39. The quantum of business purpose or activity necessary to satisfy Moline has been described as “extremely low,” Strong v. Commissioner, 66 T.C. 12, 24 (1976), aff'd, 553 F.2d 94 (2d Cir. 1977), and “rather minimal,” Hosp. Corp. of Am. v. Commissioner, 81 T.C. 520, 579 (1983). PITLP/LLC was formed for a valid purpose pursuant to the E&Y step plan to acquire the Dexcel Contract, which did not require active business activities until omeprazole was approved by the FDA for marketing.

Defendant seeks to avoid the application of Moline by relying on two cases (Higgins v. Smith, 308 U.S. 473 (1940), and Continental Oil Co. v. Jones, 113 F.2d 557 (10th Cir. 1940)) that, according to defendant, provide a “clear exception to the general rule of corporate recognition under Moline.” (PageID.2675-76.) Defendant's interpretation is untenable.

The Supreme Court in Moline made it clear that Higgins and Continental Oil are limited exceptions to the general standard of entity recognition. See Moline, 319 U.S. at 439. Indeed, a year after Moline was decided, Judge Learned Hand described Moline as a limitation on Higgins: “The gloss then put upon Higgins v. Smith . . . was deliberate and is authoritative: it was that, whatever the purpose of organizing the corporation, 'so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.'” Nat'l Inv's Corp. v. Hoey, 144 F.2d 466, 467-68 (2d Cir. 1944) (citation omitted). See also Lyon, Inc. v. Commissioner, 127 F.2d 210, 212 (6th Cir. 1942) (observing that Higgins does not authorize the government to “consider a corporation a reality or a mere fiction, whichever view advantages the revenue in a particular case”); Bennett Paper Corp. v. Commissioner, 78 T.C. 458, 464-65 (1982) (refusing to apply the Continental Oil test where a new entity was formed for a valid business purpose and acted in its own name with respect to its property), aff'd, 699 F.2d 450 (8th Cir. 1983).

The narrow factual circumstances addressed in Higgins and Continental Oil do not undermine the application of Moline here. In Higgins, an individual was denied a loss on the sale of stock to his wholly owned corporation; the decision did not ignore the corporation but denied the loss on the transaction. In Continental Oil, the court rejected an oil producer's attempt to avoid an excise tax on its oil sales by transferring the oil to a non-producing subsidiary exempt from the excise tax. These situations fundamentally differ from Perrigo's creation of PITLP/LLC to hold the Dexcel Contract and to bear the risks and perform the obligations associated with that asset in exchange for appropriate arm's-length consideration — circumstances that clearly satisfy the Moline standard.

Notwithstanding the undisputed facts regarding PITLP/LLC's substantive business activities, defendant seeks to apply the sham entity doctrine by once again resorting to buzz words, labeling those activities as mere “paper transactions.” (PageID.2677.) Defendant also attacks the undisputed accounting book entries reflecting actual business activities that are consistent with written contracts, some of which were executed later, as “accounting chicanery.” (PageID.2655.) But PITLP/LLC's real activities are plainly sufficient to satisfy the Moline standard. See Nat'l Inv's, 144 F.2d at 468 (the transfer of stock to a corporation in anticipation of a merger transaction was sufficient business activity for the corporation to be respected as a separate entity); N. Ind. Pub. Serv. Co. v. Commissioner (“NIPSCO”) v. Commissioner, 115 F.3d 506, 513 (7th Cir. 1997) (respecting a subsidiary as a separate entity based on its conduct of its “concededly minimal activity, but business activity nonetheless” in a transaction motivated solely by tax reduction); Bass v. Commissioner, 50 T.C. 595, 599-600 (1968) (recognizing a Swiss corporation whose substantive activities, conducted by a local lawyer, included signing contracts, collecting income, paying expenses, and investing excess funds at the direction of the shareholder).

In sum, it is undisputed that PITLP/LLC took and transferred title to omeprazole, and LPC distributed the product on behalf of PITLP/LLC. These activities actually occurred and demonstrate that PITLP/LLC was much more than “a purely passive dummy.” Strong, 66 T.C. at 22.

