Merck Contesting Big Tax Bill

If it's ultimately forced to pay up, the company would have to hand over at least $5.6 billion.
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Merck

(MRK) - Get Report

is continuing to contest assessments by U.S. and Canadian authorities that could create a multibillion-dollar tax bill for the drugmaker.

The company is appealing rulings by the Internal Revenue Service and Canadian regulators, according to a document filed with the

Securities and Exchange Commission

late Tuesday.

Although some disputes had been made public, Merck's SEC filing also describes new disagreements. If it's ultimately forced to pay up, the company would have to hand over at least $5.6 billion.

Merck says it has provided "for the best estimate of the probable tax liability for these matters," adding that it believes resolving the disputes won't hurt its liquidity or financial position. However, unfavorable rulings "could have a material adverse effect" on the company's operations during the quarter that it makes a payment.

The company says the IRS has completed a review of its tax returns between 1993 and 1996 and that the agency will complete its examination of returns through 2001 by the end of the year.

One dispute focuses on a 1993 partnership and Merck's accounting for it through 2001. The IRS has disallowed certain expenses claimed as deductions, putting Merck at risk for an extra $60 million in taxes, $70 million in interest and $12 million in penalties just for 1993. For 1994 through 2001, Merck would have to pay an extra $1.15 billion in back taxes plus $700 million in interest.

"The IRS will likely make similar claims for years subsequent to 2001 with respect to this transaction," says Merck, predicting that it could be on the hook for another $300 million in back taxes and $30 million in interest.

Merck says the IRS has proposed assessing penalties for 1993 through 2001 and would probably seek penalties for the other years, as well.

Another dispute involves a 1995 financing deal in which Merck claims a capital loss. The IRS didn't allow the claim, which would add $330 million in back-taxes and $150 million in interest for 1995 through 1998. The IRS also says a loan from a foreign subsidiary to Merck should be considered a taxable distribution, thus raising the company's tax bill by $330 million, plus $210 million in interest.

Merck also says its tax returns in Canada for 1998 through 2004 are being reviewed. Last month, Canada's equivalent of the IRS said Merck owed $1.4 billion in back taxes plus interest of $360 million. Merck says Canada's claims have no merit and that it will object to the assessment through the agency's appeals process and the courts if necessary

Merck's stock closed Wednesday at $44.34, losing $1.56, or 3.4% on a day when all U.S. Big Pharma stocks were down.