Many companies think of litigation as simply a cost of doing business. Does this mean that litigation fees can be deducted as a business expense? The IRS and Maylan Inc. recently went to court over Mylan’s 2014-2021 filing wherein they deducted patent litigation fees. 1 The mixed outcome is one with implications for businesses and their legal teams, particularly for patent litigation.
The specific area in which disagreements arose between the IRS and Mylan Inc., was the preparation of Paragraph-IV Notice Letters. These letters are a necessary part of any new Abbreviated New Drug Application.2 The purpose of this letter is to begin the FDA approval process and confirm that any patents in question are not infringed by the generic version of the product.
The IRS raised issues with the legal expenses being claimed for patent infringement litigation. These fees represented $130 million in deductions, all of which were being disputed by the IRS.3 The court found that the fees required to simply meet statutory requirements related to Paragraph-IV are not deductible. This is because Mylan was exposed to these expenses as a result of the need for regulatory approval. This approval generated benefits for the taxpayer, which must be capitalized.4
The decision that is perhaps most interesting is that the defense of lawsuits aimed at challenging patent validity were in fact tax deductible. Being that Mylan’s intention was to protect the branded version of drugs that it wanted to produce in generic form, the associated costs can be legally deemed as necessary business expenses. The Tax Court stated that the reason for this decision is that Mylan’s defense against litigation is not a required step within the process of FDA approval.5
While there is still a chance that the IRS appeals this case, the current implications are clear: Any companies that find themselves in the midst of regular IP litigation may be able to deduct legal fees associated with patent infringement lawsuits from their tax filings. Many view this as a taxpayer-favorable ruling, assuming it isn’t overturned on appeal.
Meanwhile, generic drug manufacturers, and in fact many companies outlaying significant funds for patent litigation, and their legal teams should strongly consider how this ruling impacts previous tax years. There is the potential to claim a refund, however consent from the IRS will be required. Considering the fiscal benefit that this ruling presents for companies around the world, businesses may want to audit their legal expenses in order to pinpoint potential deductions in the face of this new ruling.
This ruling may also open the door to claiming other types of litigation fees as business expenses . . . perhaps even fees for expert witness work? Stay tuned as these questions will likely be playing out in court in the coming years.
Our accounting expert witnesses, speakers, and consultants include former employees of Wachovia, Fireman Fund Insurance, and the Internal Revenue Service, as well as professors from many major universities. Our accounting experts have experience in areas ranging from forensic accounting, agricultural economics, and audits to fraud, IT security, tax accounting methods, and more.
Litigation is the process of legal action between two opposing parties who are working to enforce or defend a legal right. In most cases, the parties settle out of court by negotiating an agreement. Some cases go to court, where a judge or jury hear both side’s argument and determine how the case is settled.
A tax is money paid to the government not for transaction-specific goods and services. The five most well-known taxes are income, excise, sales, property, and estate taxes. The income tax is assessed annually by the government on an individual’s income. A duty put on manufactured goods when they are manufactured is an excise tax, while a sales tax is a duty put on manufactured goods at the time of sale. Property taxes are paid annually by property owners based on the value of their owned property. Estate taxes are put on the net value of a deceased person’s estate before it is distributed to their heirs.