TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, March 25, 2017

Amazon Beats IRS In $1.5 Billion Tax Court Case

Amazon logoSeattle Times, Amazon Wins $1.5 Billion Tax Battle With IRS: scored a big victory Thursday against the IRS in a case that the company says could have cost it about $1.5 billion [ v. Commissioner, 148 T.C. No. 8 (Mar. 23, 2017)].

The case is related to the creation more than a decade ago of Amazon’s European subsidiary in Luxembourg. ... The European Commission is currently investigating the tax agreement Amazon struck with Luxembourg, to determine whether it gives the U.S. company unfair advantages. ...

The IRS contended that the e-commerce giant had inappropriately brought down its U.S. tax bill by grossly undervaluing the assets it transferred to its Luxembourg subsidiary. Judge Albert Lauber of the U.S. Tax Court ruled that the IRS’ determination of those assets’ worth was “arbitrary, capricious, and unreasonable.” He also broadly sided with Amazon on the way the U.S. company calculates how it shares costs with its European subsidiary. ...

The case started in late 2012, when Amazon contested an IRS finding that it had underpaid its taxes by hundreds of millions of dollars. But its origins date to the creation in the mid-2000s of a European-wide subsidiary based in Luxembourg. ... In 2005, Amazon’s newly born unit agreed to pay its U.S. parent $226.5 million over seven years for the use of its intellectual property. Another payment agreement, for $28 million, was struck in 2006. The subsidiary also agreed to enter a cost-sharing agreement with the U.S. company. The IRS, however, determined that Amazon’s Luxembourg subsidiary should have paid its U.S. counterpart $3.6 billion (it later reduced that calculation to $3.5 billion). ...

In securities filings, Amazon said that resulting adjustments would have meant an additional U.S. tax bill of $1.5 billion, plus interest.

Wall Street Journal, Amazon Defeats IRS in Tax-Court Case:

The case illustrates the allure of low-tax foreign jurisdictions for U.S. companies looking to minimize their tax bills and their ability to beat the government in complex multiyear lawsuits. “They get out litigated, especially on the expert witness front,” Reuven Avi-Yonah, a tax law professor at the University of Michigan, said of the IRS. “We are talking billions, and the resources of the taxpayer [Amazon] are much higher than the IRS.” ...

Judge Lauber’s 207-page ruling is a detailed analysis of competing experts’ opinions on the useful lives of Amazon’s assets and the appropriate discount rates. “Regardless of the correctness of the decision on the merits, cases like this — costing millions of dollars to litigate, featuring 30 expert witnesses battling one another, and decided through a 200 page opinion — are symptomatic of an unadministrable international tax system,” said Ed Kleinbard, a tax law professor at the University of Southern California. “We urgently need international tax reform.”

Reuters, Wins $1.5 Billion Tax Dispute Over IRS:

"This is good for everybody, not just Amazon," said Michael Pachter, a Wedbush Securities analyst who has practiced tax law. "It reaffirms that the tax law permits wholly-owned subsidiaries can license intellectual property" as Amazon did. "Totally legal, totally legal."

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I'm guessing Caterpillar must have hired the wrong advisers?

Posted by: Dale Spradling | Mar 26, 2017 9:06:01 AM