III. The Assignment Had Practical Economic Effects and Business Purpose Apart from Tax Benefits; It Was Not an Economic Sham

For the reasons described above, PITLP/LLC was not a “sham entity” that can be simply disregarded for tax purposes, as if it never existed. Furthermore, on the undisputed facts of record, the Assignment and related transactions were not “sham transactions” devoid of economic substance. In the Sixth Circuit, “[t]he proper standard in determining if a transaction is a sham is whether the transaction has any practicable economic effects other than the creation of tax benefits.” Rose v. Commissioner, 868 F.2d 851, 853 (6th Cir. 1989).

The parties agree that, in applying the economic substance standard, the relevant issue is whether Perrigo's overall transactions related to omeprazole — from the execution of the Dexcel Contract through the successful sale of store-brand omeprazole tablets to United States customers — had practicable economic effects and business purpose apart from tax considerations. (PageID.2679 (“[T]he Court must consider the entire structure of a transaction, not just isolated steps or elements.”) (emphasis added.)) See also Am. Elec. Power Co. v. United States, 326 F.3d 737, 742-43 (6th Cir. 2003); ACM P'ship v. Commissioner, 157 F.3d 231, 247 (3d Cir. 1998) (“In applying these principles, we must view the transactions as a whole, and each step, from the commencement . . . to the consummation . . . is relevant.”) (internal quotations and citations omitted).

For this reason, defendant's contention that Perrigo “offers no evidence showing its intercompany omeprazole transactions had real economic consequences” (PageID.2680) does not withstand scrutiny. When viewed in their totality and within the context of Perrigo's larger global restructuring effort to conduct its regular pharmaceutical business as efficiently as possible, the disputed transactions had real economic effects apart from the creation of tax benefits — based solely on the undisputed facts.

The Sixth Circuit standard for “practicable economic effects” is whether the taxpayer stands to earn a profit from the transaction, construed, as described above, broadly from commencement to consummation, putting aside the projected tax benefits. See Dow Chem. Co. v. United States, 435 F.3d 594, 600-05 (6th Cir. 2006) (no economic substance in the absence of profit absent the promised tax benefits); Am. Elec. Power, 326 F.3d at 742 (taxpayer's transaction bore the hallmarks of an economic sham where there was no possibility of profit apart from tax savings); Rose, 868 F.2d at 854 (no economic substance where there was no possibility the taxpayers would recoup their cash investment).

The “transactions” here to be judged are those that encompass the totality of Perrigo's undisputed generic drug transactions involving omeprazole. In contrast to the taxpayers in Dow Chemical, American Electric Power, and Rose, the undisputed elements of the omeprazole transactions with Dexcel and between LPC and PITLP/LLC related to Perrigo's core generic drug business and had undeniable economic effects on all the parties involved. PITLP/LLC assumed the Dexcel Contract when substantial economic contingencies existed and stood to benefit economically if those contingencies were removed or ameliorated. The only real issue is what price LPC should have received for the Dexcel Contract under the arm's length standard of section 482, taking into account LPC's re-engagement by LLC for distribution activities.

On the undisputed facts, Perrigo's transactions resulted in “actual, non-tax-related changes in economic position.” NIPSCO, 115 F.3d at 512. The transactions involved a real product (omeprazole), real obligations (to pay contract obligations and to acquire and distribute omeprazole), and real parties (including an unrelated party, Dexcel). The Assignment shifted ownership of the Dexcel Contract from LPC to LLC, a separate taxable entity, thereby making LLC the primary obligor to Dexcel and responsible for all post-Assignment payments to Dexcel required under the Dexcel Contract. Although defendant claims that the Performance Guarantee and related documents between Dexcel and LPC “suggest” that Perrigo was responsible for performance (PageID.2670), the fact remains that the Performance Guarantee did not change the underlying contractual relationships or obligations between Dexcel and PITLP/LLC. To be clear, even after the Performance Guarantee, PITLP/LLC still had a contractual duty to Dexcel to perform. As in UPS, the restructuring simply conveyed a business activity (and any income generated by that activity) from Perrigo to a foreign affiliate. UPS, 254 F.3d at 1019. Moreover, PITLP/LLC earned profit on its activity of purchasing and reselling omeprazole. See NIPSCO, 115 F.3d at 513. Furthermore, as detailed above, Perrigo's intercompany transactions related to omeprazole were undertaken as part of a “bona fide, profit-seeking business,” and, thus, were infused with more than enough business purpose to merit respect under the law. See UPS, 254 F.3d at 1019 (when dealing with a “going concern,” a transaction has adequate business purpose so long as it figures in a “bona fide, profit-seeking business,” and a “business purpose” does not mean a reason “free of tax considerations”).

