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IRS

Department of the Treasury
Internal Revenue Service

Date:

NOV 0 9 2012

Taxpayer Identification Number:

915 Second Avenue
Mailstop Wl40
Seattle, WA 98174

91-1646860
Form Number: 1120
Person to Contact:
90 Day Notices Clerk
Contact Telephone Number:

CERTIFIED MAIL

206-220-6192

AMAZON.COM INC AND SUBSIDIARIES
(a consolidated group}
410 Terry Ave North
Seattle, WA 981 09

Contact Fax Number:

206-220-5691
Employee Identification Number:
Not Applicable
Last Day to File a Petition With the United
States Tax Court:

FEB 0 7 2013

Tax Year Ended:
December 31, 2005
December 31, 2006

Deficiency:

Penalties or Additions to Tax

$8,380,790.00
$225,653,149.00

Dear Taxpayer:
Why We Are Sending You This Letter

We detennined that you owe additional tax or other amounts, or both, for the tax year or years identified above.
This letter is your NOTICE OF DEFICIENCY, as required by law. The enclosed Fonn 4549, Income Tax
Examination Changes, shows how we figured the deficiency.
If You Wish to Challenge This Determination

If you want to challenge this detennination in court before making any payment, you have 90 days from the
date of this letter (150 days if this letter is addressed to you outside of the United States) to file a petition with
the United States Tax Court to reconsider the deficiency.
Information You Will Need

If you have recently sought bankruptcy relief by filing a petition in bankruptcy court, see enclosed Notice 1421,
How Bankruptcy Affects Your Right to File a Petition in Tax Court in Response to a Notice ofDeficiency.

Letter 531 (Rev. 4-2012)
Catalog Number 40223L

 Form

886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Name of Taxpayer
AMAZON.COM INC AND SUBSIDIARIES
TIN 91-1646860

Schedule No.
or Exhibit

Year/Period
Ended
2005/12-31-2005
2006/12-31-2006

UNAGREED ADJUSTMENTS

1-05 Initial Buy-In
Tax Period
Adjustment
2005
$1,036,305,000.00
2006
$1,170,251,000.00

You transferred intangible property (including all related transactions and/or services) necessary to operate the
European website businesses to your commonly owned or controlled entity (within the meaning of Internal
Revenue Code § 482), Amazon Europe Holding Technologies SCS. Under Internal Revenue Code § 482, to
clearly reflect income, your taxable income is increased by $1 ,036,305,000.00 for the taxable year 2005 and
increased by $1,170,251,000.00 for the taxable year 2006.
1-01 Acquisition Buy-Ins
Tax Period
Adjustment
2005
$4,881,993.00
2006
$2,548,165.00

You transferred intangible property from the acquisitions ofBooksurge LLC, Customflix Labs, Inc., Pulver
Technologies, Inc. and Mobipocket.com SA to your commonly owned or controlled entity (within the
meaning oflntemal Revenue Code § 482), Amazon Europe Holding Technologies SCS. Under Internal
Revenue Code§ 482, to clearly reflect income, your taxable income is increased by $4,881,993.00 for the
taxable year 2005 and increased by $2,548,165.00 for the taxable year 2006.
1-03 Cost Shadng Payments (Other Costs)
Tax Period Adjustment
2005
$23,032,918.00
2006
$109,889,346.00

Under Internal Revenue Code § 482, to clearly reflect the income of commonly owned ot· controlled entities
(within the meaning oflntemal Revenue Code§ 482), we have allocated income to reflect the proper
calculations of amounts that you should have received under the cost sharing arrangement effective January 1,
2005. To clearly reflect total intangible development costs, we have included certain omitted costs to be
shared. Consequently, we have reduced your allowable deductions, resulting in an increase to your taxable
income. Taxable income is increased by $23,032,018.00 for the taxable year 2005 and increased by
$109,889,346.00 for the taxable year 2006.
In addition, in making the determination of your income tax liability, careful consideration has been given to
your claim for refund (Affinnative Claim) filed on February 25, 2010 for the taxable year 2005. It is
detennined that the issue{s) raised in your claim requesting a reduction in the cost sharing payment in the
amount of $59,752,000.00 for the taxable year 2005 is not allowable because your method of reducing
1

 Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

schedule No.
or Exhibit
Year/Period
Ended

N8me of Taxpayer
AMAZON.COM INC AND SUBSIDIARIES
TIN 91-1646860

2005/12-31-2005
2006/12-31-2006

previously included total costs for certain cost centers by applying a developer percentage and a QRE
percentage is not proper.
If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue(s) set
forth in your claim should be made part ofthe petition to be considered by the United States Tax Court in any
redetermination of your tax liability. If a petition is not filed, the claim will be disallowed and official notice
will be issued by certified mail in accordance with Internal Revenue Code§ 6532(a)(l).
1~04

Cost Sharing Payments (Stock~Based Compensation)
In making the determination of your income tax liability, careful consideration has been given to your claim
for refund (Affirmative Claim #2) filed on June 21,2010 for the 2005 and 2006 taxable years. It is
detennined that the issue(s) raised in your claim requesting a reduction in cost sharing payments in the
amounts of $2,545,000.00 for the 2005 taxable year and $6,951,000.00 for the taxable year 2006 is not
allowable because all costs of developing intangible property, including the cost of stock·based compensation,
must be shared with affiliates under a qualified cost sharing arrangement. With respect to the cost sharing
arrangement effective January 1, 2005, we have determined that the cost of stock-based compensation is
properly includable in the costs to be shared.
If a petition to the United States Tax Cout1 is filed against the deficiency proposed herein, the issue(s) set

forth in your claim should be made part of the petition to be considered by the United States Tax Court in any
redetermination of your tax liability. If a petition is not filed, the claim will be disallowed and official notice
will be issued by certified mail in accordance with Internal Revenue Code§ 6532(a)(l).
PREVIOUSLY AGREED ADJUSTMENTS
ENG-01

