The IRS claims the pharmaceutical giant Merck & Co. owed $3.8 billion in back taxes. Merck settled with the IRS yesterday for $3.4 billion. California taxes will likely be paid too because Merck had sales in California.
The details of the tax problem have not been disclosed. But apparently it revolved around a 1993 transaction in which Merck created a partnership in Bermuda, a tax haven, to finance its purchase of another company.
The company Merck purchased sold two cholesterol drugs and Merck paid the partnership that it set up royalties from those drug sales. Merck deducted the royalty payments as business expenses when it filed its U.S. corporate income tax return.
By setting up the partnership, Merck deducted money it essentially paid itself.
Both Merck and the IRS see the settlement in its own best interests. In view of the time and uncertainty of taking complex tax issues to court when so much is at stake, each side won’t have to spend years litigating and millions of dollars.
Having a tax attorney who is accustomed to dealing with complicated fact patterns analyze your situation so as to bring about the best possible result is invaluable.