In the first of two field attorney advice memoranda, the IRS held that the legal fees incurred to investigate patents and defend against patent infringement lawsuits were not deductible currently, but were required to be capitalized because they facilitated obtaining a capitalizable intangible, namely an abbreviated new drug application (ANDA). FAA 20114703F, dated September 14, 2011 and released December 9, 2011 ("§ 263(a) FAA").
In the second FAA, the IRS then determined that the ANDA is a §197 intangible and thus the capitalized legal fees are amortizable over 15 years beginning on the date the ANDA is acquired, which would be the date the FDA approves the ANDA as effective (provided the trade or business requirement is met). FAA 20114901F, dated September 27, 2011 and released November 28, 2011 ("§ 197 FAA"). The § 197 FAA further held that the resulting amortization deductions would be subject to § 263A as a licensing cost that was incurred by reason of the production of the generic drug. As a result of these FAAs, generic pharmaceutical companies that currently are deducting such legal fees should be aware of the potential for IRS scrutiny and begin to develop strategies to mitigate that risk.