Tax News

CCH (cch.taxgroup.com) reports:

  Medicaid rebates paid to state agencies by pharmaceutical manufacturers under the Medicaid Rebate Program are purchase price adjustments that should be subtracted from gross receipts. The rebates should reduce the sales price of the pharmaceuticals because, in determining income derived from the sale of property, the amount realized must be based on the actual price for which the property was sold and not on a greater price for which the property may have been, but was not, sold. Medicaid rebates are made with the purpose of reaching an agreed-upon selling price for the pharmaceuticals that is negotiated before the sale takes place and should, therefore, be treated as an adjustment to the manufacturer's gross receipts.

  The Medicaid Rebate Program was established under the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). Under the program, Medicaid rebates are paid by consumer drug manufacturers pursuant to contracts signed with the Health and Human Services Department. Manufacturers agree to the rebate program in order to be able to participate in Medicaid-funded sales. The manufacturers pay the rebates directly to each state Medicaid agency to cover a portion of the price that the agency pays to drug retailers to compensate them for drugs dispensed to Medicaid beneficiaries.

  CCH Comment. The IRS limited its holding to Medicaid rebates that a pharmaceutical manufacturer pays pursuant to the Medicaid Rebate Program under the Act.

 
Rev. Rul. 2005-28, 2005-1 CB 997, is clarified and superseded. Rev. Rul. 2005-28 suspended, in part, Rev. Rul. 76-96, 1976-1 CB 23.
Rev. Rul. 76-96, in part, concluded that rebates paid to retail customers by automobile manufacturers were deductible by the manufacturer as a business expense, under Code Sec. 162. The portion of
Rev. Rul. 76-96 that concludes that rebates made by the manufacturer are deductible as ordinary and necessary business expenses remains suspended pending the IRS's reconsideration of the issue and publication of subsequent guidance.

  CCH Comment. The IRS has not suspended the portion of
Rev. Rul. 76-96 that stated that rebates are not includible in income by the consumer.

Rev. Rul. 2008-26, 2008FED ¶46,428

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5600.31

  CCH Reference - 2008FED ¶5600.85

 
Code Sec. 162

  CCH Reference - 2008FED ¶8590.033

  CCH Reference - 2008FED ¶8858.028

  CCH Reference - 2008FED ¶8858.607

 
Code Sec. 1016

  CCH Reference - 2008FED ¶29,412.9967

  Tax Research Consultant

  CCH Reference - TRC INDIV: 33,552
CCH Reference - TRC BUSEXP: 18,556.05
CCH Reference - TRC SALES: 6,056.15