By JERRY MOSKAL
When Lake Forest-based Cooper Cos. paid $1.2 billion for rival Ocular Sciences Inc. earlier this month, it got more than just a big jump in market share for contact lenses. It got a $57.5 million tax bill.
The Internal Revenue Service is seeking that much in added taxes and penalties from Concord-based Ocular Sciences, which now is part of Coopers’ CooperVision unit.
Lawyers for Ocular have filed three petitions asking U.S. Tax Court in Washington, D.C., to overturn the IRS demand, which covers 1999 to 2001.
Ocular contends the IRS erred when it denied the company $100 million in deductions related to raw materials buying from subsidiaries, something known as intercompany trading in the tax world.
“I can’t comment on a case that is ongoing,” said John G. Ryan, a lawyer with the Palo Alto office of Chicago-based McDermott Will & Emery who represents Ocular. “If the company wants to comment, we would leave it to them.”
B. Norris Battin, a vice president and spokesman for Cooper, said he couldn’t comment beyond a statement the company filed with the Securities and Exchange Commission.
“Ocular intends to vigorously contest the IRS’s claims, and Ocular and Cooper believe that the ultimate outcome of this matter will not have a material adverse effect on the combined company,” Cooper said in its filing.
The IRS filed its notices of deficiency, as the agency’s demand for added taxes and penalties are known, in September, according to Cooper’s filing.
The action came a day before the statute of limitations in the case was set to expire and may have been a rush to judgment, according to Cooper.
The company “believes that the IRS may not have fully reviewed the facts before making its assessment of additional taxes for these years,” the filing said.
An IRS spokesman said the agency is barred by law from commenting on pending tax cases.
The agency ordered Ocular to pay $29 million in back taxes and penalties for 1999 and 2000. For 2001, Ocular and subsidiaries were ordered to pay $27 million in added 2001 taxes and penalties.
Another subsidiary, OSI Puerto Rico Corp., was ordered to pay $1.8 million in back taxes for 1999 and 2000.
“Ocular believes that its intercompany transactions, and resulting tax payments, reflected pricing terms that were and are consistent with industry practice for transactions with third parties,” the company said in its petition to reverse the IRS’ finding.
OSI Puerto Rico’s petition claimed the IRS erroneously denied it a $2.06 million tax deduction for 1999. It also disputes an agency finding that it had $1.79 million in taxable interest income for 2000.
Cooper announced plans to buy Ocular last year in a deal that took months to close under regulatory scrutiny.
With Ocular in the fold, Cooper now is the No. 3 contact lens maker, after Johnson & Johnson and Novartis AG’s Ciba Vision. Cooper had been the No. 5 player.
Three years ago, Cooper bought Biocompatibles EyeCare Inc., the world’s sixth largest contact lens maker.
Last year, Cooper had sales of $490 million, up 18% from 2003.
Ocular had yearly sales of about $315 million.
The IRS has 60 days to file a response to Ocular’s Dec. 28 petitions. If the IRS and Cooper fail to negotiate a settlement, the case could go to trial before a tax court judge.
Moskal is a Washington, D.C.-area freelance writer covering U.S. Tax Court.
