Paul L. Caron
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Monday, February 15, 2021

Drug Companies Seek Billion-Dollar Tax Deductions From Opioid Settlement

Washington Post, Drug Companies Seek Billion-Dollar Tax Deductions From Opioid Settlement:

Four companies that agreed to pay a combined $26 billion to settle claims about their roles in the opioid crisis plan to deduct some of those costs from their taxes and recoup around $1 billion apiece.

WaPo

In recent months, as details of the blockbuster settlement were still being worked out, pharmaceutical giant Johnson & Johnson and the “big three” drug distributors — McKesson, AmerisourceBergen and Cardinal Health — all updated their financial projections to include large tax benefits stemming from the expected deal, a Washington Post analysis of regulatory filings found.

The Dublin, Ohio-based Cardinal Health said earlier this month it planned to collect a $974 million cash refund because it claimed its opioid-related legal costs as a “net operating loss carryback” — a tax provision Congress included in last year’s coronavirus bailout package as a way to help companies struggling during the pandemic.

The deductions may deepen public anger toward companies that prosecutors say played key roles in a destructive public health crisis that kills tens of thousands of Americans every year. ...

U.S. tax laws generally restrict companies from deducting the cost of legal settlements from their taxes, with one major exception: damages paid to victims as restitution for misdeeds. Still, Congress has placed stricter limits on such deductions in recent years, and some tax experts say the Internal Revenue Service could challenge the companies’ attempts to deduct opioid settlement costs. ...

Francine J. Lipman, a tax professor at the University of Nevada at Las Vegas, said Cardinal Health appears to be “getting a bit of a windfall from laws that Congress intended to help companies that are suffering due to a pandemic.”

The “carryback” tax break permits any company that lost money in 2018, 2019 or 2020 to apply those losses to previous, more profitable years. Some form of this provision has been permitted by the U.S. tax code for over a century to help businesses that face ups and downs to even out their taxes.

The Cares Act raised the limit on the amount of losses companies can use to offset taxes and permitted them to apply those losses to earlier periods. Because the corporate tax rate was higher before 2018, companies with recent losses can increase tax refunds they received before that year by up to 67 percent. ...

A group of 120 Democrats in Congress have pushed for restricting the ability of businesses to carry back losses to years with a higher tax rate, arguing that provision has been abused by companies that have seen little or no negative impact from the coronavirus. ...

UNLV’s Lipman said Cardinal’s decision to apply for a tax refund before any legal settlement has been finalized could face scrutiny from the IRS. Deductions must be made against business expenses that are shown to have “economic effect,” she said, which may preclude deductions against future, unpaid legal settlements.

https://taxprof.typepad.com/taxprof_blog/2021/02/drug-companies-seek-billion-dollar-tax-deductions-from-opioid-settlement.html

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