Microsoft is being audited by the IRS and they demand leaders testify
The IRS is suing a number of former and current executives of Microsoft in a bid to force them to testify in an investigation into the company’s corporate tax practices.
According to The Seattle Times, at issue is whether the company is following corporate tax law in its practices of transferring the rights to its software to various subsidiaries in countries and territories of the U.S. with low taxes. This practice is commonly used by multinational corporations with valuable intellectual properties, and reportedly had “billions of dollars of impact” on Microsoft’s taxable income between 2004 and 2006, according to the lawsuit being brought by the IRS.
How it works
Companies that have subsidiaries in countries around the world are supposed to operate as though those subsidiaries were an “arm’s length” away for tax purposes. This means negotiating and dealing fairly with each other instead of setting prices that are favorable to the company come tax time. Frequently, this is not what happen.
Picture a large, multinational company with Subsidiary A in a country or locale with low taxes but a small market for its intellectual goods. Subsidiary B is in a country with higher taxes but a much larger market. Subsidiary B makes $1 billion in profits, but to reduce the overall tax burden, the company shifts the rights to the intellectual goods to Subsidiary A and sets the “price” for Subsidiary B to sell those goods at $1 billion. The result is that Subsidiary B makes no profits on paper, meaning that it has to pay virtually nothing in corporate tax. Subsidiary A has $1 billion in profits and pays the lower taxes on those profits that are mandated by its location.
The Internal Revenue Service appears to believe that this is what is happening in the case of Microsoft, and is attempting to get to the bottom of the issue.
According to GeekWire, the IRS issued a summons to longtime CEO Steve Ballmer at his home in Seattle demanding that he testify on Dec. 8, but he failed to appear. Microsoft had already told the IRS by this point that it was declining to make Ballmer and other former executives available because of a disagreement with the IRS over interview procedures. The IRS is also seeking to interview former chief Jim Allchin, former executive Bill Veghte, former Office division leader Jeff Raikes, former research and strategy chief Craig Mundie, former VP of Microsoft’s Worldwide Partner Group Jon Roskill and former marketing chief Mich Matthews, among others.
Reputational Risk and Legal Exposure: Why New Jersey Businesses Must Manage Them Together
New Jersey businesses must manage legal and reputational risk together because modern disputes play out on two fronts at once: the legal proceeding itself and the court of public opinion, where customers, employees, investors, and business partners often reach conclusions long before a judge or jury has had the opportunity to evaluate the facts. Success […]
Eviction Is Not Always the End: Understanding Post-Possession Rent Claims in New Jersey and New York
No. An eviction does not automatically end a tenant’s obligation to pay rent. Post-eviction rent claims are common because recovering possession resolves who has the right to occupy the premises, but it does not extinguish the tenant’s contractual obligations under the lease. Whether unpaid or future rent remains owed depends on three factors: the lease’s […]
Company Dissolved? Legal and Financial Consequences to Expect
A company is dissolved; legally, it ceases to exist. Accordingly, dissolution results in significant legal and financial consequences. It is a process that must be properly managed to avoid continuing liability. The Corporate Dissolution Process Corporate dissolution is the legal process of formally closing a corporation, paying its debts and distributing the remaining assets. Most […]
The Legal Implications of Signing a Triple Net Lease
A triple net lease is a commercial lease in which the tenant pays the property’s real estate taxes, insurance, and maintenance costs, known as the three nets, in addition to base rent. They are most often used in freestanding retail and office buildings and in large single-tenant industrial properties, with terms that typically run 10 […]
When to Settle and When to Fight: A Litigator's Framework
Every lawsuit comes with a cost, and knowing when to settle a lawsuit is one of the most consequential decisions a business owner will face. Experienced litigators understand how to minimize cost and obtain certainty for their clients. For many business owners, the decision is viewed almost entirely through a financial lens: What will it cost […]
What Is Corporate Litigation? A Clear Guide for Businesses
Corporate litigation, also called commercial litigation or business litigation, is the formal legal process through which companies resolve disputes in the civil court system. When a business relationship breaks down and other resolution methods have failed, litigation provides a structured legal mechanism for asserting rights, recovering damages, enforcing obligations, and obtaining court-ordered relief. Unlike criminal […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
