SCOTUS Reports

Tag: Mylan, Inc. & Subsidiaries v. Commissioner

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Capitalization and Deductibility of Legal Expenses in Pharmaceutical Industry

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a significant ruling, the U. S. Tax Court determined that Mylan, a generic drug manufacturer, must capitalize legal fees for preparing FDA notice letters but can deduct costs for defending patent infringement suits. This decision impacts how pharmaceutical companies handle legal expenses related to FDA approvals and patent disputes, clarifying the tax treatment of such expenditures.

    Parties

    Mylan, Inc. & Subsidiaries (Petitioner), a U. S. corporation and manufacturer of generic and brand name pharmaceutical drugs, filed petitions against the Commissioner of Internal Revenue (Respondent) to challenge determinations of tax deficiencies for the years 2012, 2013, and 2014. The cases were consolidated in the U. S. Tax Court.

    Facts

    Mylan incurred significant legal expenses from 2012 to 2014 in two categories: (1) preparing notice letters to the FDA, brand name drug manufacturers, and patentees as part of the process for obtaining FDA approval for generic versions of drugs, and (2) defending against patent infringement lawsuits initiated by these manufacturers and patentees. These lawsuits were triggered by Mylan’s submission of Abbreviated New Drug Applications (ANDAs) with paragraph IV certifications, asserting that certain patents listed in the FDA’s Orange Book were invalid or not infringed by Mylan’s generic drugs.

    Procedural History

    Mylan deducted its legal expenses as ordinary and necessary business expenditures on its 2012, 2013, and 2014 tax returns. Following an IRS examination, the Commissioner determined these expenses were capital expenditures required to be capitalized and disallowed Mylan’s deductions, issuing notices of deficiency for tax deficiencies amounting to $16,430,947 for 2012, $12,618,695 for 2013, and $20,988,657 for 2014. Mylan filed timely petitions for redetermination with the U. S. Tax Court, which consolidated the cases and held a trial.

    Issue(s)

    Whether the legal expenses Mylan incurred for preparing notice letters required to be sent as part of the FDA approval process for generic drugs must be capitalized under section 263(a) of the Internal Revenue Code?

    Whether the legal expenses Mylan incurred for defending against patent infringement lawsuits brought by brand name drug manufacturers and patentees are deductible as ordinary and necessary business expenses under section 162(a)?

    Rule(s) of Law

    Section 162(a) of the Internal Revenue Code allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 263(a) mandates capitalization of expenditures that create or enhance a separate and distinct asset or generate significant future benefits for the taxpayer. Section 1. 263(a)-4(b)(1)(v), Income Tax Regs. , requires capitalization of amounts paid to facilitate the acquisition or creation of certain intangibles, including rights obtained from a governmental agency.

    Holding

    The U. S. Tax Court held that the legal expenses Mylan incurred to prepare notice letters are required to be capitalized because they were necessary to obtain FDA approval of Mylan’s generic drugs. Conversely, the legal expenses incurred to defend patent infringement suits are deductible as ordinary and necessary business expenses because the patent litigation was distinct from the FDA approval process.

    Reasoning

    The court’s reasoning differentiated between the two types of legal expenses based on the origin and character of the claims and the applicable legal standards:

    For the notice letter expenses, the court applied the regulation under section 1. 263(a)-4(b)(1)(v), which requires capitalization of expenses facilitating the creation of an intangible asset. The court found that the notice letters were a required step in securing FDA approval, thus facilitating the acquisition of an intangible asset (effective FDA approval).

    For the litigation expenses, the court employed the “origin of the claim” test, focusing on whether the litigation arose from the acquisition, enhancement, or disposition of a capital asset. The court determined that the patent infringement suits were tort claims, not related to the acquisition or enhancement of Mylan’s intangible assets. The court also considered the policy objectives of the Hatch-Waxman Act, which encourages the entry of generic drugs into the market while protecting brand name drug manufacturers’ patent rights. The court found that the litigation was a mechanism for brand name manufacturers to protect their intellectual property rights, not a step in the FDA approval process for Mylan.

    The court also analyzed relevant regulatory examples and the nature of patent infringement litigation, concluding that such litigation expenses are typically deductible as ordinary and necessary business expenses for companies engaged in the business of exploiting and licensing patents.

