Opinion
16017-21 15631-22
07-31-2024
AMGEN INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves, Judge
At issue in these consolidated cases is whether payments received by Amgen Inc. as repayments for healthcare reform fees (HCR Fees) imposed by section 9008 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 9008, 124 Stat. 119, 859-62 (2010) (ACA) must be included in gross income. Currently before the Court are petitioner's (1) Motion for Partial Summary Judgment, related to the income tax deficiencies attributable to the HCR Fee adjustments (Motion for Partial Summary Judgment on HCR Fees), filed November 10, 2023, and (2) Motion for Partial Summary Judgment on HCR Fees Penalties, filed November 10, 2023. For the reasons set forth below, we will deny both motions.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding petitioner's motions and not as findings of fact in these cases. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). As discussed further below, there is uncertainty as to a number of material facts. We construe these ambiguities in the light most favorable to respondent to decide whether summary judgment is appropriate. See Bond v. Commissioner, 100 T.C. 32, 36 (1993).
Amgen Inc., a Delaware corporation, is the parent corporation of a multinational group of consolidated corporations and affiliated companies (collectively petitioner), specializing in biologic therapeutics. The transactions at issue in these motions involve the following related companies: Immunex Corporation (Immunex), Amgen Technology, Limited (ATL), Amgen Manufacturing Limited (AML), Amgen Technology (Ireland) Unlimited Company (ATI), and Amgen USA, Inc (Amgen USA). Immunex, a Washington Corporation, is a wholly owned subsidiary of Amgen Inc. ATL, a Bermuda corporation, is a wholly owned subsidiary of Amgen Inc. ATL directly owns 100% of AML, a Bermuda corporation. ATL also directly owns 100% of ATI, an Irish unlimited company. Finally, Amgen USA, a Delaware corporation, is a wholly owned subsidiary of Amgen Inc.
I. Commercial Exploitation Agreements
A. Intragroup Agreements
Amgen Inc., Immunex, AML, and ATI entered into a series of licensing agreements. The earliest relevant agreement, the existence of which is disputed, is an alleged oral contract from 2002 between Amgen Inc., Immunex, and AML. The agreement allegedly provided that AML would reimburse Amgen Inc. and Immunex for expenses related to licensed drugs. Petitioner did not provide any additional facts related to this alleged oral contract. In 2012, Amgen Inc. and Immunex sent AML letters detailing this alleged oral contract and specifying that the reimbursement obligation would extend to the HCR Fees.
These letters are attached to the parties' First Stipulation of Facts as Exhibits 130-J and 131-J. Respondent objects to these letters on the grounds of hearsay and the best evidence rule. Because we deny petitioner's motions, we will not consider respondent's objections at this time.
As relevant to these motions, Amgen Inc. and AML executed four agreements related to the commercial exploitation of certain pharmaceutical drugs. The commercial exploitation agreements were executed in 2010 (2010 Amgen-AML Agreement), 2012 (2012 Amgen-AML Agreement), 2014 (2014 Amgen-AML Agreement), and 2015 (Amgen-AML Repatha Agreement). In addition to these agreements, Immunex and AML entered into an additional two commercial exploitation agreements in 2009 (2009 Immunex-AML Agreement) and 2015 (2015 Immunex-AML Agreement. The final relevant intergroup agreement was between Immunex and ATI and was executed in 2014 (2014 Immunex-ATI Agreement).
Three clauses in each of these contracts are relevant to disposing of these motions. The first relevant clauses are the payment terms that AML and ATI agreed to pay in consideration for the licenses. All of the agreements between Amgen Inc. and AML and the 2015 Immunex-AML Agreement provided that AML would pay "royalties and/or other consideration" in exchange for the licenses. The 2009 Immunex-AML Agreement and 2014 Immunex-ATI Agreement provided that AML and ATI would pay "royalties" in exchange for the licenses.
