Mylan, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 156 T.C. No. 10, aff’d CA-3 Nos. 22-1193, 21-1194 and 22-1195 (July 27, 2023)
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
Legal Fees Incurred by Generic Drug Manufacturer Not Required to be Capitalized (Mylan, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 156 T.C. No. 10, aff’d CA-3 Nos. 22-1193, 21-1194 and 22-1195 (July 27, 2023))
Generally, legal expenses incurred in defense of a patent or in a patent infringement action when creating a new product would be required to be capitalized as part of the cost of the asset. Treas. Reg. §1.263(a)-(4)(b)(1)(v) requires that a taxpayer capitalize “an amount paid to facilitate” an acquisition or creation of an intangible.
Mylan brought generic drugs to market using and FDA process called Abbreviated New Drug Application (ANDA). The ANDA process requires the FDA to act quickly in providing approval or rejection of a generic drug. In certain ANDA processes, Mylan was required to provide “notice” letters to the brand name drug company for the drug on which it was requesting approval. The “notice” letters are part of the FDA approval process. The “notice” letters will usually, but not always, provoke litigation for patent infringement by the brand name drug company. FDA approval under an ANDA was slowed, but not dependent on any patent infringement litigation.
Mylan incurred $130 million in legal expenses for preparing “notice” letter and defending itself against patent infringement suits. The Tax Court determined (and the appellate court agreed) that the legal expenses incurred for preparing the “notice” letters must be capitalized because those costs were part of the ANDA process. FDA approval could not be obtained without preparing those letters. However, the costs of defending itself in patent infringement litigation was allowable as a current expense. The patent infringement lawsuits were not part of the FDA approval process and therefore did not provide any benefit to the asset being created. “Critically, when generic manufacturers like Mylan defend themselves in patent infringement suits…they obtain no rights from a successful outcome. They acquire neither the intangible asset of a patent nor an FDA approval.”
Also see.
Charles Kinney v. Comm., TCM 2022-81 Where an attorney could not deduct expenses related to his disbarment and vexation litigant declaration because the underlying causes were personal rather than business related.