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29 April 2021GenericsAlex Baldwin

US Tax Court says Mylan can deduct patent litigation fees

Mylan can deduct legal fees from defending itself against patent infringement suits as business expenses, according to the US Tax Court.

The court ruled on Tuesday that pharmaceutical giant Mylan could deduct legal fees related to patent infringement suits from its tax filings, but not fees from preparing notice letters required by the Food and Drug Administration (FDA) for the approval of generics.

The court decided that litigation fees are to be treated as separate expenses from the FDAs fees.

“We conclude that the legal expenses Mylan incurred to prepare notice letters are required to be capitalised, while the litigation expenses Mylan incurred to defend patent infringement suits are deductible as ordinary and necessary business expenses.”

Case background

Through 2012 to 2014, Mylan deducted “significant” legal expenses related to patent litigation as ordinary business expenditures.

As part of its generics drug application process, Mylan paid to defend infringement lawsuits related to generic versions of brand name drugs it was applying for.

On the company’s federal income tax returns, Mylan claimed deductions on those legal fees as “necessary business expenses” under section 162(a)—which states that “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”

The IRS did not allow the deductions, claiming that legal expenses were to be capitalised under section 263(a), which in contrasts states that “[n]o deduction shall be allowed” for a capital expenditure.

It then issued Mylan notices of deficiency for each of the taxable years, determining deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively.

Litigation expenses

In the filing, the court claimed that: “The deductibility of a legal expense generally depends upon the origin and character of the claim with respect to which the expense was incurred.”

Judge Patrick Urda citied prior case law in Santa Fe Pac Gold v Commissioner, which states: “Expenses directly connected with (or pertaining to) the taxpayer’s trade or business are deductible under Section 162 as ordinary and necessary business expenses”, while “expenses arising out of the acquisition, improvement or ownership of property are capital expenditures under Section 263(a) and are not currently deductible.”

The court argued that costs incurred by a business to defend against “tort” claims have “generally” been held as deductible, citing  Meyer & Bro v Commissioner, and Addressograph-Multigraph v Commissioner.

When it came to the Paragraph IV notice letters for the Abbreviated New Drug Application (ANDA) however, the court said that: “The legal expenses Mylan incurred to prepare, assemble, and transmit such notice letters constitute amounts incurred ‘investigating or otherwise pursuing’ the transaction of creating FDA-approved ANDAs… and must be capitalised.”

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18 July 2018   US-based biopharmaceutical company AbbVie entered into a patent licensing agreement with generics company Mylan yesterday.

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18 July 2018   US-based biopharmaceutical company AbbVie entered into a patent licensing agreement with generics company Mylan yesterday.