Schering-Plough: IRS trains its business purpose and economic substance weaponry on deemed repatriation strategy

Many practitioners who advise multinational corporations mark Mar 5, 1997, as the beginning of a new era of case law on seemingly well-trodden issues of business purpose and economic substance. In one sense, the recent Schering-Plough Corp case, decided Aug 28, 2009, by the US District Court for the District of New Jersey, is a continuation of this well-entrenched trend line. The Schering-Plough case may be the first in this era where the IRS has brought the business purpose and economic substance ammunition to bear upon a transaction perceived to provide a repatriation of foreign subsidiary earnings without dividend or Code Sec. 956 consequences. Both the Tax Court and the Court of Appeals for the Third Circuit ruled in favor of the IRS in its disallowance of the taxpayer's claimed losses. In the case, Schering-Plough asserted that the swap-and-assign transactions were valid Interest rate swaps followed by a sale of the future income streams to Schering-Plough's foreign subsidiaries.