Defendant's attempts to distinguish NIPSCO and UPS are unconvincing. First, defendant erroneously contends that the cases are “factually inapposite.” (PageID.2681.) For example, defendant claims that the transaction at issue in NIPSCO had real economic consequences because the foreign subsidiary gained “access [to] the Eurobond market.” Id. The problem with defendant's claim is that it ignores the fact that the subsidiary's U.S. parent already had access to the Eurobond market and formed a subsidiary in the Netherlands Antilles for the sole purpose of obtaining a U.S. tax advantage that would not have been available had the U.S. parent accessed that market directly. See NIPSCO, 115 F.3d at 508. Similarly, defendant claims that real economic consequences were present in UPS because the transaction included a “'real insurance policy' with a third party.” (PageID.2681.) The issue there, however, was not the validity of the third-party insurance contract (like the Dexcel Contract here), but rather the transfer of the activity from the U.S. taxpayer to its foreign affiliate. The court refused to adopt a sham analysis merely because the transaction had shifted income outside the United States and instead focused on transfer pricing issues. The same reasoning that supported recognition of the transfer of the insurance policy in UPS as having economic substance applies with equal force to Perrigo's Assignment of the Dexcel Contract to PITLP/LLC.

Second, defendant unilaterally and categorically asserts that the “expansive approach espoused in UPS is inconsistent with the need to find 'real' economic consequences as required by” the Sixth Circuit. (PageID.2681.) There is nothing in Sixth Circuit law that undermines the fundamental teaching of UPS — that businesses may structure their business affairs in a tax-efficient manner. This teaching is also not at all inconsistent with the generally accepted notion that a transaction must have practicable economic effects to be respected for tax purposes. These are not mutually exclusive concepts — a taxpayer such as Perrigo may enter into a transaction that is economically viable with or without tax benefits and structure it in a way that generates tax benefits. That is the essence of tax “planning” after all. All of the cases cited by defendant involved transactions divorced from business activities that were uneconomic — the taxpayers could not have received any profits but for the promised tax benefits. For example, defendant cites Kerman v. Commissioner, 713 F.3d 849 (6th Cir. 2013), involving an individual's purchase of a marketed tax-shelter that promised artificial tax losses, but which made no economic sense apart from the losses. This has no resemblance to Perrigo's sale of omeprazole, which promised substantial economic rewards regardless of whether LLC was formed.

Defendant also contends that the Fourth Circuit “is similarly not aligned with the analysis in UPS,” citing Black & Decker Corp. v. United States, 436 F.3d 431, 442 (4th Cir. 2006). (PageID.2681.) But the Fourth Circuit's disagreement with UPS was limited to the issue of whether the objective prong of the economic substance inquiry looks broadly to economic effects of any nature, as the Eleventh Circuit's analysis suggested, or more narrowly to whether the taxpayer had a reasonable expectation of profit as Fourth Circuit (and Sixth Circuit) precedent required. See Black & Decker, 436 F.3d at 442. The Fourth Circuit in Black & Decker did not take issue with the Eleventh Circuit's general explanation that taxpayers are free to arrange actual business affairs with tax considerations in mind; the only requirement is that the transaction “figures in a bona fide, profit-seeking business.” UPS, 254 F.3d at 1019. Perrigo's omeprazole transaction clearly met that requirement.

