Facebook Mostly Loses on Intangibles Valuation in Tax Court (2)

The IRS used an acceptable method to assess the value of intangible assets assigned to Meta Platforms Inc.'s Irish subsidiary, but used the wrong inputs to calculate the resulting US tax bill for the Facebook parent, the US Tax Court held Thursday.

Judge Cary Douglas Pugh said the agency’s application of the income method in a way that increased the Facebook parent company’s taxable income for 2010 was “consistent with regulation.” In so holding, the court rejected Facebook’s arguments that the Treasury Department regulations on which the IRS relied were invalid.

Facebook and the IRS have been battling over the tech giant’s Irish arrangement for a decade in a dispute that has threatened to cost the company $9 billion in unpaid taxes, not including penalties or interest.

“The regulations themselves are not invalid merely because they impose a limit on the expected return on IDCs at a discount rate reflecting market-correlated risks,” Pugh said, referring to intangible development costs.

However, the court also said the IRS picked the wrong inputs to reallocate income between the foreign subsidiary and domestic parent, and therefore abused its discretion under IRC Section 482. Pugh directed the two parties to return to the table and recalculate Facebook’s taxes.

The company has said in financial filings that, while the $1.73 million tax bill the IRS initially assessed is small, it could find itself facing a tax bill as high as $9 billion if the government’s position applies to subsequent tax years. A second petition at Tax Court involving two other tax years remains open.

Facebook argued the IRS erred in its calculations by overlooking “nonroutine platform contributions,” revenue projections, and Facebook’s best realistic alternative to cost-sharing. With those in mind, Facebook’s valuation would have been correct, the company argued.

The cost-sharing arrangement required Facebook’s Ireland subsidiary to make annual payments to the US subsidiary for technology, user community rights, and marketing intangibles, among other things.

The platform contribution transaction in question resulted in widely different opinions between the two sides, with Facebook asserting the net present value of the payment at $6.3 billion, while the IRS asserted $19.945 billion.

Long-Running Dispute

Facebook first petitioned the Tax Court over the issue in 2016, and after delays, a trial began in 2020 only to be paused during the pandemic, then resumed in Washington, D.C. the next year. At trial, the company justified its royalties scheme arguing it faced sizable risks and unknowns in areas like mobile advertising.

The company in 2023 settled another case involving the value of Instagram intangibles between US and Irish entities, resulting in a settlement where the company agreed to increase royalties for transferring the property by $498 million.

Facebook and the IRS didn’t immediately respond to requests for comment.

Baker McKenzie and Latham & Watkins LLP represent Facebook.

The case is Facebook Inc. v. Commissioner, T.C., No. 21959-16, 5/22/25.