The next relevant clauses are the reimbursement provisions. The 2010 Amgen-AML Agreement, the 2012 Amgen-AML Agreement, and the 2009 Immunex-AML Agreement did not expressly require AML to reimburse Amgen Inc. and Immunex for expenses related to the licensed drugs. In contrast, the 2014 Amgen-AML Agreement, the Amgen-AML Repatha Agreement, and the 2015 Immunex-AML Agreement required AML to reimburse Amgen Inc. and Immunex for expenses related to the licensed drugs as accounted for under U.S. GAAP that Amgen Inc. and Immunex incurred on behalf of AML. The 2014 Immunex-ATI Agreement contained an identical reimbursement requirement.
The final relevant clause in these contracts is the merger clause. All the contracts contained a materially identical merger clause: "This Agreement together with the Schedules and Exhibits attached hereto constitute the entire agreement between the parties and supersedes all prior agreements, understandings and communications between the Parties with respect to the subject matter hereof from and after the Effective Date."
B. Pfizer Contract
On December 16, 2001, Amgen Inc., Immunex, and American Home Products Corporation, a subsidiary of third-party Pfizer Inc., (Pfizer) executed the Amended and Restated Promotion Agreement (Pfizer Co-Promotion Agreement). Under the Pfizer Co-Promotion Agreement, the parties agreed to market and sell Enbrel in the United States and Canada. The parties established an Enbrel Management Committee, comprised of representatives from Immunex and Pfizer.
Immunex and Pfizer agreed to share equally on marketing expenses approved by the Enbrel Management Committee. The agreement defined marketing expenses as "any and all commercial expenses relating to Enbrel on a country-by-country basis in the Territory other than Sales Force Costs." The definition lists several examples of marketing expenses but does not expressly mention HCR Fees. In consideration of Pfizer's performance, Immunex agreed to pay Pfizer a sliding percentage of the gross profits from the sale of Enbrel. Board minutes from December 2010 demonstrate that the Enbrel Management Committee discussed the possible inclusion of the HCR Fees in the annual budget.
II. HCR Fee Payments and Repayments
During the years at issue, AML and ATI sold the licensed drugs to Amgen USA to distribute. Amgen USA sold the drugs to third parties, including United States Government programs. Between 2010 and 2013, Pfizer and Amgen Inc. appear to have sold Enbrel in the United States to third parties, including United States Government programs. In Food and Drug Administration records, Immunex is listed as the manufacturer or importer of Enbrel, and Amgen Inc. is listed as the manufacturer or importer of all remaining licensed drugs except for Xgeva. The parties did not provide information as to which entity is listed as the manufacturer or importer of Xgeva.
For 2011 through 2015, Amgen Inc. filed IRS Form 8947, Report of Branded Prescription Drug Information. These forms reported information on the consolidated group's sale of branded prescription drugs. On each form, Amgen Inc. listed "Amgen Inc. and Subsidiaries" as the entity filing the form. On the 2011 through 2014 forms, Amgen Inc. listed the members of its controlled group as itself and Immunex. On the 2015 form, Amgen Inc. listed the members of its controlled group as itself, Immunex, and Onyx Pharmaceuticals, Inc. Amgen Inc. reported the sales of the licensed drugs on Forms 8947. For each year, the IRS issued Letter 4658, Final Fee Notice, setting forth the amount of HCR Fees due for each year. Amgen Inc. paid the fees each year.
AML repaid Amgen Inc. between 2011 and 2015, and ATI repaid Amgen Inc. in 2014 and 2015. Neither party separately stated the amount of the repayments per entity nor how such amounts were calculated. The total combined repayments are as follows:
Year
Repayments
2011
$58,175,870
2012
$16,437,259
2013
$62,515,988
2014
$100,883,242
2015
$82,511,388
Pfizer repaid Amgen Inc. in the following amounts:
Year
Repayments
2011
$14,801,745
2012
$11,698,919
2013
$14.654,860
2014
$16,086,150
Amgen Inc. did not include these repayments in its income for the years at issue.