IV. Defendant's Sole Basis for Assessing and Collecting Tax from Perrigo Arises under Section 482

Perrigo agrees that, while it intended the price for the Assignment to meet the arm's length standard, the amount actually charged was too low. Perrigo intends to present expert evidence at trial of the correct price for the Assignment and the royalty consequences of that price for all open tax years. Section 482 and the extensive regulations thereunder examine the economic substance of actual business transactions and require arm's length pricing of related party business transactions. As the Second Circuit, for example, observed in Rubin v. Commissioner, 429 F.2d 650, 653 (2d Cir. 1970):

Resort to section 482 is clearly superior to the blunt tool employed by the Tax Court. References to 'substance over form' and the 'true earner' of income merely restate the issue in cases like this: Who is the 'true earner'? What is substance and what is form?

In contrast, defendant once again relies on a tax shelter case to assert that it may proceed in this matter on both common-law “sham” grounds as its primary theory and section 482 as its fallback, citing Pacific Management Group v. Commissioner, T.C. Memo. 2018-131. (PageID.2686-87.) However, that case involved a promoter marketing “a complex tax shelter scheme” that had no connection at all to the taxpayer's core business of designing water recovery systems. T.C. Memo. 2018-131, at *1-9. The case was also bereft of any transfer pricing implications. Pacific Management has no application here.3

Also, defendant asserts, without explaining the implications, that most of the cases cited in Perrigo's Motion predate the commensurate-with-income (“CWI”) standard (Page.2687) added to section 482 in 1986. Defendant is correct that CWI applies here, but there are no consequences in this case from that proposition.4 CWI is solely a section 482 pricing analysis without sham implications. In reality, the Dexcel Contract, which is intangible property under the governing regulations, was legally transferred to a properly formed entity, and LPC was re-engaged to distribute the omeprazole product. The parties contemplated paying an arm's length price under section 482, which provides all the analytical framework necessary for testing Perrigo's omeprazole transactions.

This Court should reject the defendant's asserted sham doctrines and, instead, resolve this case under section 482. See UPS, 254 F.3d at 1020; Rubin, 429 F.2d at 654; Hosp. Corp. of Am., 81 T.C. at 586.

CONCLUSION

Based on the foregoing, the Court should grant Perrigo's Motion.

Dated: July 12, 2019

Respectfully submitted,

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

FOOTNOTES

1 Capitalized terms used without definition in this reply brief have the meanings set forth in Perrigo's Motion. (PageID.2554-58.)

2 Defendant acknowledges that LLC “issued thousands of purchase orders to Dexcel.” (PageID.2662; PageID.2744 at 52:3-10.)

3 Contrary to defendant's assertion, Perrigo does not seek to limit the economic substance doctrine to individual tax shelters and exempt all corporate transactions. (PageID.2682-83.) Rather, Perrigo is pointing out that, because the shelter cases involve transactions that are empty of both business connection and real economics, they are not applicable to actual business transactions structured in tax efficient ways. The distinction is readily apparent when one compares UPS to the pre-packaged, highly structured, and heavily promoted transactions in the cases relied upon by defendant: Billy F. Hawk, Jr., GST Non-Exempt Marital Tr. v. Commissioner, 924 F.3d 821 (6th Cir. 2019) (mass-marketed “Son-of-Boss” type transaction); Dow Chem. Co. v. United States, 435 F.3d 594 (6th Cir. 2006); Am. Elec. Power Co. v. United States, 326 F.3d 737 (6th Cir. 2003) (corporate-owned life insurance (“COLI”) tax shelters); Consol. Edison Co. of N.Y. v. United States, 703 F.3d 1367 (Fed. Cir. 2013) (lease-in-lease-out tax shelter unrelated to electricity production); and Kerman v. Commissioner, 713 F.3d 849 (6th Cir. 2013) (mass-marketed “CARDS” tax shelter).

4 Defendant also misconstrues Medieval Attractions N.V. v. Commissioner, T.C. Memo. 1996-455, when it asserts that the Court must determine whether a “transfer occurred” before applying section 482. (PageID.2687.) The issue in Medieval Attractions was whether there was a transfer of an intangible at all; the focus was thus on who owned the disputed intangible under the developer-assister rules that applied to non-legally protected intangible property under the 1993 regulations. The case had nothing to do with whether the transfer was a “sham” before applying section 482 principles.

END FOOTNOTES

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