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On September 25, 2025, the United States District Court for the Western District of Michigan issued its highly anticipated opinion in Perrigo Co. v. United States, No. 1:17-CV-00737. Perrigo was a bellwether for the IRS’s erstwhile novel litigation approach, which sought to reanimate the economic substance doctrine and extend it and other seemingly malleable common law doctrines to controlled taxpayer transactions, using Section 482 adjustments only as an alternative backstop. The district court did not take the bait: (1) rejecting the IRS’s attempt to sham Perrigo’s assignment of a third party supply and distribution agreement to its controlled Israeli affiliate, and (2) holding that the IRS’s secondary Section 482 position, which reallocated nearly all of Perrigo’s Israeli affiliate’s income to Perrigo – based on a discounted cash flow (DCF) analysis using ex-post sales data – was arbitrary, capricious, and unreasonable.i
Perrigo’s precedential value is limited to its jurisdiction and its facts, but it is a strong counter and hopeful deterrent to IRS attempts to test the limits, or expand the contours of, the economic substance doctrine and other anti-abuse common law doctrines in cases where those doctrines do not easily fit. See also Patel v. Commissioner, 165 T.C. No. 10 (November 12, 2025) (holding that the codified economic substance doctrine is conditioned upon a relevancy determination within the meaning of Section 7701(o)).
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i The district court also rejected proposed accuracy-related and valuation misstatement penalties, determining that Perrigo acted in good faith and in reliance on its advisors. Additionally, the district court held that Perrigo was entitled to deduct as ordinary and necessary business expenses, as opposed to capitalize, its Section 271(e)(2) patent litigation expenses, related to an Abbreviated New Drug Application.
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