III. Audits and Current Cases
Petitioner timely filed income tax returns for 2010 through 2015 for the consolidated group. The IRS selected the 2010 through 2012 tax returns for examination. The IRS determined income tax deficiencies for these years, in part related to its determination that the HCR Fee repayments should be included in Amgen Inc.'s income. On March 9, 2017, respondent issued a notice of proposed adjustment (NOPA) related to the HCR Fees and petitioner filed an administrative protest related to this adjustment. During the 2010 through 2012 audit, the IRS also selected petitioner's 2013 through 2015 tax returns for examination. Related to the HCR Fee adjustments, the IRS determined income tax deficiencies and accuracy-related penalties for substantial understatements of income tax, and in the alternative, accuracy-related penalties for negligence or disregard of rules or regulations.
On April 27, 2021, the IRS issued a notice of deficiency to petitioner related to tax years 2010 through 2012. On April 15, 2022, the IRS issued a notice of deficiency to petitioner for tax years 2013 through 2015. Amgen Inc. timely petitioned this Court for review regarding both notices of deficiency, and we granted a joint motion to consolidate the two cases. On November 10, 2023, petitioner filed a (1) Motion for Partial Summary Judgment on HCR Fees and (2) Motion for Partial Summary Judgment on HCR Fees Penalties. On January 3, 2024, respondent filed oppositions to both motions. On February 22, 2024, petitioner filed replies to both oppositions.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(a)(2); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). Furthermore, we construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. See Bond, 100 T.C. at 36. The nonmoving party may not rest upon the mere allegations or denials of his pleading but must set forth specific facts showing that there is a genuine dispute for trial. See Rule 121(d); Bond, 100 T.C. at 36. We conclude that there are material facts in dispute related to both motions, and therefore, will deny both motions.
II. HCR Fees
To determine whether the repayments may be excluded from gross income, we must first explain the HCR Fees statutory scheme. The ACA imposes an annual fee on covered entities in the business of manufacturing or importing branded prescription drugs that have receipts from branded prescription drug sales. ACA § 9008, as amended by section 1404 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 1404, 124 Stat. 1029, 1064 (2010) (HCERA).
A branded prescription drug sale is the sale of a branded prescription drug to specified government programs or under the coverage of these programs. ACA § 9008(e)(1). The HCR Fees for these sales are imposed on covered entities. A covered entity is a manufacturer or importer with gross receipts from branded prescription drug sales. Id. subsec. (d)(1). A covered entity may be a single person or a controlled group. Id. para. (2). A controlled group is treated as a single covered entity if the entities are treated as a single employer under section 52(a) or (b), without regard to the exclusion of foreign corporations taxed under section 881, or section 414(m) or (o). Id. subpara. (A), (B). To identify the manufacturer or importer of a drug, the Department of the Treasury (Treasury Department) relies on the Labeler Code of the National Drug Code which is assigned by the Food and Drug Administration. Treas. Reg. § 51.2(i); Temp. Treas. Reg. § 51.2(i) (2011). For a controlled group, the group is attributed all drugs that the Labeler Code identifies as owned by a member of the group. Treas. Reg. § 51.5(b); Temp. Treas. Reg. § 51.5(b) (2011).
Each year covered entities are required to file Form 8947 to report branded prescription drug sales. Treas. Reg. § 51.3(a); Temp. Treas. Reg. § 51.3T(a) (2011). The Treasury Department calculates the amount of HCR Fees due by each covered entity annually. ACA § 9008(a)(1). The total amount of HCR Fees due annually is apportioned to each covered entity as a function of that covered entity's branded prescription drug sales from two years prior to the fee year. Id.; HCERA § 1404(a)(2). The HCR Fees are collected in the same manner as an excise tax for purposes of Subtitle F. ACA § 9008(f)(1). For purposes of a deduction, the HCR Fees are treated as a nondeductible excise tax under § 275(a)(6). Id. para. (2).
