Stephen L. Curtis (Cross Border Analytics), Reuven S. Avi-Yonah (Michigan; Google Scholar) & David G. Chamberlain (Cal Poly; Google Scholar), Facebook Decision Enables IRS to Seek CWI Enforcement Against Meta, 188 Tax Notes Fed. 709 (Aug. 4, 2025):
In this report, the authors explain how the Tax Court’s recent decision in the Facebook transfer pricing case — although widely viewed as a victory for the taxpayer, Meta Inc. — could instead be a Pyrrhic victory because it enables the IRS to pursue a potentially substantial periodic adjustment against the company.
Conclusion
Despite being the third Tax Court case after Veritas and Amazon in which the IRS largely lost its challenge to an ex ante buy-in valuation, Facebook was a resounding win for the CWI statute and thus for the periodic adjustment regulations that implement it. Facebook is also the third Tax Court decision to consider and rule on the validity of the CWI statute and regulations, the other cases being Altera and 3M.
Given the analyses performed in this report, which suggest a likely periodic adjustment by 2017, together with AM 2025-001, there appear to be no obstacles that would prevent the IRS from now applying what could be the first periodic adjustment in the history of IRS transfer pricing enforcement since the CWI statute was enacted in 1986. In fact, with the AERR computations that Facebook included in some of its court filings, it seems probable that Facebook has already internally performed AERR and period adjustment computations for its 2017 through 2019 tax years to understand the tax risks that it faces. The IRS should simply request these calculations, scrutinize them, and apply periodic adjustments after making any necessary adjustments to the company’s calculations. Facebook’s 2019 results in particular — in which foreign pretax income appeared to be 400 percent of its U.S. pretax income, compared with being less than its U.S. income in 2016, when Facebook almost triggered a periodic adjustment in that year, according to its own calculations — makes it seem all but certain that a periodic adjustment had been triggered by then, if not already triggered in 2017 or 2018.
Enforcing this apparent cost-sharing periodic adjustment against Facebook now should be only the first in a long list of IRS enforcement actions for similar identified violations. The relatively objective computational nature of these adjustments is based largely on rote calculations involving historical tax information that presents few opportunities for manipulation. That makes this an ideal situation for deployment of a team of trained specialists. That team could evaluate and pursue many of these cases, including those identified in the series of papers listed in this report. There are undoubtedly many others yet to be discovered.
Why is a team of trained specialists needed? Despite many issues being technically or operationally complicated to identify and pursue, IRS examinations are generally not conducted in a centralized manner by topic or issue. Rather, examinations are normally conducted by individuals who examine one taxpayer at a time for any issues that they happen to come across. There is normally no central guidance to alert examining agents that a given taxpayer probably has major issues that have been identified through high-level or detailed forensic mechanisms. As a result, and as demonstrated by the above-mentioned series of papers, examiners typically do not detect major ECI, judicial doctrine, or transfer pricing violations (including periodic adjustment situations). There should at least be a small team of specialists who would identify likely candidates for these three areas of violations through the use of forensic tools. They could provide technical and practical support to the examining agents assigned to these taxpayers. The lack of a specialized team explains in part why no periodic adjustments or ECI taxation have ever been proposed to date on seemingly flagrant multinational profit-shifting structures.
We believe that as much as a trillion dollars of underpayments (including penalties and interest for past years) may be at stake. It would thus be astonishing if the IRS were to forgo creating a team of specialists and instead continued to spend its limited (and diminishing) enforcement resources performing mostly taxpayer-by-taxpayer random or continuous audits that mostly fail to identify or even understand these major issues, thereby recovering little tax.
All this is to say that despite recent turmoil at the IRS resulting from mass firings, reductions in force, and defunding by Congress, the agency has a historic opportunity to make a giant leap forward in tax administration. That leap could allow the IRS to collect more revenue and have a larger impact on the national tax gap than at any time in the past, even when the IRS had far greater resources. The IRS can do this by prioritizing enforcement resources through a centralized team approach and forensic methods that will identity and deal with the largest and most widespread corporate tax violations. Of course, it could start with the taxpayers identified in the series of papers referenced above. The IRS should not let this opportunity pass; it must lay the groundwork for achieving a very different future, in which these apparent tax violations are far riskier for taxpayers and therefore much less prevalent.
Editor's Note: If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.
