Facebook and the IRS finished up the first four weeks of their U.S. Tax Court trial in San Francisco today, which will move to Washington, D.C. in June.
The second half of the trial in Washington will mostly focus on testimony from “experts” such as economists, professors, and specialists in other areas, like technology. The second half will be more technical, focusing on the numbers behind Facebook’s valuation and the intangible assets it transferred to Ireland in 2010, among others. That information holds the key to the central question in the case: Whether Facebook knew it would be successful, and should have charged more in royalties for those assets.
“We will adjourn for this partial trial session,” Judge Cary Douglas Pugh said Friday, later adding, “I can’t say I loved being here but this was great.”
“The planes are still flying,” she said.
If the IRS position is proven true, that means the intangibles—users, technology, trademark, and marketing assets—were indeed worth more than what Facebook claimed. With an IRS win, Facebook could owe up to $9 billion in taxes because the agency plans to apply its position to other years. The dispute comes at a time when the U.S. and other countries have been cracking down on multinationals that potentially shift profits to no- or low-tax jurisdictions, such as Ireland.
Pugh heard testimonies from more than 42 witnesses, comprising mostly current and former Facebook employees, including Ted Price, vice president of tax, and Andrew Bosworth, vice president of augmented and virtual reality.
Trial themes have included Facebook’s user growth and mobile advertising—tasks handed to its Irish operations. The IRS has argued Facebook knew years ago that it would grow to be the social media giant it is today.
Facebook was a highly scalable, high-growth company similar to Google in 2010—the contested tax year, Alok Mahajan, principal at KPMG told IRS counsel Michael Coravos.
The company, which now has over 2 billion active users, was seeing exponential growth in its user base at the time of the disputed transfer. In 2010, it had 500 million global users—the majority outside of the U.S.—with more than half of those users visiting the site everyday, CEO Mark Zuckerberg said in a video the IRS introduced.
Facebook had also secured advertising partnerships with household names, like Proctor & Gamble Co., Coca-Cola Co, and Sony Pictures Television Inc., even before 2010, according to Facebook’s former advertising executive Mike Murphy and former vice president for partnerships, Daniel Rose.
Facebook’s counsel tried to show the company’s Irish operations were taking big risks in areas such as mobile advertising, and the company wasn’t sure whether its marketing efforts would pan out.
Facebook’s user growth wasn’t easy in certain countries, like Japan, said Taro Kodama, Facebook’s former head for Japan. Japanese users were “allergic” to the idea of exposing personal information by using their real identities on Facebook, Kodama told Scott H. Frewing, partner at Baker MacKenzie LLP, representing Facebook.
Advertising had challenges, too. Europe had heavy regulations around it, Richard Allan, Facebook’s former vice president of policy solutions, said.
“Advertising was a fundamental negative,” Allan said.
Facebook witnesses also claimed they struggled to figure out online ads on its mobile platform.
“We couldn’t figure out where to put the ads,” Julie Zhuo, former vice president for product design, said. So, Facebook wasn’t able to monetize its foray into mobile, she said.
The case is Facebook, Inc. v. Commissioner, T.C., No. 021959-16, trial started 2/18/20.