A special reporting and collection scheme applies to controlled groups treated as a single covered entity. For controlled groups, the common parent entity files Form 8947 and pays the HCR Fee to the IRS. Treas. Reg. § 51.2(f)(1), (2); Temp. Treas. Reg. § 51.2T(f)(1), (2) (2011). All entities in the group are jointly and severally liable for the HCR Fees. HCERA § 1404(a)(3). Temporary treasury regulations that were effective before July 28, 2014, provided that all covered entities within a controlled group were jointly and severally liable for the HCR Fees. Temp. Treas. Reg. § 51.8T(d) (2011). The final regulation, which applies on or after July 28, 2014, provided that all members of the controlled group were jointly and severally liable for the HCR Fees. Treas. Reg. § 51.8(d).
The parties do not dispute that Amgen Inc. and Immunex are covered entities. Nor do they dispute that AML and ATI are members of the controlled group. Finally, there is no dispute that Amgen Inc. is the designated entity and complied with its filing and payment obligations on behalf of the controlled group. The heart of the parties' dispute relates to whether the burden of the HCR Fees should fall on Amgen Inc. or the reimbursing parties.
III. Motion for Partial Summary Judgment on HCR Fees
A. Parties' Arguments
We have not previously considered whether repayments to a designated entity for HCR Fees by a member of the controlled group should be included in the gross income of the designated entity. The parties argue for different tests to determine whether the repayment is a reimbursement.
Respondent argues for a broad rule that HCR Fees are taxes imposed on the designated entity. Therefore, any repayment would be the payment of the designated entity's tax liability, which he argues is gross income under Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929). Even assuming the HCR Fees are taxes, respondent's reliance on Old Colony Trust Co. is too broad. In Old Colony Trust Co., the Supreme Court considered whether an employer's payment of an employee's income tax liability constituted additional taxable income to the employee. Id. The Court determined that the payment was income for the employee because "[t]he discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." Id. The Supreme Court's holding rested on the conclusion that the taxes were the obligation of the employee not the mere fact that the expense at issue was a tax. Therefore, while we must determine to whom the expense belongs, we reject respondent's argument for a broad rule.
In contrast, petitioner appears to structure its argument around a Chief Counsel Advisory Opinion that sets forth a five-part test to determine whether the repayment of HCR Fees is includable in the designated entity's gross income: (1) whether the parties intended that the reimbursing party would bear the economic burden of the fee, (2) whether the designated entity had an unconditional obligation to pay the amount received to the government, (3) whether the designated entity had any profits, gains, or benefits as a result of the amount received and remitted, (4) whether the designated entity claimed the repayment as its own, and (5) whether the amount received is attributable to services the designated entity performed. I.R.S. Chief Couns. Advisory 202132009 (Aug. 13, 2021). Petitioner also cites a handful of cases related to excluding reimbursements of expenses from income.
Section 6110(k)(3) provides that Chief Counsel Advisory Opinions may not be used or cited as precedent and, therefore, may not be relied upon by the general public when planning their affairs. Therefore, the Chief Counsel Advisory opinion is not binding on this Court nor respondent. See Sage v. Commissioner, 154 T.C. 270, 286 n.19. Instead, we will look to our established precedent as a guide for resolving this issue.
B. Reimbursements
Gross income is defined as "all income from whatever source derived." § 61(a). Generally, the payment of a taxpayer's expense by another is included in that taxpayer's gross income because it relieves the taxpayer of the obligation. See Old Colony Trust Co., 279 U.S. at 729; see also Young v. Commissioner, 113 T.C. 152, 157 (1999) (holding that a taxpayer realized gross income when the taxpayer's obligation to pay attorney's fees was discharged directly out of certain sale proceeds), aff'd, 240 F.3d 369 (4th Cir. 2001); Huff v. Commissioner, 80 T.C. 804, 814 (1983) (holding that payment by a third party of a taxpayer's civil liabilities constituted gross income to the taxpayer). All of these cases are premised on the fact that the expenses were that of the taxpayer.
