Merck Tax Bill May Top $2 Billion

The IRS is questioning royalty and other expenses connected to the acquisition of Medco Health Solutions.
Stephen TaubMay 11, 2004

Merck Inc. announced it may owe the Internal Revenue Service more than $2 billion related to a partnership deal the company entered in 1993.

The drug maker said in a regulatory filing that the IRS is proposing to disallow certain royalty and other expenses claimed as deductions on its 1993 to 1996 tax returns. Merck added that it soon expects to receive a similar notice for 1997 through 1999.

If the IRS ultimately prevails, Merck said its income tax due for the years 1993 through 1999 would increase by about $970 million plus interest of approximately $490 million.

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The IRS will likely make similar claims for years subsequent to 1999 in future audits with respect to this transaction, added the company. The potential disallowance for these later years would come to about $540 million plus interest of about $40 million.

The partnership in question, said Merck spokeswoman Anita Larsen, according to Reuters, was formed to help Merck obtain financing when it shelled out $6 billion to buy Medco Health Solutions Inc., then called Medco Containment Services Inc., in 1993. Larsen declined to discuss details of the partnership’s operation, added the wire service.

Merck spun off Medco in August 2003.