Perrigo Ruling a Blow to IRS Use of Economic Substance in Audits

The IRS’s defeat in a long-running dispute with pharmaceutical maker Perrigo Co. threatens to muddle the agency’s campaign to wield the controversial economic substance doctrine against taxpayers in transfer pricing audits.

The US District Court for the Western District of Michigan handed Perrigo a big win in saying that transactions with a subsidiary in Israel didn’t lack economic substance as the IRS had argued, but had a business purpose other than tax planning.

The Sept. 25 opinion also largely sided with the company’s pricing of the transactions—its transfer pricing, which is required to be done at arm’s length, as though ...