Merck may owe taxman $2 billion

NEW YORK (Reuters) – Merck & Co Inc. said Friday the Internal Revenue Service could make it pay more than $2 billion in taxes and penalties because of the agency’s decision to disallow deductions the drug maker has claimed since 1993 from a partnership.

Investors initially appear unconcerned by the tax issue as Merck (MRK: down $0.14 to $47.97, Research, Estimates) shares drifted higher on the New York Stock Exchange.

Merck, in a filing with U.S. regulators, said it would vigorously fight the IRS ruling, but warned that “an unfavorable resolution could have a material effect on the company’s results of operations or cash flows” when the adjustment is recorded or the tax is due or paid.

“Merck stands behind the integrity of all its tax reporting practices and believes the partnership transaction is in full compliance with IRS rules and regulations,” Merck spokeswoman Anita Larsen told Reuters.

The partnership in question was formed to help obtain financing for the company’s $6 billion 1993 acquisition of the pharmacy benefits manager Medco Health Solutions Inc., known then as Medco Containment Services Inc., Larsen said. She declined to discuss details of how the partnership operated.

Merck spun off Medco in August 2003.

Merck said the IRS had completed its examination of the company’s tax returns for the years 1993 to 1996 and last month informed Merck it was proposing to disallow certain royalty and other expenses claimed as deductions pertaining to the partnership transaction entered into in 1993.

The Whitehouse Station, New Jersey-based company said in the quarterly filing with the Securities and Exchange Commission that it expects to receive a similar notice on its taxes for the years 1997 to 1999 shortly.

If the IRS prevails, Merck said income tax due for 1993-1999 would increase by about $970 million plus interest to date of about $490 million.

Additionally, the company said, similar claims from IRS audits on the years beyond 1999 could result in $540 million in additional taxes due plus interest to date of about $40 million.

The drug maker said it intends to aggressively contest the matter through all applicable IRS and judicial procedures.

“While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on the company’s financial position,” it said.