Why Has The IRS Outsourced Microsoft’s Transfer Pricing Audit To A Private Law Firm?

Perhaps it was just a matter of time until the Internal Revenue Service decided to "outsource" its tax audit and litigation function to a private entity, i.e., a law firm. As reported in the December 8th issue of Tax Notes, the Service has hired the law firm of Quinn Emanuel Urquhart & Sullivan LLP, at a cost of more than $2 million, to assist in the transfer pricing audit of Microsoft Corp., signaling a resolve to aggressively litigate disputes over buy-in payments in cost-sharing agreements (CSAs), and raising the prospect of Quinn Emanuel lawyers participating in summons interviews of Microsoft executives. Does that work delegation to render legal advice to the Service sound appropriate, or even legal? For those of you who are not quite familiar with Quinn Emanuel the litigation-only global law firm is rumored to have the second highest profits per equity partner of any law firm in the world. The firm is headquartered in Los Angeles, California and currently employs 650 attorneys throughout eleven locations around the world, with its largest office located in New York City.

So What's The Cost to the Taxpayer? Two Million One Hundred Eighty Five Thousand Dollars

Certainly Microsoft wanted to know. It filed a complaint on November 24 in the U.S. District Court for the District of Columbia under FOIA for the IRS to produce "all documents representing proposals" and "all documents representing agreements for the performance of services to be rendered by Quinn Emanuel." Attached to the complaint as an exhibit is "what purports to be a copy of a[n] excised portion" of the IRS's contract with Quinn Emanuel, which the Service gave to Microsoft on September 10 . Quinn Emanuel, such contract provides, will "assist with the evaluation, analysis, presentation and defense of claims or adjustments related to the issues under examination," including "transfer pricing issues relating to the license of intangible property rights in association with a cost sharing arrangement and related transactions."

According to a website maintained by the Office of Management and Budget, the contract was signed May 19, 2014, with a completion date of December 31, 2016, and a payment obligation of $2,185,500. The website categorizes the service to be supplied by Quinn Emanuel as "Support-Professional: Expert Witness," suggesting that the law firm's services may be limited to identifying and supporting expert witnesses. It is speculated that Quinn Emanuel's involvement could also extend to be involved in the trial preparation phase. The contract further reveals, according to Tax Notes, that Quinn Emanuel will be closely associated with the IRS examination team during the audit phase, stating that the "Contractor will work collaboratively with the Service to support the examination." Particularly, the law firm is tasked...