    Disposition

    The court sustained the IRS’s determinations regarding the capitalization of expenses for preparing notice letters and ruled that the litigation expenses for defending patent infringement suits were deductible as ordinary and necessary business expenses. The court also upheld the IRS’s determination that Mylan’s capitalized expenses were subject to amortization over a 15-year period under section 197 of the Internal Revenue Code.

    Significance/Impact

    This case clarifies the tax treatment of legal expenses in the pharmaceutical industry, particularly for generic drug manufacturers. It establishes that expenses for preparing FDA-required notice letters are capital expenditures due to their role in facilitating FDA approval, whereas expenses for defending patent infringement suits are deductible as ordinary and necessary business expenses. This ruling impacts how pharmaceutical companies structure their legal strategies and manage their tax liabilities. It also underscores the distinction between expenses related to regulatory compliance and those arising from tort claims, which may influence how other industries categorize similar expenses for tax purposes. Subsequent courts and the IRS may refer to this decision when addressing similar issues, potentially affecting the tax treatment of legal expenses across various sectors.

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Deductibility of Legal Expenses in Pharmaceutical Patent Litigation

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a landmark ruling, the U. S. Tax Court held that Mylan, a generic drug manufacturer, must capitalize legal expenses related to preparing FDA-required notice letters for generic drug applications, while expenses defending against patent infringement suits are deductible. This decision clarifies the tax treatment of legal costs incurred by generic drug companies in navigating the complex regulatory landscape of pharmaceutical patents, impacting how such costs are managed in the industry.

    Parties

    Mylan, Inc. & Subsidiaries, the petitioner, is a U. S. corporation engaged in the manufacture of both brand name and generic pharmaceutical drugs. The respondent, the Commissioner of Internal Revenue, represents the Internal Revenue Service (IRS). Mylan challenged the IRS’s disallowance of deductions for legal expenses incurred during 2012, 2013, and 2014.

    Facts

    Mylan incurred significant legal expenses from 2012 to 2014 related to its efforts to bring generic versions of brand name drugs to market. The process involved submitting Abbreviated New Drug Applications (ANDAs) to the Food & Drug Administration (FDA), which required certifications regarding any patents listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) that covered the brand name drugs. Mylan often certified that these patents were invalid or would not be infringed by their generic drugs (paragraph IV certifications), triggering the need to send notice letters to the brand name drug manufacturers and patentees. These certifications also constituted an act of patent infringement, leading to lawsuits against Mylan under 35 U. S. C. § 271(e)(2). Mylan deducted the legal fees incurred for preparing notice letters and defending against these infringement suits as ordinary and necessary business expenses under Internal Revenue Code (IRC) § 162(a). The IRS, however, determined these were nondeductible capital expenditures under IRC § 263(a).

    Procedural History

    Upon examination of Mylan’s 2012, 2013, and 2014 tax returns, the IRS disallowed the deductions for legal expenses, asserting they were capital expenditures to be amortized over 15 years under IRC § 197. The IRS issued notices of deficiency for each year, determining tax deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively. Mylan petitioned the U. S. Tax Court for redetermination, and the cases were consolidated for trial. The Tax Court’s standard of review was de novo.

    Issue(s)

    Whether the legal expenses incurred by Mylan to prepare notice letters required for FDA approval of generic drugs are required to be capitalized under IRC § 263(a)?

    Whether the legal expenses incurred by Mylan to defend against patent infringement suits under 35 U. S. C. § 271(e)(2) are deductible as ordinary and necessary business expenses under IRC § 162(a)?

    Rule(s) of Law

    IRC § 162(a) allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. ” Conversely, IRC § 263(a) mandates the capitalization of expenditures that create or enhance a separate and distinct asset or generate significant future benefits. The regulations under IRC § 1. 263(a)-4(b)(1) require the capitalization of amounts paid to acquire or create certain intangibles, including rights obtained from a governmental agency. The origin of the claim test, established in cases such as Woodward v. Commissioner, 397 U. S. 572 (1970), is used to determine whether legal expenses are deductible or must be capitalized based on the nature of the underlying claim.

