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Merck Expects To Pay IRS $2.3 Billion

by Leroy Baker,, New York

16 February 2007

Pharmaceutical major Merck announced that it has entered into a definitive agreement to settle its previously-disclosed tax disputes with the Internal Revenue Service (IRS).

According to Merck, the settlement resolves all of the issues that were in dispute and brings to a close the IRS's examination of the company for the period 1993-2001.

Under the agreement, the final net cash cost to Merck is expected to be approximately $2.3 billion which covers federal tax, net interest after federal tax deductions and penalties. The impact for years subsequent to 2001 of the previously disclosed tax disputes is included in the settlement, although those years remain open.

The company revealed in a statement that given the theoretical amount in disagreement, it was in the its best interests to reach this settlement "so as to remove the uncertainty and cost of potential litigation". Merck also acknowledged that the agreement was reached "as a result of the cooperation and reasonableness of the IRS and the company".

In September 2006, the US Internal Revenue Service issued a number of deficiency notices following audits of the company's tax returns from 1993 to 1996 and 1996 through 2001. One notice proposed an adjustment with respect to a partnership transaction entered into in 1993. The notice also disallowed certain royalty and other deductions on tax returns from 1994 through 2001.

The IRS also issued a notice with respect to a 1995 minority interest equity financing, and disputed a capital loss which would increase the tax due for 1995 to 1998. In addition, the IRS proposed the recharacterisation of a loan from a foreign subsidiary to the company as a taxable distribution. Another minority interest equity financing in 2000 was also disputed by the agency.

Merck said that it has previously reserved for these items, and that the settlement is not expected to have any material impact on the company's annual earnings for 2007.

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