Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 1 of 37 U.S. TAX COURT RECEIVED U.S. TAX COURT FlLED OCT T 1 2016 UNITED STATES TAX COURT HAND D V , . f0Cf 1 1 2016 '. & SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 21 9 5 -16 Respondent. PETITION Facebook, Inc. ("Facebook") and Subsidiaries hereby petitions for a redetermination of the deficiencies in income tax for the taxable year ended December 31, 2010 ("2010") determined by the Commissioner of Internal Revenue ("Respondent") in a Notice of Deficiency dated July 26, 2016 (the "Notice"). As a basis for its case, Facebook alleges as follows: 1. Petitioner. Facebook is a corporation organized under the laws of the Address Used By Court State of Delaware. Facebook's principal place of business is 1601 Willow Road, Menlo Park, California, 94025. Facebook timely filed its federal income tax return for 2010 electronically. 2. Notice of Deficiency. The Notice (a copy of which is attached) was mailed to .Facebook on or about July 26, 2016, by the Small Business/Self- 645904 Appendix 1 1 SERVED Oct 13 2016 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 2 of 37 Employed division of the Internal Revenue Service at 55 South Market Street, San Jose, California, 95113. 3. Amount in Dispute. In the Notice, Respondent determined a deficiency in the amount of $1,733,335 for 2010. The entire amount of the deficiency is in dispute. The Court's determinations with respect to the assignments of error alleged in Paragraph 4., infra, will require redetermination of various correlative and computational adjustments made in the Notice in accordance with Tax Ct. R. 155. 4. Assignments of Error. Respondent's determination of a deficiency is based upon the following errors: 4.a. INCOME FROM THE LICENSE OF INTANGIBLE PROPERTY. Respondent erred in increasing Facebook's gross royalty income contrary to section 482,' Treas. Reg. § 1.482-4, and Treas. Reg. § 1.482-7T in the amount of $84,915,248 for 2010, with respect to the intangible property made available by Facebook to Facebook Ireland Holdings Unlimited ("Facebook Ireland") effective as of September 15, 2010. Respondent's income allocation ignores the arm's length standard of section 482 and the regulations promulgated thereunder. Respondent's income allocation is arbitrary, capricious, or unreasonable. ¹ All references to "section" or "Code" refer to the Internal Revenue Code of 1986, as amended. 645904 2 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 3 of 37 4.b. COST SHARING PAYMENT ADJUSTMENT. Respondent erred in adjusting Facebook's reasonably anticipated benefits ("RAB") share and incorrectly allocating intangible development costs between Facebook and Facebook Ireland contrary to section 482 in the amount of $5,390,144. Respondent's adjustment to Facebook's RAB share violates the arm's length standard of section 482 and is arbitrary, capricious, or unreasonable. 4.c. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION. Respondent erred in decreasing Facebook's domestic production activities deduction ("DPAD") by $6,003,887 for 2010 contrary to section 199. 4.d. CREDIT FOR INCREASING RESEARCH ACTIVITIES. Respondent erred in decreasing Facebook's credit for increasing research activities ("research credit") by $7,156,209 for 2010 contrary to section 41. 4.e. NET OPERATING LOSS DEDUCTIONS. As a result of the errors sets forth in paragraphs 4.a. and 4.b., which are incorporated here by reference, Respondent erred in increasing the amount of Facebook's utilized Net Operating Loss ("NOL") carryover deduction by $90,305,392 in 2010. 5. Supporting Facts. Facebook relies on the following facts as the basis for this proceeding: 645904 3 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 4 of 37 5.a. INCOME FROM THE LICENSE OF INTANGIBLE PROPERTY. Overview of Facebook's Business and Industry 5.a.1. Facebook's mission is to give people the power to share and make the world more open and connected. As of 2010, Facebook developed and operated Facebook.com, a website that enabled people to interact with other people they know in a trusted environment. 5.a.2. Since 2006, anyone, anywhere in the world, over the age of 13, subject to local laws, can register to use Facebook, free of charge. 5.a.3. Any person registered to use Facebook can deactivate or delete his or her Facebook account at any time. 5.a.4. In 2010, people primarily accessed Facebook through the internet from a desktop computer. 