IRS says Facebook’s valuation of IP transfer to Ireland may have been understated by billions of dollars

A US Department of Justice lawsuit filed in Federal court on Wednesday reveals that the IRS believes that Facebook may have significantly undervalued a transfer of intellectual property rights to an Irish subsidiary.

The Department of Justice is seeking enforcement of six summonses issued by the IRS to Facebook that relate to a 2010 transaction where Facebook transferred to its Irish subsidiary intellectual property rights associated with Facebook’s business in locations except for in the US and Canada.

According to the declaration of IRS agent Nina Wu Stone in the lawsuit, filed the US District Court for the Northern District of California, Facebook did not comply with IRS requests to provide numerous documents.

Stone said that in 2010, Facebook US transferred to its Irish subsidiary rights to its online platform, which allows users to communicate, Facebook to store user information, and advertisers to reach users. In a related transactions, Facebook purported to license rights in marketing intangibles to the Irish sub and the parties agreed to share future costs to jointly develop the Facebook online platform.

EY was retained to value the intangibles transferred. The firm separately valued Facebook’s user base, online platform, and marketing intangibles using different methodologies, claiming they could be reliably measured on a stand-alone basis.

After gathering information about the transaction in 2013–2014, though, the IRS became concerned that EY’s valuation of the intangibles on a stand-alone basis was “problematic,” Stone said in her declaration.

“Several [Facebook] employees indicated that the user base, online platform and marketing intangibles were interdependent and it would be difficult to isolate one from the other,” she said.

Stone added that the IRS exam team’s preliminary position suggests that the value of the transactions were understated by billions of dollars.

The summonses seek documents containing information about the 2010 agreements to assist in ascertaining the value of the transferred intangibles. The statue of limitations to file a court action to recover back taxes expires on July 31.

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