During 1974 and 1975, petitioner maintained a pharmaceutical, chemical, and biochemical research, development, and control facility in Skokie, Illinois. As with the Aldactone/Aldactazide chemical, because of Mexican Government restrictions, it was necessary to refine the barbasco root in Mexico. In 1962, petitioner acquired by license from Janssen the exclusive right to make and sell haloperidol in certain countries, excluding the United States and Japan. 221-238 (1955). The taxpayer (the subsidiary corporation) sold the stock at the end of the transfer year for $7,175 and reported a loss of $133,202 on the sale. This required the recall of one lot of Lomotil tablets and one lot of Aldactazide tablets. While we agree that a royalty would be the likely form that an arm's-length consideration would take in the circumstances before us (sec. The change was first suggested by SCO's Director of Quality Control. However, in economic terms, a specific investment made in research and development necessarily involves a substantial degree of risk. The chemical processes involved consisted of additions to and reactions with late or last-step chemical intermediates purchased by SCO. Subsequently, in the late 1960's, when the demand for antiarrhythmic drugs increased significantly and the price of Quinidine increased, petitioner decided to seek approval to market Norpace in the United States. Respondent alleges, however, that he has the authority under section 482 to disregard the legal ownership of the intangibles and to reallocate the income and related business expenses attributable to the intangibles back to petitioner in order to prevent the evasion of taxes or clearly to reflect petitioner's income. The Board of Tax Appeals and the Court of Appeals for the Third Circuit upheld the Commissioner's allocation of the loss from the taxpayer to the parent corporation for the portion of the loss sustained before the transfer. Three employees of SCO in pharmaceutical technology and eight in chemical development engaged in process trouble shooting and process improvement regarding SCO's products. 961, 971 (1971). This cost included the amounts expended on products that did not successfully complete the regulatory review process to the marketplace. 64-155, 1964-1 C.B. In addition, other areas of pharmaceutical research included disease progression and therapeutic control. Approval by petitioner of the modifications to production tickets was not required before SCO could initiate such modifications in its manufacturing processes. It is the practice of leading pharmaceutical firms such as petitioner to establish a brand name or trademark name for their chemical compounds once they are placed on the market. When an order was prepared for shipment, the items to be shipped were entered by SCO employees into the computer terminal in Puerto Rico and transmitted to petitioner in Skokie via the communications network. Although petitioner did not require its sales representatives to have college degrees, approximately 72 percent of its representatives during 1974 and 1975 had either 2-year or 4-year college degrees and approximately 3 percent had graduate degrees. By notice dated April 2, 1969, SCO was substituted for petitioner in the above applications. [556 F. 2d at 891-892; (fn. However, Foster did not consider the transfer of intangible property but rather dealt solely with a nonrecognition transfer and subsequent sale of tangible property. Petitioner's principal method of marketing ethical pharmaceutical products involved the direct contact, or detailing, method. Rather, the court noted that the statutory language "clearly to reflect the income" was an independent reason for allocation under section 482. 931) in conjunction with investment incentive programs established by possessions of the United States, especially the Commonwealth of Puerto Rico, have [sic] been used as an inducement to U.S. corporate investment in active trades and businesses in Puerto Rico and the possessions. 1962), affg. [H. Rept. On January 10, 1969, on behalf of SCO (which was yet to be organized), petitioner filed an application for a tax exemption grant under the provisions of the Puerto Rico Industrial Incentive Act of 1963. 3,013,012) was obtained by petitioner on December 22, 1961. [5] Control of this blockbuster drug was often mentioned as a key reason for Pfizer's acquisition of Pharmacia. But in a sale for stock between related corporations, no such income is recorded and the accounts of the transferor cannot properly reflect the true income status of the enterprise as a going concern. ], During the taxable years in issue, section 482 provided in its entirety as follows:22. Thus, whether our allocation herein is considered an additional payment for services or for intangibles that were not transferred34 or as a royalty payment for the intangibles themselves, the result is the same. Our home facilities will be used for other production as well as providing backup capability. A portion of the research which was the subject of the investigation had been paid for by SCO. As a result of these inconsistencies and the FDA's own evaluation of petitioner's studies relative to Aldactone, the FDA convened a Cardio-Renal Advisory Committee to determine whether any action should be taken because of the information contained in the 78-week rat study relative