5.a.5. During the period prior to September 15, 2010, the numbers of total monthly active users ("MAUs")2 (in millions) of Facebook by region were as follows: 2 MAUs refer to the number of people who have logged in and visited Facebook, or took an action to share content or activities with their Facebook friends or connections via third-party websites that are integrated with Facebook in the last 30 days as of the date of measurement. 645904 4 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 5 of 37 Date North America Rest of World Total January 18, 2009 55 101 156 March 31, 2009 68 129 197 June 30,2009 81 161 242 Sept. 30, 2009 99 206 305 Dec. 31, 2009 112 248 360 March 31, 2010 130 301 431 June 30, 2010 137 345 482 September 14, 2010 146 392 538 5.a.6. As of 2010, Facebook earned revenue from (1) advertisers displaying ads to people using Facebook from a desktop computer and (2) third-party developers who developed their own products or services for Facebook users. 5.a.7. As of 2010, Facebook did not display ads to people who accessed Facebook from mobile devices. 5.a.8. As of 2010, Facebook did not earn any revenue by selling ads displayed to people when they accessed Facebook through mobile devices. Facebook's International Headquarters: Facebook Ireland 5.a.9. In 2008, Facebook decided to establish in Dublin, Ireland, its headquarters for the Facebook business outside North America. 645904 5 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 6 of 37 5.a.10. In connection with the establishment of Facebook Ireland, Facebook and Facebook Ireland entered into an Intangible Property License Agreement effective as of January 19, 2009 (the "2009 IP License"). 5.a.11. Pursuant to the 2009 IP License, Facebook granted to Facebook Ireland a non-exclusive license to use the "Facebook System" to develop, promote, expand, maintain, and monetize the users, advertisers, and developers outside North America ("Facebook Ireland's territory"). 5.a.12. The 2009 IP License defined the "Facebook System" as the system that "facilitates the sharing of data about users, advertisers and developers, scales to accommodate the amount of data transferred, delivers advertising to user pages, provides an application development platform, and any related processes or technology that relates to Facebook facilitating communication between users and serving advertising that utilize, embody or incorporate, or are created or produced using, Covered Intangibles." 5.a.13. The 2009 IP License defined "Covered Intangibles" as the "technologies, procedures, processes, designs and design rights, inventions, discoveries, know-how, patents (including patent applications pending before any relevant authority worldwide, with any additions, continuations, continuations-in- part, divisions, reissues or extensions based thereon), copyrights (and other rights of authorship), trade secrets, computer programs (in source code and object code 645904 6 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 7 of 37 form), flow charts, formulae, enhancements, updates, translations, adaptations, information, specifications, designs, process technology, quality control standards, and any other similar intangible property owned or licensed in, in whole or in part, by [Facebook], including any intangible property developed as a part of in-process and future research and development." 5.a.14. Between January 19, 2009 and September 14, 2010, Facebook Ireland, at its expense, grew the user base in its territory from 101 million MAUs to 392 million MAUs. 5.a.15. The 2009 IP License was terminated effective as of September 15, 2010. Online Platform Intangible Property Buy-In License Agreement 5.a.16. Facebook and Facebook Ireland entered into the Online Platform Intangible Property Buy-In License Agreement ("PCT Agreement") effective as of September 15, 2010. 5.a.17. Pursuant to the PCT Agreement, Facebook granted to Facebook Ireland an exclusive license to the "Facebook US PCT Property" in Facebook Ireland's territory. 5.a.18. The PCT Agreement defined "Facebook US PCT Property" as all "Intangible Property, including computer software, relating to the 645904 7 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 8 of 37 Facebook Online Platform existing and owned or licensed by Facebook US as of [September 15, 2010]." 