The US Tax Court, in a precedential opinion in Mylan, Inc. & Subs. v. Commissioner, 156 T.C. No. 10 (Apr. 27, 2021), held that legal expenses incurred by drug manufacturers in defending patent infringement lawsuits under the Hatch-Waxman Act are currently deductible, and not capitalized, for federal tax purposes. A copy of the opinion is provided.

For federal tax purposes, business expenses are either deductible in the tax year incurred or capitalized to the basis of related assets. Costs capitalized to the basis of intangible assets, such as US patents, are recoverable on a straight-line basis over 15 years. Thus, deduction of costs on a current basis will yield significant tax savings compared to capitalization. 

The Tax Court’s decision confirms that costs to initiate and defend patent infringement suits will receive this favorable tax treatment. With this decision, the Tax Court effectively lowered the cost of patent litigation activity and impacted both the initiation of new patent lawsuits and the settlement of existing cases. 


The case involves Mylan, Inc., which manufactures brand name and generic pharmaceutical drugs. The issues before the Tax Court focused on generic drugs and the US Food and Drug Administration (FDA) approval process under the Hatch-Waxman Act–in particular, the procedures related to a “paragraph IV certification” and any consequent patent infringement litigation. 

Under the Hatch-Waxman Act, a generic drug manufacturer may submit an abbreviated new drug application (ANDA) with FDA that tracks a brand-name drug’s application information–specifying that the generic drug has the same active ingredients as, and is biologically equivalent to, the brand name drug already approved by the FDA–and avoiding the cost and time associated with approval of a new brand-name drug. The paragraph IV certification procedures allow an applicant, like Mylan, to submit a generic drug for approval with FDA and to challenge the validity of brand-name manufacturers’ patents, thereby accelerating the approval of the drug and any corresponding patent infringement litigation. 

Mylan regularly submitted ANDAs with paragraph IV certifications to obtain FDA approval for generic versions of brand name drugs, prepared and sent formal notice letters to the patent holders implicated by the certifications, and defended itself against lawsuits brought by the patent holders. By doing so, Mylan incurred legal expenses for (i) preparing and sending the formal notice letters and (ii) defending any subsequent patent infringement suit. Mylan deducted both categories of legal expenses on its corporate income tax returns (approximately $130 million in deductions), but the IRS disallowed the expenses and instead required the expenses to be capitalized with amortization over 15 years.  

Tax Court Decision

The Tax Court held that Mylan’s litigation expenses under the Hatch-Waxman Act were deductible on a current basis. In doing so, the Tax Court observed that “[p]atent infringement litigation is a different creature altogether, sounding in tort . . . [and] . . . costs incurred by a business to defend against tort claims generally have been held deductible for the current taxable year.” Thus, the Tax Court noted that, historically, it has permitted the deduction of costs incurred in defending patent infringement suits and the same result would apply here to Mylan’s legal expenses incurred in defending patent infringement.1

The Tax Court rejected the IRS’s argument that Mylan’s patent litigation was a step in the FDA approval process and, therefore, facilitated the creation of an intangible asset–an argument that, if accepted, may have required capitalization (see 26 C.F.R. § 1.263(a)-4(b)(1)(v), (e)(1)(I), (3)). The Tax Court explained:

Although the filing of an ANDA with a paragraph IV certification triggers the opportunity for patent litigation as well as the FDA review process, this statutory design does not transform patent litigation into a step in the ANDA approval process. The patent litigation expenses at issue accordingly are not subject to capitalization.

Importantly, the Tax Court found it significant that litigation is not required to obtain effective approval of an ANDA with a paragraph IV certification and that a brand-name manufacturer is under no obligation to initiate a patent infringement lawsuit under the Hatch-Waxman Act. The Tax Court added that “[a]bsent the filing of such a suit by a patent holder, the generic drug manufacturer is under no obligation to demonstrate that a patent is invalid or not infringed to obtain FDA approval.”

By contrast, the Tax Court accepted the IRS’s argument that Mylan’s legal expenses to prepare and send the formal notice letters to patentees and brand-name approval holders represented “a required step in securing an FDA-approved ANDA” and, therefore, constituted “amounts incurred ‘investigating or otherwise pursuing’ the transaction of creating FDA-approved ANDAs . . . . Those legal expenses, therefore, were “paid to facilitate” the creation of an intangible asset (i.e., FDA approval of the generic drug under the Hatch-Waxman Act) and must be capitalized.

In explaining its holding, the Tax Court stated, “the litigation expenses of the patent holders that initiated infringement suits against Mylan seem clearly deductible.”2 Thus, litigation expenses incurred by an initiating party (i.e., a plaintiff patent holder or counterclaimant) are also deductible. This decision can be read to encompass all patent litigation, under the Hatch-Waxman framework or otherwise, and clearly broadens the scope of litigation expenses that are deductible. 

Key Takeaways

The Tax Court’s decision in Mylan provides needed clarity to the federal tax treatment of patent litigation expenses as well as the treatment of other costs incurred during the FDA approval process for generic pharmaceutical drugs. Following the Tax Court decision, litigation expenses incurred in prosecuting and defending patent infringement suits can be deductible. The favorable tax treatment of patent litigation expenses may defray a portion of the costs of the litigation and should be considered by plaintiffs and accused infringers when filing or settling patent lawsuits. In addition, the Tax Court provides helpful guidance for taxpayers generally, in evaluating whether legal costs and government-process costs (FDA or otherwise) are deductible or must be capitalized.  

1 The Tax Court also noted that patent law “has long distinguished suits for the defense of title to intellectual property from patent infringement litigation. The former involves the disposition or acquisition of a capital asset, and expenses in litigating such a suit have been treated as capital . . . .”

2 The IRS did not challenge legal fees incurred with respect to drugs that had already been approved by FDA and commercially launched. Thus, post-approval legal expenses are fully deductible when incurred.