to the toxicity of Aldactone. All those management personnel resided in Puerto Rico and had their principal place of work in Puerto Rico. Eight of those products and compounds were SCO's products. Since such a strategy would be unavailable to an uncontrolled taxpayer, the Commissioner did not abuse his discretion in reallocating the deduction back to the subsidiary, the true donor under the standard of an uncontrolled taxpayer. G. D. Searle & Co., Limited (High Wycombe, EN), Click for automatic bibliography The section of the new bill provides that the Commissioner may, in the case of two or more trades or businesses owned or controlled by the same interests, apportion, allocate, or distribute the income or deductions between or among them, as may be necessary in order to prevent evasion (by the shifting of profits, the making of fictitious sales, and other methods frequently adopted for the purpose of "milking"), and in order clearly to reflect their true tax liability. The two drugs were the first orally active drugs of that type, and are known as anticholinergics. 1970), revg. Materials failing those tests were rejected and returned to chemical manufacturing for reworking, recovery of active ingredients, or destruction. In 1972, the FDA learned of an independent investigator's report which indicated that Flagyl was a carcinogen in mice. In addition, selected retention samples were forwarded to the employees of GDS's quality control department in Skokie. The chemical manufacturing process began with the issuance, by SCO's manager of chemical manufacturing, of a production ticket for the particular lot of chemical to be manufactured. Petitioner's sales representatives identified themselves to physicians as "Searle sales representatives" or simply, "Searle men.". 1971), affg. No such inference can be drawn from that case and the opposite is apparent from its language. As we have noted, a bona fide business purpose for a transaction is not, in and of itself, a complete defense to a reallocation under section 482. Between 1971 and 1974, SCO registered in its own name numerous copyrights relating to its products. 31 B.T.A. The Mexican Government imposes prohibitively high export duties on the export of unrefined barbasco root in order to stimulate employment in Mexico. During 1970 through 1975, the worldwide pharmaceutical research of petitioner and its consolidated subsidiaries was directed towards seven general therapeutic areas. Subsequent to 1962, IND's were required to be filed prior to seeking NDA's and as a prerequisite to obtaining authorization to modify labeling information relative to products already marketed to establish new therapeutic uses for said product. Petitioner's management described the basis for its decision to establish an operation in Puerto Rico in its 1969 Annual Report to Shareholders in the following terms: The move to Puerto Rico was prompted by shortages of manpower and production capacity in Skokie. Such media contain many independent factors which are found by experimentation to promote the maximum growth of the cultured cells. 1960); Central Cuba Sugar Co. v. Commissioner, 198 F.2d 214 (2d Cir. Division of Scientific Affairs, G. D. Searle and Company Limited, Lane End Road, High Wycombe, Buckinghamshire, HP12 4HL, EnglandSearch for … As a result of uncertainty as to whether the FDA would approve Depepsen for use in duodenal ulcers and because the cost of manufacturing Depepsen would be high, petitioner decided, in the early 1970's, not to pursue further the development of Depepsen. Please check your email for instructions on resetting your password. tit. When finished goods were released for shipment, all completed batch records and records of quality control tests relating to that lot were filed at SCO's facility in Caguas, Puerto Rico, together with the retention samples of the product. In certain situations, an SCO purchase requisition could be prepared by petitioner's employees at Skokie, but only upon the telephone direction of a responsible person at SCO. The resulting solutions were filtered, washed, distilled or crystallized, dried, recrystallized, and milled. PESA later became part of Searle de Mexico. refs. The amount of the administrative fee paid by SCO to petitioner with respect to 1974 and 1975 was $3,304,000 and $3,989,000, respectively. Among the types of administrative services performed by petitioner on behalf of SCO were (i) purchasing assistance, (ii) materials handling and receiving assistance, (iii) engineering assistance, (iv) equipment maintenance assistance, (v) accounting assistance including computerized accounting, (vi) legal assistance including product liability litigation, (vii) treasury assistance including advice and assistance relating to portfolio investments, and (viii) personnel development and employee benefits assistance. It is respondent's position that if petitioner and SCO had dealt at arm's length, SCO's income in connection with the products it manufactured would have been limited to a profit on its manufacturing activities. After the transfers, it received no income from the sale of the products themselves, but rather received only compensation for services it provided to SCO. After synthesis, the new compound is tested in animals for pharmacologic activity and toxicity.
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