Mylan Inc. achieved a victory in a tax dispute with the IRS in the Tax Court which may result in tax savings for companies who frequently face litigation related to intellectual property, especially patents.
Mylan is a producer of pharmaceutical products. In its 2021-2014 tax filings, Mylan deducted legal fees related to its generic drug business as business expenses, but the IRS disagreed. Specifically at issue were legal fees related to preparing Paragraph-IV Notice Letters (which are required as part of an Abbreviated New Drug Application) and the legal expenses for patent infringement litigation that was later initiated by the branded drug patent holders. Those fees were no small thing; $130 million in deductions were in dispute.
In the holding, the Court found that legal fees necessary to meet statutory requirements (e.g., a formal Paragraph-IV notice) are not deductible because they are expenses incurred to create a separate intangible asset (regulatory approval) or generate significant benefits for the taxpayer extending beyond the current year which therefore must be capitalized (however, at least, these expenses are deductible over 15 years).
However, the defense of lawsuits challenging the validity of patents protecting the branded versions of drugs which Mylan sought to produce in generic form were deductible as ordinary and necessary business expenses. As the Tax Court pointed out, Mylan defending itself against litigation was not a required step in the FDA approval process and the litigation did not relate solely to title for the asserted IP.
Mylan or the IRS may appeal this case. The legal fees involved in both sets of issues included substantial litigation expenses and attorney fees.
For companies that regularly face litigation on intellectual property, this ruling confirms the general practice that legal fees associated with patent infringement suits, as opposed to creating a separate intangible, are currently tax deductible.
Robyn Ast-Gmoser is an experienced patent litigator who represents clients in patent and trademark matters in federal courts. Ed Buchholz serves as a key tax advisor to companies and is the chair of Thompson Coburn's transactional tax practice.
Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you (an ‘engagement letter’).
By clicking the ACCEPT button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and, further, even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you. Please click the ACCEPT button if you understand and accept the foregoing statement and wish to proceed.