The Tax Times: Amazon Defends It's Pricing and Tax Court Issues the IRS its 2nd Large §482 Defeat

Monday, March 27, 2017

Amazon Defends It's Pricing and Tax Court Issues the IRS its 2nd Large §482 Defeat

On January 5, 2015 we posted Tax Cases To Watch In 2015? which included at #4 Amazon.com, Inc& Subsidiaries, (2017) 148 TC No. 8 and describe that Amazon was bitterly locked in a $1.5 billion transfer pricing dispute with the Internal Revenue Service over an arrangement it inked with a European subsidiary, and the outcome of the case, which is sitting in U.S. Tax Court, is being closely watched by multinationals and tax lawyers alike.

Now the US Tax Court has ruled against the IRS in this $1.5 billion transfer pricing dispute with Amazon, which currently has experts calling for a re-examination of the agency's valuation methodologies in order to prevent it from wasting its own resources and those of taxpayers.

Using methodologies the U.S. Tax Court had already knocked down in another transfer pricing lawsuit against Veritas Software Corp. in 2009, the IRS made substantial transfer pricing adjustments that reallocated more income from Amazon’s European subsidiary to its U.S. operations and assessed more than $234 million in deficiencies for the 2005 and 2006 tax years. The IRS’ position could have resulted in an overall tax liability of $1.5 billion, plus interest, Amazon estimated.

Somewhat predictably, U.S. Tax Court Judge Albert Lauber noted the similarities between the Amazon and Veritas cases, and reprimanded the IRS for being “unreasonable” and for abusing its discretion in reaching its conclusions. Amazon’s methodologies, with some adjustments, were more reasonable, he said.

Rejecting IRS's substantial transfer-pricing adjustments under Code Sec. 482, the Tax Court has concluded that IRS's determination with respect to the buy-in payment and cost-allocation method, under an agreement in which Amazon.com and its domestic subsidiaries transferred intangible assets to its foreign subsidiary, was arbitrary, capricious, and unreasonable.

The Court found that the taxpayer's uncontrolled transaction (CUT) method, with appropriate upward adjustments, was the best method to determine the buy-in payment, and that its cost-allocation method, with certain adjustments, supplied a reasonable basis for allocating costs to intangible development costs (IDCs).

The Tax Court’s opinion does not specify what Amazon’s final tax liability will be, but the retailer had previously estimated that the IRS’ notices of proposed adjustments issued for a seven-year period, starting in 2005, could have resulted in a tax liability of $1.5 billion plus interest.

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