DOW JONES NEWSWIRES
A federal court in New Jersey denied Schering-Plough Corp. (SGP)
a $473 million refund in connection with two transactions in which
the drug maker allegedly sought to avoid taxation on $690 million
in profits it repatriated from offshore subsidiaries into the
U.S.
Though U.S. companies generally pay annual taxes on all their
income worldwide, there normally is a broad exception for profits
"permanently" reinvested in overseas operations. Money moved back
to the U.S. gets taxed.
In 1991 and 1992, Schering-Plough entered into Strippable
Increasing Principal Swaps transactions created by its financial
adviser, Merrill Lynch & Co. The transactions were designed to
bring previously untaxed profits made by Schering-Plough's foreign
subsidiaries into the U.S. without paying the tax owed on
repatriation.
Judge Katherine S. Hayden ruled that Schering-Plough owed tax
because the STRIP transactions' form - a sale of the stream of
income payments under the swaps - was inconsistent with the
substance, which was a loan from the subsidiaries to
Schering-Plough that triggered taxation.
Alternatively, the court said the transactions lacked economic
substance, did not have a genuine business purpose and were
designed to avoid tax.
"This victory for the United States should serve as another
warning to taxpayers of all sizes and sophistication who consider
attempting to circumvent the federal tax laws and their duty to pay
their fair share," said D. Patrick Mullarkey, acting deputy
assistant attorney general of the Justice Departments Tax
Division.
A Schering-Plough representative wasn't immediately available
for comment.
Schering-Plough's shares fell 2 cents to $28.16 in after-hours
trading. The stock is up almost two-thirds this year.
Schering-Plough soon will be acquired by rival Merck & Co.
(MRK), whose shares closed Monday at $32.43, up 0.3%, and were
inactive after hours.
-By Kathy Shwiff, Dow Jones Newswires; 212-416-2357;
Kathy.Shwiff@dowjones.com