Facebook Inc. has sued the Internal Revenue Service seeking access to an internal IRS appeal process regarding a decision related to the social media giant’s tax bill.
In a 12-page complaint filed in U.S. District Court for the Northern District of California on Wednesday, Facebook claims that IRS counsel have stymied the company’s request to pursue an internal IRS appeal by citing a new and so far seldom-used rule that allows IRS exam teams to deny access to internal appeals when they determine such an appeal would not be in the interest of “sound tax administration.”
Facebook wants a finding that the IRS violated the Administrative Procedure Act by issuing the new rule—Revenue Procedure 2016-22, 2016-15 I.R.B. 1—and by denying Facebook’s request for an internal appeal.
“Facebook is entitled to an independent administrative forum, and upon information and belief, the IRS decision to deny Facebook access to IRS Appeals was made by individuals in IRS Counsel who were charged with litigating against, or overseeing litigation against Facebook, and were thus not independent,” wrote Facebook’s lawyers at Baker McKenzie.
Baker McKenzie has represented Facebook in its ongoing dispute with the IRS over the value of assets the company transferred in 2010 to its Irish holding company, which underlies the lawsuit filed Wednesday. Facebook has been challenging the IRS’s claim that it underpaid taxes, possibly by more than $3 billion, due to the way it valued intangible assets transferred to its Irish subsidiary in 2010. According to Facebook’s lawsuit, the decision to refuse an internal appeal was made in retaliation against Facebook for refusing to extend the statute of limitations in the ongoing matter.
The IRS has accused a number of U.S. multinational corporations of transferring profits to countries with lower tax rates. These so-called transfer pricing cases have focused heavily on technology and pharmaceutical companies whose intangible assets—patents, trademarks, user bases and customer lists—can be transferred across borders and cross-licensed to lower tax liability.
In Wednesday’s complaint, Facebook’s lawyers point out that during calendar years 2012 through 2014, the IRS proposed adjustment amounts that totaled about $10.5 billion in the 213 taxpayer examinations that included at least one transfer pricing issue. According to the complaint, IRS records show that only $321 million of the original proposed $10.5 billion in adjustments for the period were posted to taxpayer accounts.
“By denying Facebook access to IRS Appeals the IRS has treated Facebook differently than similarly situated taxpayers for which the IRS had proposed similar income adjustments prior to the issuance of Rev. Proc. 2016-22,” the company’s lawyers wrote.
Facebook is asking a federal judge to set aside the new rule, finding it “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
A Facebook spokeswoman declined to comment beyond the court papers.
A spokeswoman for the IRS wasn’t immediately prepared to comment on the case.