5.a.19. The PCT Agreement defined "Intangible Property" as any "intellectual property rights, proprietary rights, procedures, processes, know-how, patents (including patent applications pending before any relevant authority worldwide, with any additions, continuations, continuations-in-part, divisions, reissues or extensions based thereon), copyrights (and other rights of authorship), trade secrets, computer software (in source code and object code form), algorithms, flow charts, formulae, enhancements, updates, modifications, translations, adaptations, information, specifications, process technology, and any other similar intangible property as defined under U.S. Treasury Regulation § 1.482-4(b) or rights to such intangible property." 5.a.20. The PCT Agreement defined "Facebook Online Platform" as the "hardware and software system, including all developments, enhancements, and features in existence on [September 15, 2010], which are generally made available by Facebook on the platform or any successor platform, that facilitates the sharing of data between users for social networking purposes, sales of credits and virtual items, development of applications by developers, delivery of targeted advertisements to user pages, and any related processes or technology that relates to facilitating communication and social networking among 645904 8 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 9 of 37 users and serving advertisements that utilize, embody or incorporate, or are created or produced using, Intangible Property." 5.a.21. The PCT Agreement specifically excepts any User Base and Marketing Intangibles (as defined below), related to the Facebook Online Platform owned or licensed by Facebook as of September 15, 2010 from the scope of the PCT Agreement. 5.a.22. In exchange for Facebook's grant of rights under the PCT Agreement, Facebook Ireland agreed to pay arm's length royalties contingent on the exploitation of the licensed rights. 5.a.23. Facebook concluded that the net present value of the Facebook US PCT Property as of September 15, 2010 was $1,685,644,726. User Base Transfer and Marketing Intangibles License Agreement 5.a.24. Facebook and Facebook Ireland entered into the User Base Transfer and Marketing Intangibles License Agreement ("User Base and Marketing License") effective as of September 15, 2010. 5.a.25. Pursuant to the User Base and Marketing License, Facebook transferred the "User Base" in Facebook Ireland's territory as of September 15, 2010 to Facebook Ireland. 645904 9 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 10 of 37 5.a.26. The User Base and Marketing License defined "User Base" as "contracts and other relationships with persons comprising the various user communities developed and maintained by the Parties, information about such users, and networks developed by users[.]" 5.a.27. Facebook made the User Base available to third- party developers who developed and sold virtual and digital goods, such as virtual goods used in social games, to those users. 5.a.28. When users purchased virtual and digital goods from third-party developers, Facebook received arm's length fees representing a portion of the transaction value. 5.a.29. Facebook concluded that the net present value of the User Base in Facebook Ireland's territory as of September 15, 2010 was $4,078,192,896. 5.a.30. In exchange for Facebook's grant of rights under the User Base and Marketing License, Facebook Ireland agreed to pay arm's length annual contingent amounts. 5.a.31. Facebook Ireland overvalued the User Base in Facebooks Ireland's territory because Facebook Ireland, at its expense, developed the User Base in its territory from January 19, 2009 through September 14, 2010. 645904 10 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 11 of 37 5.a.32. Additionally, pursuant to the User Base and Marketing License, Facebook also granted to Facebook Ireland the non-exclusive right to "Marketing Intangibles" in Facebook Ireland's territory. 5.a.33. The User Base and Marketing License defined "Marketing Intangibles" as any "trademarks, service marks, trade names, trade dress, domain names, business marks, designs, packaging, marketing strategies, customer lists, other marketing information, registrations, pending registrations and copyrights to logos or pictorial depictions, any intangible property associated with any such marks (such as marketing intangibles and brand name quality control standards), and other similar marketing intangible property." 5.a.34. Facebook concluded that an annual contingent royalty of one percent of Facebook Ireland's revenue for the Marketing Intangibles licensed by Facebook to Facebook Ireland was arm's length. Respondent's Ad justment 5.a.35. On July 26, 2016, Respondent issued the Notice alleging a deficiency of tax in the amount of $1,733,335 for 2010. 