Opinion
16017-21 15631-22
08-01-2023
AMGEN INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves Judge
On May 2, 2023, petitioner filed a Motion to Calendar requesting that the Court conduct a site visit and tour of a manufacturing facility in Puerto Rico, which is owned and operated by Amgen Manufacturing Limited (AML). AML is a Puerto Rico subsidiary of Amgen Inc. (Amgen). On June 2, 2023, respondent filed a Response to petitioner's Motion opposing the requested site visit.
Background
These transfer pricing cases under section 482 relate to petitioner's 2010 through 2015 tax years (years at issue). The transactions at issue primarily involve Amgen, AML, Immunex Corporation (Immunex), and Amgen USA, Inc. (AUSA). Both Immunex and AUSA are U.S. subsidiaries of Amgen.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
In 2002, Amgen (and later Immunex) started licensing certain intellectual property (Licensed IP) to AML. Under intercompany license agreements (License Agreements), Amgen and Immunex granted AML rights to use the Licensed IP to manufacture and sell certain biopharmaceutical products (Licensed Products). In return AML paid royalties to Amgen and Immunex.
The Licensed Products are a type of medicine known as a biologic. Manufacturing a biologic occurs in two steps. First, a manufacturer uses living cell cultures to produce a protein that achieves the desired pharmacological activity. This protein is referred to as the "Drug Substance" or "Bulk." Second, a manufacturer performs functions known as form, filling, and finishing to transform the Bulk into a final product ready for sale to a consumer.
AML manufactured the Bulk for some of the Licensed Products. For others, AML purchased Bulk manufactured by either Amgen or Immunex under Bulk purchase agreements (Bulk Agreements). AML then performed the form, fill, and finishing functions to arrive at finished Licensed Products for sale.
Since 2002, AML and AUSA have been parties to a distribution agreement covering the U.S. Under this agreement AUSA marketed and sold the Licensed Products in the U.S. on behalf of AML.
The primary dispute involves whether the following transactions were at arms-length:
• The price AML paid to Amgen for Bulk under the Bulk Agreements;
• The royalties AML paid to Amgen and Immunex for certain rights to the Licensed IP; and
• The price AUSA paid to AML to purchase the Licensed Products.
Petitioner applied the profit split method to allocate returns under § 482. The profit split method involves evaluating the relative economic contributions parties make to the success of a business activity and allocating returns based on such contributions. Treas. Reg. § 1.482-6(a) states:
The profit split method evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is arm's length by reference to the relative value of each controlled taxpayer's contribution to that combined operating profit or loss.Further, Treas. Reg. §1.482-6(b) states:
The relative value of each controlled taxpayer's contribution to the success of the relevant business activity must be determined in a manner that reflects the functions performed, risks assumed, and resources employed by each participant in the relevant business activity, consistent with the comparability provisions of § 1.482-1(d)(3).
Evaluating relative contributions involves analyzing and comparing the economic contributions of all parties to the transactions at issue. Petitioner's Motion asks the Court to schedule a single site visit (to AML's manufacturing facility) to provide the Court with "the foundational understanding in biologic manufacturing and AML's operations necessary to decide…the amount of profit allocable to AML…."
Discussion
Our Rules do not specifically address a party's request for the Court to conduct a site visit. See Rule 72 (a) (mentions only a party's request to enter another party's land or other property for discovery purposes). Even so, we have used discretion in considering a site visit request and have conducted such visits on prior occasions. See e.g., Smith v. Commissioner, T.C. Memo 1979-324. In using such discretion, courts have considered: (i) the importance of the evidence to be obtained; (ii) whether a view will substantially aid the Court in reaching a correct verdict; (iii) whether the Court could visualize the scene from other types of evidence apart from a site visit; and (iv) whether site visits would be practical or logistically difficult. See Marquez v. Casa Espana en Puerto Rico, 104 F.Supp.3d 186, 188 (D.P.R. 2015) (citing Rooney v. Sprague Energy Corp., 495 F.Supp.2d 135, 137 (D.Me. 2007). We find these factors helpful in determining whether to grant petitioner's Motion.
With respect to the importance of the information to be obtained, petitioner maintains that the most important issue in these cases is the amount of profit that should be allocated to AML during the years at issue. Petitioner further maintains that a site visit will be beneficial in providing the Court with a comprehensive understanding of AML's manufacturing process and the investments made in the facility. While we agree that this information is important, we do not believe that it is more important than information relating to other Amgen sites that also must be included in a profit split analysis.
A profit split analysis requires the relative evaluation of the economic activities of all the parties to an economic venture. Respondent maintains that an AML site visit (without visiting other relevant sites) would prejudicially emphasize the functions and resources employed by one controlled entity, while ignoring those of Amgen's U.S controlled entities. We agree. Without the benefit of visiting the other relevant sites, the Court could not put AML's operations in proper perspective in determining comparability with the other sites.
With respect to the second factor of whether a site visit will substantially aid the Court, petitioner points out the advantages of a tour compared to video or testimony:
[A] tour is a dynamic experience during which the Court will have the opportunity to look around, ask questions and focus on areas of interest in the manufacturing facilities. … During the tour, the Court will have a 360 degree view of the equipment and manufacturing processes that is superior to a two-dimensional video. [P Motion, p.27]
Assuming that an in-person view of the AML facilities would be superior to video or other presentation methods, we do not believe that it is a necessary replacement that will substantially aid the Court. This leads us to the third factor, where we consider whether the Court could visualize the scene from other types of evidence apart from the site visit. Any evidence presented at trial with respect to petitioner's non-AML locations will use standard presentation methods such as videos, photographs, expert reports, testimony, or documentary evidence. We have no doubt that evidence presented using these methods will provide us with information sufficient for us to make reasoned decisions with respect to the issues before us in these cases. Moreover, we do not find sufficient reason why evidence with respect to AML should be presented any differently than evidence with respect to other Amgen locations.
Finally, we recognize the possibility that the Court may benefit from visiting AML as well as several of Amgen's numerous facilities throughout the U.S. The logistics, time commitment, and impracticality of crisscrossing the U.S. to do so, however, would be prohibitive.
In light of the foregoing, it is
ORDERED that Petitioner's Motion to Calendar filed May 2, 2023, is denied.