    Holding

    The Tax Court held that the legal expenses incurred by Mylan to prepare notice letters required for FDA approval are capital expenditures under IRC § 263(a) because they facilitate the acquisition of FDA approval, an intangible asset. Conversely, the legal expenses incurred by Mylan to defend against patent infringement suits under 35 U. S. C. § 271(e)(2) are deductible as ordinary and necessary business expenses under IRC § 162(a) because such litigation is distinct from the FDA approval process and arises from the protection of business profits.

    Reasoning

    The court’s reasoning hinged on the distinction between the two types of legal expenses. For notice letter expenses, the court applied the rule that amounts paid to facilitate the acquisition of an intangible asset must be capitalized. The court found that the notice letters were a required step in securing FDA approval, thus facilitating the acquisition of the intangible right to market the generic drug. The court rejected Mylan’s argument that these expenses were merely related to potential patent litigation, emphasizing that the notice was a statutory prerequisite for ANDA approval.

    Regarding the litigation expenses, the court applied the origin of the claim test and found that these expenses arose out of patent infringement claims, which are torts aimed at protecting the patent holder’s business profits. The court relied on precedents such as Urquhart v. Commissioner, 215 F. 2d 17 (3d Cir. 1954), which established that expenses incurred in defending patent infringement suits are deductible because they relate to the protection of business profits rather than the acquisition of property rights. The court distinguished these expenses from those incurred in defending title to intellectual property, which are capital expenditures.

    The court also considered regulatory examples under IRC §§ 1. 263(a)-4 and 1. 263(a)-5, finding that the litigation expenses did not facilitate the acquisition of FDA approval but were instead related to resolving patent rights, thus supporting their deductibility.

    Disposition

    The court sustained the IRS’s determination to capitalize the legal expenses incurred for preparing notice letters and upheld the disallowance of deductions for those expenses. Conversely, the court allowed deductions for the legal expenses incurred in defending patent infringement suits. The court’s decisions will be entered under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    This decision has significant implications for the pharmaceutical industry, particularly for generic drug manufacturers. It clarifies that legal expenses related to the regulatory process of obtaining FDA approval must be capitalized, affecting the timing of tax deductions for such costs. Conversely, it affirms the deductibility of expenses incurred in defending against patent infringement suits, providing clarity and potential tax benefits for companies engaged in such litigation. The ruling may influence how generic drug companies structure their legal strategies and manage their tax liabilities, potentially affecting the pace and cost of bringing generic drugs to market. The case also underscores the importance of the origin of the claim test in distinguishing between deductible and capital expenditures in the context of legal fees.

  • Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10 (2021): Capitalization and Deductibility of Legal Expenses in the Pharmaceutical Industry

    Mylan, Inc. & Subsidiaries v. Commissioner, 156 T. C. No. 10 (2021)

    In a significant ruling, the U. S. Tax Court held that Mylan, a pharmaceutical company, must capitalize legal fees for preparing FDA-required notice letters related to generic drug approvals, but can deduct expenses for defending patent infringement lawsuits. This decision clarifies the treatment of legal costs in the pharmaceutical sector, balancing the need for capitalization of costs directly related to FDA approval processes against the deductibility of litigation costs defending patent rights.

    Parties

    Mylan, Inc. & Subsidiaries, the petitioner, is a U. S. corporation involved in the manufacture of both brand name and generic pharmaceutical drugs. The respondent, the Commissioner of Internal Revenue, represents the Internal Revenue Service (IRS). The case was adjudicated in the U. S. Tax Court.

    Facts

    Mylan incurred legal fees from 2012 to 2014 in connection with applications submitted to the FDA for approval to market and sell generic versions of brand name drugs. As part of the application process, Mylan was required to certify the status of any patents listed in the FDA’s Orange Book as covering the respective brand name drug. Mylan’s certifications often stated that the listed patents were invalid or would not be infringed by their generic drugs, triggering the need to send notice letters to brand name drug manufacturers and patentees. Such certifications also constituted an act of patent infringement, giving the brand name manufacturers and patentees the right to sue Mylan for patent infringement. Mylan deducted these legal expenses on its tax returns as ordinary and necessary business expenditures, but the IRS disallowed these deductions, deeming them capital expenditures required to be capitalized.

