ALLEGAN — Perrigo. Co. plc wants the federal government to pay back more than $163.5 million in taxes it paid over four years.
In a lawsuit filed in August in the U.S. District Court for the Western District of Michigan in Grand Rapids, the Allegan-based Perrigo argues the Internal Revenue Service erred in ruling that subsidiaries it set up more than a decade ago were “sham” entities.
Last week in a response to the lawsuit, the federal government stood by the IRS rulings for the 2009-2012 tax years and denied Perrigo’s claims.
The case stems from subsidiaries Perrigo created to handle the distribution and sales of an over-the-counter, generic version of Prilosec, a medication to treat ulcers, heartburn and acid reflux. One subsidiary, L. Perrigo Co., signed a supply and distribution contract with Israeli-based Dexcel Pharma Technologies Ltd., which at the time was working on a generic OTC version of the drug.
L. Perrigo Co. then signed a sales and distribution agreement with other subsidiaries, Perrigo Israel Trading Limited Partnership and Perrigo LLC, in November 2006. Under that deal, L. Perrigo would distribute Dexcel’s generic OTC version of Prilosec, known as omeprazole, on behalf of the other two subsidiaries, according to court documents.
The agreement also shifted rights and legal obligations to Perrigo Israel Trading Limited Partnership/Perrigo LLC, which “assumed all risks associated with the approval and marketing of the generic OTC omeprazole product,” Perrigo stated in its original federal court filing.
After settling a patent infringement lawsuit with Prilosec maker AstraZeneca PLC in September 2007, Dexcel began producing and shipping omeprazole tablets in early 2008.
The IRS later ruled the subsidiaries were “sham entities” when Perrigo filed tax returns from 2009 to 2012.
In responding to the lawsuit, attorneys for the federal government wrote that Perrigo LLC “has not engaged in substantive business activity,” has not been taxed in the U.S., and “performs no valid economic function.”
The government’s response noted that Perrigo LLC “had no employees of its own; its officers were employees of plaintiff; it had no offices or operational facilities of its own; it had no assets with which to purchase distribution rights to Dexcel’s omeprazole product from plaintiff; and Dexcel’s omeprazole product was shipped directly from Dexcel to plaintiff, where it was then distributed and sold by plaintiff.”
“(Perrigo) LLC’s purported transactions with plaintiff relating to omeprazole prior to and during the tax years at issue lack substance and should be disregarded. (Perrigo) LLC itself is a sham and should be disregarded,” Acting Assistant Attorney General of the Tax Division David Hubbert wrote in the federal government’s response. “Plaintiff’s purported assignment of distribution rights, as well as its subsequent purported transfer payments to (Perrigo) LLC relating to omeprazole sales, constitute an impermissible assignment of income.”
In its original filing in August, Perrigo argued that the IRS theory and application of common law in its ruling “lacks factual and legal basis” and is “erroneous, illegal, and not grounds to keep plaintiff’s money.”
Perrigo Israel Trading Limited Partnership and Perrigo LLC were “formed as part of Plaintiff’s intended internationalization of its business operations” and the entities “conducted bona fide business activities,” the company stated in its lawsuit.
Perrigo — which re-domiciled from Allegan to Dublin, Ireland in 2013 with the acquisition of Elan Corp. — said that from 2009 to 2012, Perrigo Israel Trading Limited Partnership and Perrigo LLC “had substantial capital, income, and accounts; was performing under three contracts with unrelated parties; was distributing substantial dividends, and making substantial loans; and was otherwise engaged in substantial business activities,” according to court documents.
Perrigo is seeking the return of $37.2 million in taxes and penalties paid in 2009, $98.6 million for 2010, $40.1 million in 2011, and $24.7 million for 2012.
A local attorney at Warner Norcross & Judd LLP representing Perrigo Co. plc declined to comment, and an attorney with the Washington, D.C. law firm Steptoe & Johnson LLP did not respond to an inquiry prior to deadline. The U.S. Department of Justice, representing the IRS, also declined comment.
The case was assigned to U.S. District Court Judge Robert Jonker.