Merck & Co., Inc. v. U.S.

Case Updates

The Appellate Court affirmed the District Court’s judgment and found that Merck was not entitled to a refund. The court noted that 89-21 does not apply to loans and analyzed the substance of the transaction to determine the tax treatment. The court held that the transactions in this instance did not qualify under 89-21 because they were loans (and not sales). The court did not respond to part of the judgment based on the economic substance of the transaction.

NCLC asked the Third Circuit to clarify the extent to which businesses may rely on authoritative government pronouncements in calculating their tax liability, and the extent to which the IRS or the courts may retroactively invalidate, or recharacterize for tax purposes, legitimate business transactions with economic substance. In this case, Schering-Plough relied on the IRS’s Notice 89-21 instructions to calculate its income from certain swap-and-assign transactions, but after the IRS issued new instructions, a federal district court retroactively invalidated the transactions and disregarded the company’s reliance on 89-21, raising the company’s tax liability. In its brief, NCLC argued that businesses depend on clear, predictable rules to be able to efficiently deploy their resources and to price its products. NCLC also explained that in a shifting and unpredictable tax environment, companies waiting on their final determination of tax liability are forced to park massive amounts of money on the sidelines rather than put it to productive use.