Drugmaker Schering-Plough Corp lost a bid for a refund of taxes paid on $690 million in profits earned offshore and repatriated, when a U.S. court sided with the Internal Revenue Service.

A federal court in Newark, New Jersey ruled that interest rate swaps arranged between the drugmaker's foreign units were designed to avoid tax and therefore denied a bid by the company to reverse a ruling by the IRS.

Schering-Plough has failed to meet its burden demonstrating legal error in the tax assessed by the IRS, Judge Katharine Hayden wrote in the opinion dated Aug. 28.

Schering-Plough filed refund claims with the government for $473 million paid in taxes, and was denied by the IRS. It then sued the U.S. government in 2005 in the District Court for the District of New Jersey for a full refund of the tax and interest.

We disagree with the court's decision and are considering our options, including appealing the decision, Schering-Plough spokesman Steve Galpin said.

The interest rate swaps, which companies use to limit their exposure to fluctuations in interest rates, date to 1991 and 1992 and were arranged by Merrill Lynch, now part of Bank of America.

The transactions were designed to bring previously untaxed profits made by Schering-Plough's foreign subsidiaries into the United States without paying the tax owed on repatriation, the Justice Department said in a statement on Monday.

The swaps were designed so that Schering-Plough's Switzerland-based subsidiaries received most of the interest payments, according to the Justice Department.

President Barack Obama has proposed limiting deferral of taxes earned overseas in his 2010 budget proposal, an idea meeting major lobbying by the U.S. multinational business community.

Merck & Co Inc is in the process of buying Schering-Plough, and is expected to close the deal this year. The deal was valued at $41 billion when it was announced in March.

(Reporting by Kim Dixon and Diane Bartz in Washington, and Bill Berkrot in New York; Editing by Tim Dobbyn and Carol Bishopric)