Microsoft questions the IRS use of an old antitrust adversary in new investigation

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Image Credit: NY Times

It would be safe to assume that at any given time, Microsoft is in a courtroom pushing an agenda, defending a position or seeking payment of some kind. The pool of highly talented and extremely expensive Microsoft lawyers have gotten so skilled at the dance that the company is typically fielding multiple large scale battles simultaneously. From Android patent deals to fighting the US government over international cloud privacy, Microsoft lawyers may spend just as much time in courtrooms as testers do testing code.

One of the many legal battles that look to jeopardize Microsoft’s financial position is the Microsoft Corporation vs. Internal Revenue Service, 15-cv-00850, U.S. District Court, Western District of Washington. This contentious struggle between the United States Internal Revenue Service (IRS) and Microsoft has been going for some time now. Last year, Microsoft took an income tax hit due to changes in IRS auditing process. While the IRS maintains that these proceedings are legal and necessary, Microsoft contends that “the IRS is attempting to continue to extend the statute of limitations in a case that’s been underway for nearly eight years.” Just last year, Microsoft took an income take charge because of an “audit adjustment” by the IRS. The most financially significant battle comes of late. In 2014, the IRS summoned Microsoft about the company’s transfer pricing practices in Puerto Rico, according to ZDNet. The IRS said that this marks the largest legal IRS audit of the company and could result in “tens of billions” in corporate income for the IRS.

To wrangle some understanding of the company’s financials, the IRS has sought the employment of Boies Schiller & Flexner LLP. Anyone who paid attention during the 2000 Microsoft antitrust case should remember the name David Boies. He spearheaded the investigation against Microsoft back in the day and was nearly able to split the company. With the 2003 antitrust case seemingly put to rest nationally and abroad for Microsoft, the company is now questioning Boies’ involvement and relationship with the IRS. As of May 29th, 2015, Microsoft has filed a federal lawsuit in Seattle, asking that the court enforce its public-records request for documents on the IRS decision to retain the services 3rd party, Boies Schiller & Flexner. Boies’ firm isn’t the only 3rt party firm the IRS has employed in for their continued investigation into Microsoft. Quinn Emanuel Urquhart & Sullivan is another firm that was hired to a 2.2 million dollar contract to investigate the tech company, according to Microsoft.

Image Credit: NY Times

According to Bloomberg Business, the 74-year-old Microsoft adversary, Boies had nothing to say about his involvement in this case. However, the IRS revealed some information in filings related to the case. Just last month, the IRS stated the contract between Boies and the IRS was for “expert services” and is “related to assisting the IRS in its examination of Microsoft.” Perhaps this is a tactical move on the part of the IRS to keep Microsoft on their toes. Regardless, Microsoft would like some more information: “We’re pleased the IRS provided the documents requested by one of our previous FOIA suits and hope this additional suit helps complete the information we need to further understand the government’s process,” David Cuddy, a Microsoft spokesman, said in a statement.

This battle over seemingly old logistics could have some resounding effects on Microsoft currently. We’ve reported on the overseas stockpiles of cash Microsoft is sitting on. According to Bloomberg Business, “Microsoft has more than tripled its offshore holdings since 2010, stockpiling profits outside the country under a rule that exempts them from U.S. taxation until the profits are repatriated. The company would owe $29.6 billion to the U.S. if it brought home its $92.9 billion stockpiled overseas, according to securities filings.” With the two recent suits Microsoft brought against the IRS, seeking information into the contracts between the revenue service and their 3rd party investigators, it looks like Microsoft’s plan is to poke holes in the validity of the investigation. For their part, Microsoft has received support from Washington-based trade associations as well as Senate Finance Chairman Orrin Hatch, according to Bloomberg Business. Orrin questions the necessity and validity of the IRS in using tax payers money to hire outside consultants and private contractors for this case.

Observers should expect to see this see-saw battle continue for some time. The IRS is now invested in their outside consultants to the tune of millions. Microsoft is beginning to spend their cash overseas cash pile in recent acquisitions. The totality of this case will be far from what it once originally started by the time the two bodies come to a regulatory conclusion.