IRS claims Facebook may have undervalued IP transferred to Ireland

Sheba Dalaney, Principal
ASL International Group

Facebook may have understated the value of intangible property transferred to its Irish holding company by “billions of dollars.” That’s according to a petition the U.S. Justice Department and the IRS filed in the U.S. District Court for the Northern District of California.

The petition was filed to enforce certain summonses served on the social media company in connection with outstanding information requested as part of an IRS audit. It makes the following claims:

  • Certain IP transferred to Facebook Ireland Holdings Ltd. gave rise to royalty income on Facebook’s 2010 U.S. federal tax return.
  • The IP relates to rights associated with Facebook’s worldwide business, with the exception of the U.S. and Canada.
  • The U.S. parent, Facebook Inc., in 2010 entered into certain agreements with Facebook Ireland related to user base, online platform and market intangibles.
  • Facebook’s accountants valued the transferred IP with a method based on the theory that the user base, online platform, and marketing intangibles could be reliably measured on a stand-alone basis.
  • To understand the 2010 agreements, the valuation of the IP, and the functions performed by U.S. vs. foreign Facebook entities; the IRS issued a number of information document requests (IDRs), reviewed numerous public documents, and conducted interviews with certain Facebook employees.
  • Several of those employees indicated that the user base, online platform, and marketing intangibles were interdependent and it would be difficult to isolate one from the other. The information gathered suggested that the approach used to value the IP on a stand-alone basis was problematic.
  • The IRS issued additional requests for business information from Facebook that may be relevant to valuing the transferred IP.
  • In a series of summonses, the IRS requested more information that was “needed, among other reasons, to provide insight into the nature of the transferred user base and the distinction between user-based intangibles and online platform intangibles.” However, the documents produced by Facebook were “minimal” based on a “narrow interpretation” of the requests of the IDRs.
  • The statute of limitation on the IRS’s audit of Facebook’s 2010 U.S. federal tax return was scheduled to expire on July 31, 2016.
  • The IRS attempted to extend the statute of limitation, but Facebook “refused to afford the IRS examination team any further extension of time, unless IRS agreed to unacceptable conditions.”
  • Prior to the statute expiring, the IRS issued a Statutory Notice of Deficiency related to the 2010 audit. The IRS position could also impact subsequent years and FaceBook has said the result could be $3 – $5 billion in additional tax.
  • Facebook’s “failure to comply with the summonses continues to this date.”

Facebook has denied any wrongdoing. Anteneh Daniel, a spokesperson for the Company, said in a statement: “Facebook complies with all applicable rules and regulations in the countries where we operate.” Reuters has reported that Facebook’s accountants couldn’t be reached for comment.

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