Economic Substance Doctrine: Still Giving Perrigo Heartburn?

Abstract

In this article, we evaluate the strength of the commissioner’s economic substance arguments in the pending Perrigo case, which was heard before the U.S. District Court for the Western District of Michigan in a nine-day bench trial that concluded on June 7, 2021. Although there are multiple issues at play in Perrigo, here we focus primarily on the economic substance arguments advanced by the government and the taxpayer. In addition to defending its transactions as having economic substance, the taxpayer takes the position that the application of the economic substance and sham doctrines is improper in the circumstances, and the court should focus solely on remedying any alleged deficiencies through section 482 transfer pricing mechanisms designed to deal with disputes of this nature. Although it remains to be seen whether the court will bypass what would otherwise be a significant issue in cases like this one, any discussion of the issue by the court will necessitate some commentary on the nature of the transactions and whether they meet some de minimis threshold to overcome the government’s sham doctrine and economic substance attacks.

Based on only the information available leading up to trial and without regard to the sufficiency of evidence, Blue J’s algorithm predicts with 68 percent confidence that a court will find that the transactions in question will survive an economic substance challenge. This prediction does not, however, speak to the extent to which the taxpayer’s income may be subject to recharacterization under section 482 transfer pricing rules. The economic substance issue could go either way, especially since the merits of the case turn on disputed material findings of fact and conclusions of law that are unavailable.

Keywords: economic substance doctrine

JEL Classification: H25