5.a.36. According to the Notice, Respondent alleges that the net present value of the intangible property transferred effective September 15, 2010 pursuant to the User Base and Marketing License and the PCT Agreement 645904 11 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 12 of 37 was $13,883,630,000, and, as a result, Respondent increased Facebook's gross royalties by $84,915,248 for 2010 (the "License Adjustment"). 5.a.37. The Notice does not identify or explain the methodology Respondent used to arrive at its determination of the net present value of the transferred intangible property. 5..a.38. The Notice does not identify or explain how Respondent allocated to 2010, $84,915,248 of the alleged $13,883,630,000 net present value of the transferred intangibles. 5.a.39. Respondent has not provided to Facebook a Form 5701, Notice of Proposed Adjustment relating to the License Adjustment. 5.a.40. Respondent has not provided to Facebook an IRS Economist Report relating to the License Adjustment. 5.a.41. On information and belief, a Form 5701, Notice of Proposed Adjustment, identifying or explaining the methodology for the License Adjustment did not exist at the time Respondent issued the Notice. 5.a.42. On information and belief, an IRS Economist Report identifying or explaining the methodology for the License Adjustment did not exist at the time Respondent issued the Notice. 5.a.43. On information and belief, Respondent issued the Notice without a reasonable basis for the License Adjustment. 645904 12 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 13 of 37 5.a.44. On information and belief, the License Adjustment includes an amount for the User Base in Facebook Ireland's territory developed by Facebook Ireland between January 19, 2009 and September 14, 2010. 5.a.45. Respondent made a naked assessment, increasing Facebook's gross royalties in the amount of $84,915,248 for 2010, without providing any legal, factual, or economic support for its adjustment. 5.a.46. Respondent's assessment is arbitrary, capricious, or unreasonable. 5.b. COST SHARING PAYMENT ADJUSTMENT. Agreement to Share Costs and Risks of Online Platform Intangible Property Development 5.b.1. Paragraphs 5.a.1. through 5.a.44., supra, are incorporated by reference. 5.b.2. Facebook and Facebook Ireland entered into the Agreement to Share Costs and Risks of Online Platform Intangible Property Development effective as of September 15, 2010 ("CSA"). 5.b.3. Pursuant to the CSA, Facebook and Facebook Ireland agreed to jointly develop the intellectual property rights owned by Facebook relating to the Facebook Online Platform in order to provide services to users in each party's territory. 645904 13 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 14 of 37 5.b.4. Pursuant to the CSA, Facebook and Facebook Ireland agreed to share the costs of intangible development based on each party's share of reasonably anticipated benefits ("RAB") to be derived from the exploitation of the cost shared intangibles. 5.b.5. Intangible development .costs include direct and indirect costs reasonably allocable to the intangible development activity, defined as any improvements, updates, adaptations, or other modifications to, or a complete replacement of, the Facebook Online Platform as used in the parties' online social networking business, but excluding the User Base and Marketing Intangibles. 5.b.6. Each party's RAB share is defined as the ratio of the net present value of the aggregate gross profit of one party divided by the net present value of the aggregate total gross profit of both parties, where gross profit is defined as gross profits in the current fiscal year plus projected gross profits for the two following fiscal years. 5.b.7. In 2010, Facebook and Facebook Ireland collectively incurred a total of $ 102,000,000 in intangible development costs pursuant to the CSA. 645904 14 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 15 of 37 5.b.8. In 2010, Facebook's RAB share was 57 percent and Facebook Ireland's RAB share was 43 percent, resulting in a payment by Facebook Ireland to Facebook in the amount of $44,000,000. Respondent's Ad justment 5.b.9. Respondent increased Facebook's taxable income by $5,390,144 because, according to the Notice, Facebook did not correctly calculate its RAB share. 5.b.10. The Notice does not identify or explain the methodology Respondent used to compute Facebook's RAB share. 5.b.11. Respondent has not provided to Facebook a Form 5701, Notice of Proposed Adjustment relating to Facebook's RAB share. 