You previously indicated your agreement to decrease your research credit by $32,421.00 for the taxable year
2006 by executing waiver Fonn 870 on October 12,2012. Your research credit is therefore decreased by
$32,421.00 for the taxable year 2006. However, the Unagreed Adjustments set forth above result in a
deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed herein, and if
you disagree with this adjustment that you previously indicated your agreement to, such issue should be made
part of the petition to be considered by the United States Tax Court in any redetermination of your tax
liability.
Dl, D-2, FP-1, 1-02,1-06,1-07,1-08,1-09, 1-10, 1-11,1-12, 1-13,1-14, 1-15,1-16, 1~17

You previously indicated your agreement to these adjustments by filing claims for refund and executing
waiver Fonn 870 on October 12,2012. In making the determination of your income tax liability, careful
consideration has been given to the following claims for refund: (1) claim for refund (Affirmative Claim #13)
filed on December 15, 2010, for the taxable year 2005 requesting to increase your capital loss by
$17,518,238.00; (2) claims for refund filed on December 16,2010, for the 2005 and 2006 taxable years
requesting reductions of tax in the amounts of$9,551,111.00 and $4,365,19(}.00, respectively; and (3) claims
2

 Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Name of Taxpayer
AMAZON.COM INC AND SUBSIDIARIES
TIN 91-1646860

Schedule No.
or Exhibit

Year/Period
Ended
2005/12-31-2005
2006/12-31-2006

for refund filed on July 17, 2012, for the 2005 and 2006 taxable years requesting reductions of tax in the
amounts of$9,551,111.00 and $4,365,813.00, respectively.
The issues raised in these claims and identified on the Fonn 870 signed on October 12,2012 have been
allowed in this notice of deficiency, as set forth below. However, the Unagreed Adjustments set forth above
result in a deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed
herein, and if you disagree with any of the adjustments that you previously indicated your agreement to, such
issues should be made part of the petition to be considered by the United States Tax Court in any
redetermination of your tax liability. If a petition to the United States Tax Court is not filed, a statutory notice
of disallowance will be forwarded to you in accordance with the provisions of Internal Revenue Code
§ 6532(a)(l).
D-1: Your capital loss is increased by $17,517,238.00 for the taxable year 2005.
D-2: Your taxable income is increased by $13,512,972.00 fur the taxable year 2006.
FP-1: Your Net Operating Loss carryover into the taxable year 2005 is decreased by $10,016,250.00.

I-02: Your taxable income is increased by $2,048,986.00 for the taxable year 2006.
1-06: Your Net Operating Loss carryover into the taxable year 2005 is increased by $3,101 ,397 .00.
1-07: Your Net Operating Loss carryover into the taxable year 2005 is increased by $28,164,530.00.

1-08: You are alJowed a Foreign Tax Credit, subject to limitations, in the amount of$12,903,591.00
for the taxable year 2005.
1-09: Your taxable income is decreased by $2,350,613.00 for the taxable year 2006.
1-10: Your taxable income is increased by $2,549,026.00 for the taxable year 2006. Additionally,

your capital loss is increased by $2,549,026.00 for the taxable year 2006.
1-11: Your taxable income is increased by $1,384,823.00 for the taxable year 2006. You are also

allowed a Foreign Tax Credit, subject to limitations, in the amount of$1,384,823.00 for the taxable
year2006.
1-12: Your taxable income is increased by $439,927.00 for the taxable year 2006.
1-13: Your taxable income is increased by $1,020,213.00 for the taxable year 2006. AdditionaJly, you
have an allowable Foreign Tax Credit, subject to limitations, in the amount of$1 ,020,213.00 for the
3

 Form

886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Name of Taxpayer

Schedule No.
or Exhibit
Year/Period
Ended

AMAZON.COM INC AND SUBSIDIARIES
TIN 91-1646860

2005/12-31-2005
2006/12-31-2006

taxable year 2006. Due to Separate Limitation Loss rules, you are unable to utilize the credit in the
taxable year 2006.
1-14: Your Net Operating Loss carryover into the taxable year 2005 is increased by $5,376,714.00.
1-15: Your taxable income is decreased by $730,665.00 for the taxable year 2006.
1-16: Your Net Operating Loss carryover into the taxable year 2005 is increased by $2,390,982.00.
1-17: Your taxable income is increased by $699,818.00 for the taxable year 2006.
COMPUTATION ADJUSTMENTS

We have adjusted your Contributions Deduction (CALC02) for the taxable year 2006, your Net Operating
Loss Deduction (CALC04) for the taxable years 2005 and 2006, your Foreign Tax Credit (CALC II) for the
taxable year 2006, your General Business Credit (CALC13) for the taxable year 2006, your Minimum Tax
Credit (CALC 14) for the taxable year 2006, and your Alternative Minimum Tax, including Alternative
Minimum Tax Foreign. Tax Credit (CALC22) for the taxable years 2005 and 2006, as shown on the attached
computation report.

4