Court Rules Against Wyeth Tax Shelter

A U.S. appeals court Friday struck another blow against tax shelters devised by Merrill Lynch & Co., overturning a ruling giving drug maker Wyeth a $226-million refund.

The U.S. Court of Appeals for the District of Columbia said the foreign partnership formed by Wyeth on Merrill’s advice had no legitimate business purpose beyond exploiting a tax loophole.

The three-judge appellate panel reversed a U.S. District Court ruling from October 2001 that ordered the Internal Revenue Service to refund the $226 million plus interest.

The judges said the Wyeth tax shelter was almost identical to one Merrill had proposed to AlliedSignal Inc. that the appeals court also had rejected. Merrill gets fees for work as financial advisor to companies.

Wyeth, then American Home Products, in 1990 sold a subsidiary for a capital gain of more than $605 million.

Merrill approached the company with a plan that would allow AHP to claim paper tax losses of a comparable amount, while generating only about $8 million in actual losses.

But Judge David Sentelle, writing for the court, said the test for allowing this type of arrangement was the presence of a non-tax purpose.

“Without a finding on the business need for the partnerships from AHP’s standpoint in this transaction, the judgment under review cannot stand,” Sentelle wrote.

Madison, N.J.-based Wyeth said in a Dec. 23 regulatory filing that it had not recognized the $226-million refund.

Shares of Wyeth fell 75 cents to $38.25 on the New York Stock Exchange.