However, a taxpayer does not generally have income when it is reimbursed for an expense it paid on behalf of another. See Gray v. Commissioner, 10 T.C. 590, 596- 97 (1948) (holding that a taxpayer could exclude from gross income reimbursements for expenses related to preliminary work to secure government contracts for another); Rivera v. Commissioner, T.C. Memo. 2020-7, at *12 (holding that a taxpayer did not have gross income when he was reimbursed for a rebooking penalty paid on behalf of his employer). A corollary to this principle is that where a taxpayer makes an expenditure under an agreement that the taxpayer will be reimbursed for such expenditure, the expenditure is in the nature of a loan or advance and is not deductible as a business expense. Flower v. Commissioner, 61 T.C. 140, 152 (1973) (holding that a taxpayer could not deduct sales expenses when he had a contractual right to reimbursement upon approval), aff'd, 505 F.2d 1302 (5th Cir. 1974); Canelo v. Commissioner, 53 T.C. 217, 224-25 (1969) (holding that a lawyer could not deduct litigation expenses incurred on behalf of a client when the parties signed a reimbursement agreement), affd, 447 F.2d 484 (9th Cir. 1971); Glendinning, McLeish & Co. v. Commissioner, 24 B.T.A. 518, 523-24 (1931) (determining that a taxpayer could not deduct expenses paid on behalf of a company when the relevant contract contained a reimbursement clause even though the company did not make such reimbursement.), aff'd, 61 F.2d 950 (2d Cir. 1932). We have previously treated these two principles as parities, and therefore will draw our analysis from both lines of case law. See Boston Elevated Ry. Co v. Commissioner, 37 B.T.A. 494, 508 (1938); Fishman v. Commissioner, T.C. Memo. 2011-102, slip op. at 18-19. To determine whether a payment should be excluded from gross income as a reimbursement, we must determine (1) whether the expense is that of the reimbursing party and (2) whether the reimbursed party had a right to reimbursement.
Both parties rest their primary arguments for the allocation of the expense on whether the reimbursing parties are jointly and severally liable for the HCR Fees. Legal liability alone is not sufficient to determine to whom an expense belongs. See Betson v. Commissioner, 802 F.2d 365, 369-70 (9th Cir. 1986) (holding that personal liability "did not itself establish that the expenditures were related to a trade or business"), aff'g in part, rev'g in part T.C. Memo. 1984-264; Eskimo Pie Corp. v. Commissioner, 4 T.C. 669, 675 (1945) (holding that a legal obligation to pay a debt did not automatically result in the payment being attributable to the payor when the debt was that of another party). Instead, we focus on the relationship of the expense to each party.
We are often called upon to resolve the question of which party an expense belongs to when determining whether an expense belongs to an owner or a business entity. See, e.g., Square S Co. v. Commissioner, 121 T.C. 168, 200 (2003). In these cases, the court determines whether the expense is directly connected to or is the proximate result of the business. See Deputy v. du Pont, 308 U.S. 488, 494 (1940) (citing Kornhauser v. United States, 276 U.S. 145, 153 (1928)) (allocating the expenses to a company when "they proximately result not from the taxpayer's business but from the business of the . . . Company."); see also Magruder v. Commissioner, T.C. Memo. 1989-169 (determining that expenses were that of a partnership rather than a partner because the partnership was the party to the relevant service contracts and income from the contracts was partnership income). Mere benefit is not sufficient to allocate an expense. See Square S Co., 121 T.C. at 200.
These cases often discuss the exception to the general rule that a shareholder may not deduct an expense of a corporation. Lohrke v. Commissioner, 48 T.C. 679, 684 (1967). While this rule and the Lohrke exception are beyond the scope of this order, we look to these cases for the preliminary determination of whether the expense is one of the taxpayer or the corporation.
As for the right to reimbursement, the right may be evidenced by a formal agreement, Flowers, 61 T.C. at 152, or the parties' patterns and practices, Herrick v. Commissioner, 63 T.C. 562, 566-67 (1975). A right to reimbursement may also exist even if the right is subject to additional approval requirements. Flowers, 61 T.C. at 142, 147-48, 152 n.2 (holding that a taxpayer had an unequivocal right to reimbursement even though the contract provided that his employer had to approve each reimbursement request). The right to reimbursement need not resemble nor have the attributes of a traditional commercial loan. Id. at 153.
