IRS Capitalized Legal Fees Incurred By Pharmaceutical Company

In a recently released Field Attorney Advice, the Internal Revenue Service (IRS) Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain Food and Drug Administration approval for marketing and selling generic drugs and to prevent the marketing and sale of a competing generic drug. The IRS Office of Chief Counsel also concluded that it could impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by statute of limitations.

In a recently published Internal Revenue Service (IRS) Field Attorney Advice (FAA 20131001F, March 8, 2013), the IRS Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain U.S. Food and Drug Administration (FDA) approval for marketing and selling new generic drugs and to prevent the marketing and sale of a competing generic drug. The IRS also concluded that the Commissioner could change the taxpayer's method of accounting for the legal fees and impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by the statute of limitations.

NDA and ANDA

In order to market or sell a new drug in the United States, a New Drug Application (NDA) must be submitted to and approved by the FDA. An NDA consists of clinical and nonclinical data on the drug's safety and effectiveness, as well as a full description of the methods, facilities and quality controls employed during manufacturing and packaging. An NDA also must disclose all the patents that cover the drug.

To market or sell a generic version of an existing FDA-approved drug, the maker of the generic drug must submit an Abbreviated New Drug Application (ANDA) for FDA approval. An ANDA generally is not required to include preclinical and clinical trial data to establish safety and effectiveness. Instead, an ANDA applicant must show that its generic drug is bioequivalent to an existing drug. In addition, an ANDA applicant is required to provide certification that the ANDA will not infringe on the patent rights of a third party. Specifically, if an applicant seeks approval prior to the expiration of patents listed by the NDA holder, then aparagraph IV certification must be submitted by the applicant to certify that it believes its product or the use of its product does not infringe on the third party's patents, or that such patents are not valid or...