[Pharm-policy] Pfizer's tax benefits for DIFLUCAN

[James Love]

The text below appears to be the statutory basis for tax deductions for
donations of pharmaceutical drugs.  (Pointers to other relevant statutes
or regs are appreciated).  As Ellen't Hoen pointed out, the deduction is
the lesser of half the fair market value of the drug, or twice the cost
basis of the drug.  I would imagine that in most cases, twice the cost
basis will be the relevant number.

The marginal rate for the US corporate income tax is 35 percent, so the
deduction would be worth 2 x .35 = .7 of cost basis for the drug.  

In general, there will be a large difference between the cost basis for
the drug, and the marginal cost of production, because average costs
will include the fixed costs.  There are significant economies of scale
in the manufacturing of pharmaceuticals.  Therefore, it is likely that
the company can make money on the donation, because it is receiving a
tax deduction that will exceed the marginal cost of production.

For company as a whole, Pfizer reported sales of $16.2 billion, and
"cost of sales" of $2.528 billion, or 15.6 percent of sales.  Selling,
informational and administrative expenses were a reported $6.35 billion,
or 39.2 percent of sales.  

I've seen so many prices for fluconazole, I don't know which one to use.  
Is is very rough, so don't take it too seriously, but if Pfizer has a
wholesale price of $14 a pill, and claims a cost of goods of 15.6
percent (the Pfizer average), it would claim a cost basis of $2.18 per
pill, and be able to deduct $4.36 per pill (double the cost basis), for
a tax savings of $1.53 per pill.  Given the fact that prices by generic
producers in Thailand are less than $1 per pill, this would be a pretty
good deal for Pfizer.

  Jamie

http://www4.law.cornell.edu/uscode/26/170.text.html

26 USC 170(e)(1) 

(1) General rule 
           The amount of any charitable contribution of property
otherwise taken into account under this section shall be reduced
by the sum of - 
               (A) the amount of gain which would not have been
long-term capital gain if the property contributed had been sold
by the taxpayer at its fair market value (determined at the time
of such contribution), and 
 (B) in the case of a charitable contribution - 
    (i) of tangible personal property, if the use by the donee 
    is unrelated to the purpose or function constituting the 
    basis for its exemption under section 501 (or, in the case of 
    a governmental unit, to any purpose or function described in 
    subsection (c)), or 
    (ii) to or for the use of a private foundation (as defined 
    in section 509(a)), other than a private foundation described 
    in subsection (b)(1)(E), 
    the amount of gain which would have been long-term capital
    gain if the property contributed had been sold by the
    taxpayer at its fair market value (determined at the time of
    such (contribution).  For purposes of applying this paragraph
    (other than in the case of gain to which section 617(d)(1),
    1245(a), 1250(a), 1252(a), or 1254(a) applies), property
    which is property used in the trade or business (as defined
    in section 1231(b)) shall be treated as a capital asset. For
    purposes of applying this paragraph in the case of a
    charitable contribution of stock in an S corporation, rules 
    similar to the rules of section 751 shall apply in
    determining whether gain on such stock would have been
    long-term capital gain if such stock were sold by the
    taxpayer. 
           (2) Allocation of basis 
           For purposes of paragraph (1), in the case of a
charitable contribution of less than the taxpayer's entire
interest in the property contributed, the taxpayer's adjusted
basis in such property shall be allocated between the interest
contributed and any interest not contributed in accordance with
regulations prescribed by the Secretary. 

(3) Special rule for certain contributions of inventory and other 
property 
(A) Qualified contributions 
For purposes of this paragraph, a qualified contribution 
shall mean a charitable contribution of property described in 
paragraph (1) or (2) of section 1221, by a corporation (other 
than a corporation which is an S corporation) to an 
organization which is described in section 501(c)(3) and is 
exempt under section 501(a) (other than a private foundation, 
as defined in section 509(a), which is not an operating 
foundation, as defined in section 4942(j)(3)), but only if - 
    (i) the use of the property by the donee is related to the 
    purpose or function constituting the basis for its exemption 
    under section 501 and the property is to be used by the donee 
    solely for the care of the ill, the needy, or infants; 
    (ii) the property is not transferred by the donee in 
    exchange for money, other property, or services; 
    (iii) the taxpayer receives from the donee a written 
    statement representing that its use and disposition of the 
    property will be in accordance with the provisions of clauses 
    (i) and (ii); and 
    (iv) in the case where the property is subject to 
    regulation under the Federal Food, Drug, and Cosmetic Act, as 
    amended, such property must fully satisfy the applicable 
    requirements of such Act and regulations promulgated 
    thereunder on the date of transfer and for one hundred and 
    eighty days prior thereto. 

(B) Amount of reduction 
The reduction under paragraph (1)(A) for any qualified
contribution (as defined in subparagraph (A)) shall be no greater
than the sum of - 
    (i) one-half of the amount computed under paragraph (1)(A) 
    (computed without regard to this paragraph), and 
    (ii) the amount (if any) by which the charitable 
    contribution deduction under this section for any qualified 
    contribution (computed by taking into account the amount 
    determined in clause (i), but without regard to this clause) 
    exceeds twice the basis of such property. 
			

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James Love, Consumer Project on Technology    
P.O. Box 19367        | http://www.cptech.org 
Washington, DC 20036  | love@cptech.org       
Voice 202/387-8030    | Fax 202/234-5176     
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