Petitioner failed to show as a matter of law that the HCR Fees are expenses of the reimbursing parties. Petitioner asserts that the HCR Fees are "indelibly tied to the revenue" that AML and ATI received. Other than this conclusory statement, petitioner failed to set forth any specific information related to the income AML and ATI generated in relation to the licensed drugs or how the reimbursement amount was calculated. Petitioner also failed to provide what effect, if any, the sale of the licensed drugs to Amgen USA had on the ability to connect AML's and ATI's income to the branded drug sales. The same factual footfalls prevent our ruling related to the allocation between Amgen Inc. and Pfizer. Petitioner fails to offer specific evidentiary support tying Pfizer's income to the HCR Fees. In fact, petitioner fails to set forth any drug sales resulting from the joint venture. Therefore, we are unable to determine as a matter of law whether at least a portion of the HCR Fees properly belonged to Pfizer.
The same uncertainty exists regarding Amgen Inc.'s right to reimbursement. First, we reject petitioner's argument that the HCR Fees statutory scheme required the parties to reimburse Amgen Inc. The statute does not require repayment from a subsidiary or unrelated party. Rather, the statute only specifies that the designated entity, in this case Amgen Inc., is responsible for paying the government.
Petitioner has further failed to show that any of the commercial exploitation agreements established a right to reimbursement. The 2010 Amgen-AML Agreement, the 2012 Amgen-AML Agreement, and the 2009 Immunex-AML Agreement do not contain an express reimbursement clause. The 2002 oral agreement regarding expense repayments may support the finding that Amgen Inc. had a right to reimbursement but petitioner failed to mention, much less analyze, this agreement or the effect of the merger clauses in the commercial exploitation agreements. Petitioner did not set forth sufficient detail as to the relevant patterns or practices that could also support a right to reimbursement.
The 2014 Amgen-AML Agreement, the Amgen-AML Repatha Agreement, the 2015 Immunex-AML Agreement, and the 2014 Immunex-ATI Agreement likewise do not unambiguously provide Amgen with a right to reimbursement. The agreements provide that Amgen Inc. and Immunex have a right to reimbursement for expenses directly related to the licensed drugs as determined under U.S. GAAP. However, petitioner fails to set forth that the HCR Fees are expenses directly related to the licensed drugs under U.S. GAAP. Again, petitioner failed to set forth relevant patterns or practices to support a right to reimbursement.
Finally, the Pfizer Co-Promotion Agreement does not clearly establish that Amgen Inc. had a right to reimbursement. The agreement states that Immunex and Pfizer agreed to share equally all commercial expenses related to Enbrel as approved by the Enbrel Management Committee. First, petitioners failed to set forth why the HCR Fees fall within the definition of commercial expenses. Even assuming the HCR Fees are commercial expenses, Amgen Inc. failed to show that it received the required approval. To support its claim that the HCR Fees were approved, Amgen Inc. attached board minutes from the Enbrel Management Committee, which state that the concept of the HCR Fees was discussed. The minutes do not state that the Enbrel Management Committee approved the sharing of the HCR Fees. Again, petitioner also failed to set forth specific patterns or practices to establish a right to repayment.
Therefore, we will deny petitioner's motion for partial summary judgment.
IV. Motion for Partial Summary Judgment on HCR Fees Penalties
Petitioner requests that we determine as a matter of law that Amgen Inc. is not liable for the substantial understatement of income tax penalties and the negligence or disregard of rules or regulation penalties. Because we are unable to determine whether these payments constitute income, we see no reason to consider whether petitioner is liable for the associated accuracy-related penalties. Therefore, we will deny petitioner's motion for partial summary judgment.
Upon due consideration, it is
ORDERED that petitioner's Motion for Partial Summary Judgment, filed November 10, 2023, is denied. It is further
ORDERED that petitioner's Motion for Partial Summary Judgment on HCR Fees Penalties, filed November 10, 2023, is denied.