Internal Revenue Service Getting Tough On Production Of Evidence From Current And Former Microsoft Executives In Connection With Its Transfer Pricing Audit

In recent court filings made in various federal district courts in Washington and California, the Internal Revenue Service is seeking to enforce testimonial summonses issued to current or former Microsoft employees, including former CEO Steven A. Ballmer. The summons had been issued earlier this fall. Microsoft's outside tax counsel responded to the summonses by stating that the various witnesses would not be made available to the Service. The summonses were issued to obtain information relevant to Microsoft's internal pricing of intangibles transferred under two separate cost-sharing arrangements for tax years 2004-2006.

An earlier summons further directed the company "to appear on November 20, 2014, and to produce for examination books, records, papers, and other data." Court proceedings were initiated on December 11 to enforce the summons alleging that while Microsoft appeared on the designated date it failed to fully comply in "producing all the books, records, papers, and other data as demanded in the summons."

Microsoft recently filed a motion to hold a status conference before the applicable court(s) would issue an order to show cause to "enable the Court to gain a clearer understanding of the factual and procedural background and Microsoft's affirmative defenses, to clarify the potential scope of the enforcement proceeding, to establish a briefing schedule, and to discuss whether an evidentiary hearing would be helpful to the Court."

The Department of Justice Attorneys, on behalf of the United States, objected to such requests and informed the Court that it had previously filed at least 11 related summons enforcement actions. In addition to the individual summonses mentioned above, two related summons enforcement actions had been filed against Microsoft directly and one against a consultant.

The IRS has to decide on which of two options it must take before the statute of limitations on assessment expires on December 31, 2014. The first option would be to issue a statutory notice of deficiency or, in order to stay the statute of limitations from expiring, to timely petition to enforce the outstanding summonses. Apparantly the government is pursuing the later strategy but it is still possible that the government will move ahead with issuing a stat notice.

Summons Enforcement Filing Against Former Microsoft CEO Steven Ballmer

The enforcement action against Ballmer was filed by the government in the U.S. District Court for the Western...