Facebook Uses Phone Flop as Evidence to Fight 2010 Tax Bill

Facebook can rely—at least for now—on later technological advancements as it fights against the IRS over its 2010 tax bill, a judge said.

U.S. Tax Court Judge Cary Douglas Pugh said Wednesday in San Francisco that there are developments from after 2010 that may be worth looking at, but she didn’t set explicit parameters for what witnesses can include in testimony.

“I understand the need for finality,” Pugh said. “I’m not going to say today.”

Facebook Inc. is challenging a tax bill for 2010 on the value of intangible assets, such as trademarks and copyrights, that it transferred to an Irish subsidiary. The IRS claims that Facebook undercharged its Irish subsidiary for the use of those assets, which the agency alleges are worth billions more than the company claimed they were.

The IRS has tried to show how successful Facebook was in 2010, details that underpin the tax liability. But Facebook pointed to failed ventures: Faceweb, another mobile venture, and Buffy, its attempt at creating a smartphone, as examples of projects that didn’t pan out. The company argues that because it was taking a risk by embarking on those projects, the IRS is unfairly alleging that it improperly charged an Irish subsidiary for the use of intellectual property.

Pugh recognized the potential need for post-2010 evidence.

“We want the evidence to come in,” she said on the second day of a likely weeks-long trial.

Facebook’s disputed tax bill is only in the millions, but Facebook could be on the hook for as much as $9 billion plus interest and any penalties if the IRS wins because the agency plans to apply its position to subsequent tax years.

On Tuesday the IRS objected to Facebook’s references to developments in years after 2010, arguing it wasn’t relevant.

“My job is to decide which was the reality in 2010,” Pugh said Tuesday after the IRS objected to Facebook Chief Technology Officer Mike Schropfer’s testimony on Facebook’s mobile advertising post-2010.

“The further we get into the future, the more attenuated it would be,” she said, overruling the objection because it “goes to the heart of the case.”

Later, the IRS objected to Faceweb testimony from Julie Zhuo, the vice president of product design, who was also the company’s first intern. Pugh allowed the testimony as long as it didn’t trail away too much from 2010.

The case is Facebook, Inc. v. Commissioner, T.C., No. 021959-16, trial started 2/18/20.