The Washington portion of Facebook’s tax battle with the IRS concluded on Monday after five days of testimony focused on the state of the company at the time it transferred various intangible assets to an Irish subsidiary.
The trial, which focuses on the company’s 2010 tax returns, is scheduled to pick back up on Jan. 18.
The key issue for the court to decide is whether Facebook paid its taxes based on what a company unrelated to Facebook—unlike the Irish subsidiary—would have paid for Facebook’s September 2010 platform technology, access to part of its user base, and trademark and marketing assets.
While the actual tax bill at stake in the case is small for a corporate giant, Facebook has said losing the case could ultimately leave it on the hook for as much as $9 billion, plus interest and penalties.
Judge Cary Douglas Pugh said she would like to also hold the next trial session in person, which would be in San Francisco. She described the in-person Washington trial session as “terrific” and asked to hear from the parties about it given it marked the first in-person U.S. Tax Court trial session under new Covid-19 safety protocols.
Questions on Growth, Brand Value
Over the past week, counsel for both sides examined Facebook’s records, emails, and ledgers displaying the company’s marketing strategies, revenue-sharing agreements, and how intellectual property was managed across subsidiaries in 2009 and 2010.
The court also heard testimony from researchers and consultants who worked with the company on accounting, digital marketing, and monetization efforts.
Last week, Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology, was peppered with questions by IRS counsel around Facebook’s 2009 reports detailing growth and development costs to its Irish subsidiary, and whether intangible assets could be hidden from financial statements.
On Monday, Columbia Business School professor Kinshuk Jerath, whose research focuses on technology-enabled marketing, testified as an expert witness for the IRS. Jerath said that Facebook’s users, advertisers, developers, and brands were strong in September 2010, and that a strong brand would have been expected to contribute to growth.
Dartmouth College Business School professor Kevin Lane Keller, an expert witness for Facebook and co-author of a major business school textbook titled Strategic Brand Management, said Jerath overstated the ability of Facebook’s brand to contribute to growth after September 2010.
IRS counsel questioned Keller at length, pointing to his past praise of Facebook’s innovation and marketing excellence as they stood before the shift of assets to Ireland. In response, Keller suggested that at least some of that published commentary was focused on the U.S., as opposed to assessing Facebook in an international context.
Jerath said Keller’s analysis of Facebook’s marketing capabilities in 2010 was too narrow, focusing on the small size of the marketing team.
There were many other groups in Facebook contributing to marketing capabilities, Jerath said, including a “legendary” team charged with growing Facebook’s user base. Startups wanted to emulate the Facebook growth team, which used data science and experimentation to come up with and test strategies like crowdsourcing, he said.
The case is Facebook, Inc. v. Commissioner, T.C., No. 021959-16, trial 10/18/21.