US Court Rejects Efforts by Schering-Plough to Repatriate $690 Million in Offshore Earnings w/o Paying Taxes

September 2nd, 2009

US Department of Justice

WASHINGTON – A federal court in Newark, N.J., denied Schering-Plough Corp. a $473 million refund in connection with two transactions in which Schering-Plough sought to avoid taxation on $690 million in profits it repatriated from offshore subsidiaries into the United States.

In 1991 and 1992, Schering-Plough entered into Strippable Increasing Principal Swaps (STRIPS) transactions created by its financial advisor, Merrill Lynch. These transactions involved interest rate swap agreements with most of the receive legs assigned to Schering-Plough’s controlled Swiss subsidiaries. The transactions were designed to bring previously untaxed profits made by Schering-Plough’s foreign subsidiaries into the United States without paying the tax owed on repatriation.

Judge Katherine S. Hayden found Schering-Plough owed tax because the STRIP transactions’ form–a purported sale of the stream of income payments under the swaps–was inconsistent with the substance–a loan from the subsidiaries to Schering-Plough that triggered taxation–and as a result, Schering-Plough was not entitled to the tax treatment it sought. The court found in the alternative that the transactions lacked economic substance, did not have a genuine business purpose, and were designed to avoid tax. The opinion noted that the internal revenue code does not leave room for corporate taxpayers to avoid their obligations.

“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, the Acting Deputy Assistant Attorney General of the Justice Department’s Tax Division.

Mr. Mullarkey thanked the Tax Division trial attorneys who tried the case: David Katinsky, Dara Oliphant, and Lisa Bellamy and former Tax Division Senior Litigation Counsel Richard Jacobus.

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