US Court Denies Schering-Plough $473 Million Tax Refund

   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; [e-mail]