The U.S. Department of Justice took the unusual step Wednesday of turning to a judge to help resolve a years-long dispute between Facebook and the IRS over the company’s taxes. In a petition filed in U.S. District Court in San Francisco, lawyers for the DOJ asked a judge to grant an order to force Facebook to respond to a series of summonses issued by an IRS agent investigating the company’s use of foreign subsidiaries to transfer intellectual property assets.
The summonses, which are not self-enforcing and are a standard part of government examinations of a company’s tax payments, culminated on June 17 when, according to a sworn declaration by IRS agent Nina Stone, Facebook failed to attend a hearing with the agency or provide it with documents and other information it had previously requested. At issue is Facebook’s transfer of a large portion of its intellectual property to the company’s subsidiary in Ireland. Similar tax maneuvers have become standard practice in Silicon Valley, where firms often shuffle intellectual property assets to low-tax jurisdictions, in effect greatly reducing–or in some cases eliminating altogether–taxes owed to the U.S.
According to the IRS, Facebook and its accounting firm, Ernst & Young , significantly understated the value of those assets. “The IRS examination team’s preliminary positions suggested that the E&Y valuations of the transferred intangibles were understated by billions of dollars,” Stone said in her declaration. The IRS examination was initially opened in 2013, and pertains to Facebook’s 2010 tax return. There is no deadline for a judge to issue a ruling on Wednesday’s order. A Facebook spokesperson declined to answer questions about the case, and instead issued the following statement: “Facebook complies with all applicable rules and regulations in the countries where we operate.”
A spokeswoman for the DOJ declined to comment on the case.
Accounting and tax experts briefed on the case said the move was unusual but not unprecedented. Last year, Microsoft challenged a summonses from the IRS that would have compelled former CEO Steve Ballmer to testify in a case involving similar tax arrangements. Amazon CEO Jeff Bezos reportedly faced a similar request of the online retail giant, but ultimately was not required to appear. Facebook is not alone among tech companies that have faced formal inquiries and legal action over their tax accounting, both domestically and overseas. Many of the arrangements center on the interpretation of what’s known as transfer pricing, by which firms are required to follow the “arm’s length principle.” It’s a legally gray term meant to prevent companies from skirting taxes by underselling assets to their own subsidiaries instead of transferring them at price that would be charged to an unrelated entity.
In 2012 alone, the 50 largest public companies in Silicon Valley collectively saved more than $225 billion in taxes on assets “permanently reinvested” overseas, according to an analysis of SEC filings by The Center for Investigative Reporting. (Facebook was not included in the analysis, as it had only recently gone public and had not yet filed an annual financial statement with the SEC.) News of the DOJ’s filing in the Facebook case was first reported
by law.com on Thursday.