5.b.12. Respondent has not provided to Facebook an IRS Economist Report relating to Facebook's RAB share. 5.b.13. On information and belief, a Form 5701, Notice of Proposed Adjustment relating to Facebook's RAB share did not exist at the time Respondent issued the Notice. 5.b.14. On information and belief, an IRS Economist Report relating to Facebook's RAB share did not exist at the time Respondent issued the Notice. 645904 15 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 16 of 37 5.b.15. Respondent made a naked assessment, increasing Facebook's taxable income in the amount of $5,390,144 for 2010, without providing any legal, factual, or economic support for its adjustment. 5.b.16. Respondent's cost sharing payment adjustment is arbitrary, capricious, or unreasonable. 5.c. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION. 5.c.1. Facebook claimed a Domestic Production Activities Deduction ("DPAD") in the amount of $6,003,887 for 2010. 5.c.2. According to the Notice, Respondent alleges that Facebook is not entitled to any DPAD for 2010. 5.c.3. The Notice provides no explanation or basis for Respondent's allegation that Facebook is not entitled to any DPAD for 2010. 5.c.4. Respondent has not provided to Facebook a Form 5701, Notice of Proposed Adjustment relating to Facebook's DPAD claim. 5.c.5. On information and belief, a Form 5701, Notice of Proposed Adjustment relating to Facebook's DPAD claim did not exist at the time Respondent issued the Notice. 5.c.6. Facebook correctly claimed DPAD in the amount of $6,003,887 for 2010. 645904 16 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 17 of 37 5.c.7. Respondent made a naked assessment, denying Facebook's DPAD claim in the amount of $6,003,887 for 2010 in its entirety, without providing any legal, factual, or economic support for its adjustment. 5.d. CREDIT FOR INCREASING RESEARCH ACTIVITIES. 5.d.1. Facebook generated research credits for 2010 in the amount of $7,156,209. 5.d.2. In a Form 886-A, Explanation of Items, attached to a Form 5701, Notice of Proposed Adjustment, Respondent reduced Facebook's research credits for 2010 by $797,058. 5.d.3. Respondent improperly disallowed Facebook's research credit for 2010 in the amount of $7,156,209. 5.e. NET OPERATING LOSS DEDUCTIONS. 5.e.l. Paragraphs 5.a.1 through 5.b.16, supra, are incorporated by reference. 5.e.2. As a result of the errors addressed in paragraphs 4.a and 4.b, supra, Respondent improperly increased Facebook's NOL deduction utilized in 2010 from $629,226,367 to $719,531,759. 645904 17 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 18 of 37 WHEREFORE, Facebook requests that this Court hear this case, determine that no deficiency is due from Facebook and grant Facebook such other and further relief as this Court deems just and proper. Respe tfully submitted, ADMITTED Andrew P. Crousore Scott H. Frewing T.C. No. CA0420 T.C. No. FS0327 ADMITTED Baker & McKenzie LLP M Ch -young Kim T.C. No. KC0355 660 Hansen Way Palo Alto, California 94304 (650) 856-2400 Attorneys for Petitioner Facebook, Inc. & Subsidiaries Dated: October 11, 2016 645904 18 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 19 of 37 EXHIBIT Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 20 of 37 Internal Revenue Service Department of the Treasury FACEBOOK, INC. .AKA FACEßOOK, INC, & SUBSIDIARIES ATTENTION: CHIEF FINANCIAL OFFICER, DAVID WEHNER 1601 WILLOW ROAD MENLO PARK, CA 94025 Case Number: 396 I 3 Sender; oc Letter 937(DO) (Rev.7-87) Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 21 of 37 Department of the Treasury Internal Revenue Service Small Business / Self-Em ployed (SBSE) 55 South Market Street, HQ 4630 90 Day San Jose, CA 95113-2397 CERTIFIED MAIL FACEBOOK, INC. AKA FACEBOOK, INC. & SUBSIDIARIES ATTENTION: CHIEF FINANCIAL OFFICER, DAVID WEHNER 1601 WILLOW ROAD MENLO PARK, CA 94025 Tax Year Ended December 31, 2010 Deficiency: Penalty Section(s) Increase in Tax °ª e ~JUL 2 6 2016 Taxpayer identification Number: Redacted Form: 1120 Person to Contact: Benny Tang Contact Telephone Number: (408) 283-1468 (877)477-9165 (Fax) Employee Identification Number: 1D # 1000682894 Last Day to File a Petition With the United States Tax Court: OCT 2 4 2016 $1,733,335.00 Dear Taxpayers: Why we are sending you this letter We determined 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 Form 4549-A, Income Tax Discrepancy Adjustments or Form 5278, Statement - Income Tax Changes, shows how we figured the deficiency. If you wish to challenge this determination if you want to challenge this determination 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 ofDepciency. 