Tax Analysts Blog

What’s Next for Microsoft After Some Expensive Table Pounding?

Posted on Dec 3, 2015

Every experienced trial lawyer knows the saying, “When the facts are against you, pound on the law. When the law is against you, pound on the facts. When both are against you, pound on the table.” Microsoft recently devoted substantial time, effort, and expense to litigate a challenge to a set of IRS summonses seeking documents and testimony in a long-running transfer pricing audit. Yet the judge hearing the case rejected every argument that Microsoft advanced, ruling it failed to prove that the IRS had issued the summonses for an improper purpose, or that enforcement would constitute an abuse of the court’s process.

After reviewing all of Microsoft’s filings (which totaled in the hundreds of pages), it is difficult to escape the conclusion that in deciding to fight the IRS’s request for information to complete its audit, the software giant engaged in some pretty expensive – albeit sophisticated – table pounding.

Microsoft tried to convince the court to accept the premise that the suspicious timing of several key events evidenced the IRS’s bad faith in issuing the summonses. It also objected – as have I – to the IRS’s decision to hire pricy boutique litigation firm Quinn Emanuel to help it complete the audit. All Microsoft wanted, it claimed, was for the nearly seven-year audit to be over and for the IRS to issue a notice determining what it thought Microsoft owed and why. The company’s strategy failed for a number of reasons:

      Just because events happened in a particular sequence does not mean that the earlier ones caused the later ones. In Latin, this is the fallacy post hoc, ergo propter hoc. Or as my Dad taught me years ago, the cock crowing does not make the sun rise.

      The only testimony offered at the evidentiary hearing held in August directly refuted Microsoft’s factual premises. IRS witness Eli Hoory remained calm under the fire of cross examination as he directly contradicted each key aspect of Microsoft’s theory of the case. He told the court so often that he was simply trying to “get to the right number” before concluding the audit that the court’s order quoted his testimony on that point six times.

      Some of Microsoft’s objections were directly contradicted by positions it had taken earlier in the audit. For example, while Microsoft complained that the IRS did not need to take sworn, verbatim testimony of its current and former employees, it had earlier objected to preliminary audit findings that relied on the agents’ notes of informal discussions with its employees. It is easy to see why a court would not let Microsoft have it both ways.

After the ruling, Microsoft issued a public statement noting the one criticism of the IRS in the order, the court’s statement that it is “troubled by the level of Quinn Emanuel’s involvement in this audit.” Microsoft also thanked the court for its attention and the opportunity to be heard. While it did not indicate whether it planned to appeal, the company did express the desire to finally complete the audit. In any event, the odds of a successful appeal range between slim and none – and would further delay a process that Microsoft has claimed has already gone on too long.

What happens next, and when, is entirely up to Microsoft. The conciliatory tone of its public statement suggests Microsoft’s apparent desire to complete the audit promptly, and either settle or litigate the issues. If the case ultimately goes to court, one thing is certain: Microsoft will not just be pounding the table.

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