In Schering-Plough Corporation v. United States, 2009 U.S. Dist. LEXIS 77467, the court's decision for the Government is a clarion call to taxpayers that even in cases when the taxpayer may be technically in compliance with relevant law, transactions -- particularly transfer pricing -- will be scrutinized for economic substance and tax benefits disallowed if a non-tax business purpose is found lacking.

 

Authors Robert Jennings and Elizabeth Sweigart write: Schering-Plough brought a civil suit against the United States in New Jersey District Court seeking a tax refund of approximately $473 million in Federal income taxes for taxable years 1989, 1991 and 1992. In 1991 and 1992, Schering-Plough assigned future income streams -- derived from interest rate swaps with a third party -- to related parties outside of the United States in exchange for lump-sum payments from those affiliates. The taxpayer represented that these "swap-and-assign" transactions were sales as opposed to loans and thus the income tax payment on the net proceeds of the sales could be deferred until later years. Essentially, Schering-Plough could gain access to its offshore cash immediately without a corresponding taxable event in the same year. The IRS concluded that the transactions were in fact intercompany loans and thus subject to tax under Section 956 of the Internal Revenue Code of 1986 (I.R.C.) as the resultant loans were "investments in U.S. property." In rendering its opinion, the court noted the policy rationale underlying the anti-deferral provisions enacted in the Revenue Act of 1962, Pub. L. No. 87-834, 76 Stat. 1006, § 12(a) (1962) (commonly known as "Subpart F").