All these disputes are creating opportunities for law firms looking to expand their tax practices in Silicon Valley. Earlier this month Skadden, Arps, Slate, Meagher & Flom relocated two tax partners from Washington, D.C., to Palo Alto. The firm also hired Matthew Kramer, a former attorney with the IRS, as counsel. Focusing on the semiconductor and technology industries, he negotiated transfer pricing matters between foreign governments and multinational corporations and the IRS.
"We didn't have a [tax] presence in Silicon Valley, and some of our clients here had asked us why we didn't," said Skadden partner Julia Kazaks, who represents both corporate clients and individuals.
Last year, Bingham McCutchen, which acquired a top national tax practice when it merged with McKee Nelson in 2009, cherry-picked three partners from different firms to set up its Silicon Valley tax practice, including Ryan, formerly a partner at McDermott Will & Emery, and Robert Kirschenbaum, who had helped Washington, D.C.-based Miller & Chevalier, which specializes in tax planning and controversy work, open a Palo Alto office two years ago.
"To be able to compete in the marketplace, you have to have talent that is readily accessible," said Kirschenbaum, a former team leader for the IRS' Advance Pricing Agreement Program. "Clients expect on-the-ground resources."
LOOKING FOR REDEMPTION
The IRS has something to prove, lawyers such as Kirschenbaum said. It wants to make companies believe that if they're too aggressive when filing their tax returns, they'll face stiff consequences, and not just a painful audit.
The IRS is actively looking for the next big transfer pricing case it can take to court to redeem the agency after losing two major cases in court in the past few years, lawyers said.
In December 2009, the IRS lost a case it had lodged against software maker Veritas Software Corp., which had been acquired by rival Symantec Corp. in 2005. Veritas had licensed some of its IP to an offshore affiliate in Ireland back in 1999 under a cost-sharing agreement. The IRS said the deal understated the market value of the royalties involved by $2.4 billion and told the company it owed more than $1 billion in taxes, penalties and interest. The U.S. Tax Court ruled in favor of Symantec, calling the IRS' calculations "arbitrary, capricious and unreasonable."
A few months later, the IRS lost its transfer pricing case against semiconductor manufacturer Xilinx. Clark and fellow Fenwick tax attorneys Ronald Schrotenboer and Tyler Baker persuaded the U.S. Court of Appeals for the Ninth Circuit to affirm a U.S. Tax Court decision -- a year after the same panel had voted to reverse it. The 2-1 decision concluded the IRS erred in assessing penalties for improperly accounting for the cost of stock options as part of an international tax arrangement.