Facebook’s Transfer Pricing Case Offers Lessons for Tax Teams

There are many interesting aspects about the US Tax Court’s opinion in Facebook Inc. v. Commissioner—the fate of the taxpayer’s regulatory challenge (especially since Loper Bright was issued after the parties finished post-trial briefing), how the court considered the inputs to the income method, and discussions of periodic adjustments.

While intellectually engaging, these aren’t the issues most tax departments grapple with every day. What has received far less attention, but arguably holds more practical significance, are a handful of real-world lessons for tax departments.

These takeaways arise frequently in audits, both transfer pricing and otherwise. While not exhaustive, tax departments should keep several key issues top of mind.

Aligning foreign transfer pricing reports and foreign audits. The IRS used transfer pricing documentation from a foreign jurisdiction—and the taxpayer’s responses—to the foreign tax authority in an attempt to bolster its expert’s position. In this case, the foreign jurisdiction was Australia, the location of one of Facebook’s nine international sales offices.

Facebook priced its Australian sales affiliate on a cost-plus basis in its foreign transfer pricing documentation; the Australian Taxation Office audited Facebook Australia for tax years that overlapped with the Tax Court case, and, in response to questions from the ATO, represented that its mark-up was “arm’s length.”

It’s not uncommon for the IRS to request foreign transfer pricing documents, and it’s also not uncommon for the IRS to attempt to claim that the foreign transfer pricing position is somehow inconsistent with the taxpayer’s position or consistent with their own position.

However, in Facebook, the court rejected the IRS’s contention, noting: “Facebook’s position in front of the ATO therefore is consistent with the particular roles and risks assumed by Facebook Ireland (risk-exposed) and Facebook Australia (risk-insulated).” Even though Facebook ultimately prevailed on this issue, responding required considerable time and resources.

Tax departments should strive to maintain global visibility into their transfer pricing positions to avoid fueling inconsistent narratives. While such positions from tax authorities may be inevitable, having a global line of sight will help minimize such risk.

Having valuations completed for other purposes. The IRS used a valuation that was put together by Facebook for a different purpose to support the IRS’s expert’s position. Here, Facebook valued its common stock for compensation purposes under Section 409A of the federal tax code.

That valuation used projections under the income method for valuing the platform contribution transaction. The IRS’s expert tested the reasonableness of his two key valuation inputs by using them to estimate the present value of Facebook’s business and then by comparing it to various contemporaneous valuations of Facebook, including the company’s valuation put together for 409A purposes.

In determining which projections should be used with the income method, the court again disagreed with the IRS’s use of the 409A valuation, recognizing that Facebook’s Board had used the 409A report to value common stock, “not to determine the arm’s-length value of a PCT Payment.” The court eventually concluded that the IRS’s attempted use of market corroboration was irrelevant to the question before it. “The income method does not depend on or refer to the market capitalization method.”

Again, while the court dispensed with the IRS’s argument in this situation, the taxpayer was forced to spend time and resources to respond. Tax departments should be keenly aware of their valuations put together for non-transfer pricing purposes with an eye toward how they may be used by the taxing authorities in future transfer pricing or other audits as well.

The importance of information document request responses. To further support its preferred projections for the income method, the IRS cited the taxpayer’s IDR responses from the audit.

One IDR response stated that the projections that the IRS sought to rely on were “the most likely scenario to occur.” The court explained that that statement was “the strongest point in respondent’s favor” for using those projections.

At trial, the taxpayer presented multiple witnesses who provided factual support for the use of different, modified projections. The court eventually found facts consistent with the live witness testimony. This is just another reminder that IDR responses are considered to be and have the weight of taxpayers’ “admissions.”

While IDR responses aren’t binding on the taxpayer—and may be contradicted by additional evidence—they certainly matter. They are, after all, statements made to the IRS subject to criminal penalties under 18 U.S.C. Section 1001 (making false statements knowingly to a federal agency may be subject to criminal fines or imprisonment up to five years).

Tax departments, of course, do their best to respond to IDRs with the most accurate information available to them at the time of their response. But if new information emerges after additional due diligence, taxpayers may have some explaining to do and will need to spend considerable time and resources to supplement or even contradict their previous IDR statements.

Facebook serves as a good reminder of these more mundane but practical and useful lessons. While these points may not be fodder for next spring’s law review articles or where the battle lines are being drawn in the next wave of transfer pricing disputes, they’re likely to show up in taxpayers’ next audit cycles. And they may be the difference ultimately between an “agreed audit” and a several-year Tax Court dispute.

The case is Facebook Inc. v. Commssioner, T.C., No. 021959-16, 5/22/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Thomas V. Linguanti is a partner at Morgan Lewis in Chicago focused on complex tax controversies and tax litigation.

Drew A. Cummings is an associate at Morgan Lewis in Washington, DC, focused on federal income tax controversy matters.

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