Judge orders Microsoft to give IRS what it wants

Under the judge’s order, Microsoft must hand over more documents and make some former and current executives available for interviews in a long-running tax audit of the company’s books.

Microsoft must comply with Internal Revenue Service requests for documents and interviews with current and former executives as part of a long-running tax audit.

U.S. District Judge Ricardo Martinez, in an order posted Monday, ordered the company to comply with a set of summonses the IRS issued late last year.

The IRS has been scrutinizing Microsoft’s 2004 to 2006 tax years since 2007, focusing on a pair of deals that shifted the rights to profit from Microsoft products to foreign subsidiaries.

The audit turned adversarial in late 2014, and the IRS in December sued Microsoft, former Chief Executive Steve Ballmer, and a slate of other executives to force them to agree to interviews and turn over more documents.

Microsoft objected, arguing that the IRS’ use of an outside law firm, Quinn Emanuel Urquhart & Sullivan of Los Angeles, to aid in the audit was an improper delegation of its authority to examine taxpayer books.

In his order, Martinez said the government had a legitimate purpose in continuing to pursue the audit, and that the use of Quinn Emanuel wasn’t a breach of IRS authority that would invalidate the summonses.

“The court’s role in this matter is not to pass judgment on the IRS’ contracting practices, but to enforce or not enforce the summonses,” Martinez wrote. The law allows the IRS some flexibility in its use of outside contractors, he said, and Microsoft’s characterization of the role of Quinn Emanuel “greatly exceeds what is evident in the record.”

Microsoft had portrayed Quinn Emanuel’s involvement as an IRS effort to gain an advantage should the case wind up in tax court. The company also accused the IRS of misleading Microsoft about Quinn Emanuel’s participation in the audit.

An IRS spokesman didn’t respond to a request for comment.

Martinez said he was troubled by Quinn Emanuel’s role in the audit, a point a Microsoft spokeswoman noted in a statement after the ruling.

Microsoft is disappointed with the outcome, she said. “We hope that with the additional information it has sought, the IRS will now move forward to deliver a final tax bill.”

What the tax bill is, and when it might arrive, is unclear.

The IRS in 2011 delivered a preliminary assessment of additional taxes Microsoft may owe, but withdrew that and continued the investigation as part of an enhanced inquiry of companies that shift property among subsidiaries.

So-called “transfer pricing” is at the heart of the IRS’ scrutiny of Microsoft.

Companies like Microsoft strike deals that set the prices subsidiaries pay each other for things like software code and brand rights. Such deals are supposed to be conducted on terms as if the companies were independent, a rule in place to prevent firms from shifting property at artificially cheap rates to minimize taxes.

Microsoft completed agreements in 2004, 2005 and 2006 that, in exchange for upfront payments, sent the rights to profit from Microsoft software in Asia and the Americas to units in Singapore and Puerto Rico.

In court, the IRS raised concerns about those deals, which it says had billions of dollars of impact on Microsoft’s tax bill, and on Microsoft’s cooperation with the audit. Some key pieces of information weren’t delivered until late in the audit, lawyers for the IRS said.

Microsoft says it has cooperated with the tax agency and that the examination has gone on too long.

The summonses the IRS issued to Microsoft last December covered hundreds of documents and also requested interviews with Ballmer, and former senior executives Craig Mundie, Jeff Raikes and Jim Allchin, among others.