Although the IRS called the Ninth Circuit's opinion "erroneous," it said it accepted the result, while rejecting the court's reasoning.
Clark said he and other tax attorneys are worried that the IRS is trying to rewrite the "arms length" standards that govern transfer pricing and replace them with a standard formula, instead of looking at the individual facts of each case.
"The IRS, from our point of view, is disagreeing with court decisions that are determined by real-world evidence," Clark said. "And that is a great concern."
The IRS now needs to win a case "to show taxpayers that they are willing and able to go the mat if they need to," said Craig Sharon, former director of the IRS' Advance Pricing Agreement Program who is now a tax partner at Bingham McCutchen in Washington, D.C. "But that threat isn't very credible if they can't win in court."
So the agency has more than doubled its staff of transfer pricing specialists, both nationally and in the Bay Area, Sharon said. And IRS officials have told lawyers, including both Clark and David Forst, head of Fenwick's tax practice, to expect even more hires on the West Coast soon.
Officials at the IRS did not respond to requests for comment.
Clark and other tax lawyers say they're already seeing bigger IRS teams at audit reviews and dispute resolutions involving high-tech companies. Cooley's Stephen Gardner, head of the firm's tax controversy practice, and tax litigator Kathleen Pakenham, both based in New York, recently resolved two tax disputes for Silicon Valley companies. And at every meeting, they said, the IRS would show up with about 15 people.
"And all of them had some say in how the cases would be resolved," Pakenham said. "That contributed mightily to the time it took to resolve the case. The system has gotten tremendously bogged down, and it now takes a much longer time to take a case from inception to conclusion."
Tax controversy lawyers say they're often brought in early now, in an effort to head off trouble. They'll prepare submissions to the IRS' Advance Pricing and Mutual Agreement Program and other foreign governments to explain what their transactions are and how they're valued. The APMA Program lets U.S. multinationals request approval for their transfer pricing methodology before issues arise during an audit.
But some companies still aren't convinced that's a viable option, Ryan said. For example, Veritas' problems with the IRS began when it approached the agency on its own to approve its transfer pricing methodology. Instead of getting approval, discussions fell apart, and the case ended up in court.
