A Look at the IRS Tax Probe into Facebook From a Naperville Business Lawyer

taxes, Naperville business tax planning lawyerIn 1789, Benjamin Franklin penned a letter to a French scientist named Jean-Baptiste Le Roy in which he observed, “Our new Constitution is now established, and has an appearance that promises permanency; but nothing in this world can be said to be certain, except death and taxes.” While Ben Franklin was not the first person to take such a half-humorous, half-fatalistic view, his words have been repeated for more than 200 years, most often around mid-April when personal income taxes are due.

As a business tax planning attorney, I realize that taxes are a source of major concern for business owners as well. Compliance with federal, state, and local tax laws is crucial to the long-term success of a company. When a business goes international, however, tax obligations may be become even more complex, as evidenced by a recently announced investigation by the Internal Revenue Service (IRS) into dealings by Facebook dating back to 2010.

Federal Court Filing

Earlier this week, the United States Department of Justice filed a petition in a San Francisco federal court looking to force the social media giant to comply with requests and summons from the IRS. The issue in question is a transfer of assets that took place six years ago, and the lawsuit claims that Facebook may have intentionally undervalued intellectual property in an effort to avoid paying the associated taxes. Facebook officials have denied any wrongdoing.

Complex Operations

In 2010, Facebook Inc. sold the international rights to use and exploit the Facebook platform outside of the U.S. and Canada, to Facebook Ireland Holdings. The prices of the intangible property, including “user base, online platform, and marketing intangibles,” was set by Ernst & Young, Facebook’s tax advice firm. Facebook Ireland Holdings subsequent leased the rights to a subsidiary, Facebook Ireland Ltd., the primary international business arm for the social media network.

The IRS has expressed concern on several fronts. First, the tax agency says that preliminary investigations suggest that the valuation by Ernst & Young was off—on the low end—by billions of dollars. A lower valuation means less taxes associated with the sale.

The other issue is that Facebook Ireland Holdings may have been created simply as an intermediary to avoid paying U.S. taxes. Facebook Inc. could have leased the rights to Facebook Ireland Ltd. directly, but would have been required to report the lease revenue as income in the United States. Most importantly, if Facebook Ireland Ltd. is paying more than Facebook Ireland Holdings paid, the company as a whole is making significant profit in a jurisdiction with a much lower tax rate.

The statute of limitations regarding the issue is set to expire on July 31, so action is expected in the case soon.

Tax Questions?

If you own a business, there are a number of perfectly legal strategies you can use to limit your tax liabilities. Contact an experienced Naperville business tax planning attorney today to learn more about your options. Call The Gierach Law Firm at 630-756-1160 for an appointment.

 

Sources:

Freakonomics

CNN – Money

Reuters