    Procedural History

    The IRS, upon examination, determined that Mylan’s legal expenses were nondeductible capital expenditures and issued notices of deficiency for the tax years 2012, 2013, and 2014, with deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively. Mylan filed timely petitions with the U. S. Tax Court for redetermination of these deficiencies. The cases were consolidated, and a trial was held in Washington, D. C.

    Issue(s)

    Whether the legal expenses incurred by Mylan to prepare notice letters for FDA approval of generic drugs are required to be capitalized under section 263(a) of the Internal Revenue Code?

    Whether the legal expenses incurred by Mylan to defend against patent infringement suits under section 271(e)(2) of the U. S. Code are deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code?

    Rule(s) of Law

    Section 162(a) of the Internal Revenue Code allows for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Conversely, section 263(a) mandates that no deduction shall be allowed for capital expenditures, which are to be capitalized. Section 1. 263(a)-4(b)(1), Income Tax Regs. , requires the capitalization of amounts paid to acquire or create certain intangibles, including rights obtained from a governmental agency. Section 1. 263(a)-4(d)(5)(I), Income Tax Regs. , specifies that taxpayers must capitalize amounts paid to a governmental agency to obtain rights under licenses, permits, or similar rights. Section 1. 263(a)-4(e)(1)(I), Income Tax Regs. , further defines that an amount is paid to facilitate the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing the transaction.

    Holding

    The U. S. Tax Court held that the legal expenses incurred by Mylan to prepare notice letters for FDA approval are required to be capitalized under section 263(a) of the Internal Revenue Code because they were necessary to obtain FDA approval of Mylan’s generic drugs. Conversely, the legal expenses incurred to defend against patent infringement suits are deductible as ordinary and necessary business expenses under section 162(a) because the patent litigation was distinct from the FDA approval process.

    Reasoning

    The court’s reasoning was based on the distinction between the legal fees for preparing notice letters, which were directly related to obtaining FDA approval, and the litigation expenses for defending patent infringement suits, which were separate from the FDA approval process. The court applied the ‘origin of the claim’ test to determine the nature of the legal expenses. The notice letters were a required step in securing an FDA-approved Abbreviated New Drug Application (ANDA), thus facilitating the acquisition of an intangible asset, i. e. , the right to market the generic drug upon effective FDA approval. Therefore, these expenses were capital in nature and subject to capitalization under section 263(a). In contrast, the patent infringement litigation arose out of the ordinary and necessary activities of Mylan’s generic drug business and was not directly related to acquiring FDA approval. The court referenced the case of Urquhart v. Commissioner, which established that expenses incurred in defending against patent infringement are deductible as they relate to the protection of business profits rather than the acquisition of property rights. The court also considered the regulatory examples provided in the Income Tax Regulations, which supported the deductibility of litigation expenses separate from the broader project of obtaining FDA approval. The court rejected the Commissioner’s argument that the litigation expenses facilitated the acquisition of FDA approval, emphasizing that such litigation was initiated by patent holders to protect their intellectual property rights and was not a necessary step in the FDA approval process. Furthermore, the court noted that the statutory coordination between patent litigation outcomes and FDA approval does not convert the litigation into a step in the FDA approval chain.

    Disposition

    The court sustained the IRS’ determinations for the amounts incurred to prepare paragraph IV notice letters, affirming the requirement to capitalize these expenses. However, it ruled in favor of Mylan regarding the deductibility of the litigation expenses incurred to defend against patent infringement suits.

    Significance/Impact

    This decision has significant implications for the pharmaceutical industry, particularly for generic drug manufacturers. It clarifies the tax treatment of legal expenses related to the FDA approval process and patent litigation, establishing a clear distinction between costs that must be capitalized and those that can be deducted. The ruling impacts how generic drug manufacturers manage their tax liabilities and plan their legal strategies regarding patent disputes. It also underscores the importance of the ‘origin of the claim’ test in determining the nature of legal expenses, which could influence future cases involving the deductibility of legal fees across various industries. The decision may lead to increased scrutiny by the IRS on the categorization of legal expenses by pharmaceutical companies, potentially affecting their financial planning and reporting.