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Facebook Heads to Trial in Tax Dispute That Could Cost $9 Billion

Feb. 14, 2020, 5:00 PM

Facebook Inc. will face off against the Internal Revenue Service in a San Francisco courtroom this week in a tax dispute that could cost the company up to $9 billion.

The social networking company is heading to the U.S. Tax Court to challenge a $1.73 million tax bill for 2010 that hinges on the value of intangible assets, such as trademarks and copyrights, that it transferred to an Irish subsidiary. The IRS claims that these assets are worth $13.8 billion—more than twice as much as Facebook’s $6.5 billion valuation.

Facebook is the latest company involved in a dispute with the IRS about the value of intangible assets sent offshore, following cases that include Amazon.com Inc. and Coca-Cola Co. These transfers have been seen as methods for tax avoidance, particularly when intangible assets are transferred to jurisdictions with low or no corporate tax rates.

The trial is scheduled to begin Tuesday, after being delayed.

Although the 2010 tax bill is only in the millions, Facebook could be on the hook for as much as $9 billion plus interest and any penalties if they lose the case, according to the company’s January Form 10-K filing. That is because the government’s position could apply to subsequent tax years that remain open to examination.

Facebook is also fighting another tax bill from the IRS for its 2011-13 tax years. The IRS took a similar position in the second case by adjusting the company’s transfer pricing with its foreign units and certain tax credits it claimed. Facebook said it could pay an additional $680 million, plus interest and any penalties, if the IRS prevails in this case.

According to the company’s pretrial memo, Facebook planned to call on a few dozen witnesses and anticipated the trial to last three to four weeks.

Facebook founder and CEO Mark Zuckerberg, in an opinion piece published over the weekend by the Financial Times, said the company supports the Organization for Economic Cooperation and Development’s effort to reach a global consensus on how to tax the digital economy.

Raising the Alarm

The case could set a precedent for future cases around what is an intangible asset and how to evaluate its worth, said Ramon Camacho, an international tax principal at RSM US.

“The case may come up with a valuation methodology that auditors might not like,” Camacho said. “It may raise alarm for taxpayers, who will have to adjust estimated tax liabilities because the methodology is shown to not be good.”

Camacho said the case shows the IRS is interested about the transfer of technologies and intangible assets overseas and added that the case predates the 2017 tax overhaul, which shows a willingness from the agency to litigate over prior rules.

Setbacks

The trial was originally set for August 2019 but was postponed to give Facebook and the IRS time to work through issues after the company lost a related procedural case in the U.S. District Court for the Northern District of California in 2018. Facebook had sought to avoid trial and get its $1.73 million tax bill sent to the IRS Office of Appeals for an independent review, but the district court said the IRS wasn’t obligated to take the case to Appeals.

Barbara Mantegani, a tax attorney and the founder of Mantegani Tax PLLC, said the district court’s refusal to allow Facebook to take the bill to Appeals was not unusual, but might have been a surprising development for the social network. She added that the company could choose to appeal the case to the Ninth Circuit, or could litigate it in the Tax Court.

“Facebook never had a legally enforceable right to take this case to appeal,” said Mantegani. “Once you’ve chosen the court, you can’t change your mind.”

A Facebook spokesman said the company stood by its actions from a decade ago. “This trial is about transactions that took place in 2010, when Facebook had no mobile advertising revenue, its international business was nascent, and its digital advertising products were unproven,” the spokesman said.

The IRS declined to comment.

The case is Facebook, Inc. v. Commissioner, T.C., No. 021959-16, trial starts 2/12/20.

—with assistance from Sony Kassam and Aysha Bagchi.

To contact the reporter on this story: Jeffery Leon in Washington at jleon@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Sony Kassam at skassam1@bloombergtax.com

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