55 South Market Street, HQ 4630 90 Day, San Jose, CA 95113-2397 sender: oc Letter 531 (Rev. 10-2016) Catalog Number 40223L Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 22 of 37 You can get a copy of the rules for filing a petition and a petition form by writing to the following address: United States Tax Court 400 Second Street, NW Washington, DC 20217 The Tax Court has a simplified procedure for small tax cases when the amount in dispute for each tax year is $50,000 or less. If you use this simplified procedure, you cannot challenge the Tax Court's decision. You can get information on the simplified procedure for small cases from the Tax Court by writing to the court at the address above or from the court's intemet site at www.ustaxcourt.gov. If you file a petition for multiple tax years and the dispute for any one or more ofthe tax years exceeds $50,000, this simplified procedure is not available to you. The law regarding married couples The law requires separate notices for husbands and wives. Both must sign and file the petition or each must file a separate, signed petition if this letter is addressed to both husband and wife, and both want to petition the Tax Court. If only one spouse is in bankruptcy at the time this letter was issued or files a bankruptcy petition after the date of this letter, the bankruptcy automatic stay does not prohibit the spouse who is not in bankruptcy from filing a petition with Tax Court. The bankruptcy automatic stay of the spouse seeking bankruptcy relief does not extend the time for filing a petition in Tax Court for the spouse who is not in bankruptcy. How to file your petition form Send the completed petition form, a copy of this letter, and copies of all statements and/or schedules you received with this letter to the Tax Court at the address above. If more than one tax year is shown above, you may file one petition form showing all of the years you are challenging. You may represent yourself before the Tax Court, or you may be represented by anyone admitted to practice before the Tax Court. Time limits on filing a petition The time you have to file a petition in the Tax Court is set by law. 1- The petition is considered timely filed if the postmark date falls within the prescribed 90 or 150 day period and the envelope containing the petition is properly addressed with the correct postage. 2. The Tax Court cannot consider your case if your Tax Court petition is filed late. IRS cannot grant an extension or allow a suspension of the prescribed deadline, even for reasonable cause. Thus, contacting the Internal Revenue Service (IRS) for more information, or receiving other correspondence from the IRS won't change the allowable period for filing a petition with the Tax Court. If you agree with the Notice of Deficiency If you decide not to file a petition with the Tax Court, please sign the enclosed Form 4089-B, Notice of Deficiency - Waiver, and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest. If we don't hear from you 55 South Market Street, HQ 4630 90 Day, San Jose, CA 95113-2397 sender: oc Letter 531 (Rev. 10-2015) Catalog Number 40223L Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 23 of 37 If you decide not to sign and return Form 4089-B, and you do not file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter (150 days if this letter is addressed to you outside the United States). NOTE: If you are a C-corporation, section 6621(c) of the internal Revenue Code requires that we charge an interest rate two percent higher than the normal rate on corporate underpayments in excess of $100,000. Information about the IRS Taxpayer Advocate Office The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. You may be eligible for help from the Taxpayer Advocate Service (TAS) if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. TAS is your voice at the IRS. TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation (this includes businesses as well as individuals). You can reach TAS by calling the TAS toll-free number at 1-877-777-4778 or by contacting the local Taxpayer Advocate office at: Laguna Niguel Office Taxpayer Advocate 24000 Avila Road, Room 3361 Laguna Niguel, CA 92677 (949) 389-4804 Los Angeles Office Taxpayer Advocate 300 N. Los Angeles Street Room 5109, Stop 6710 Los Angeles,.CA 90012 (213) 576-3140 Oakland Office Taxpayer Advocate 1301 Clay Street, Suite 1540-S Oakland, CA 94612 (510) 907-5269 . Sacramento Office Taxpayer Advocate 4330 Watt Avenue, Stop SA5043 Sacramento, CA 95821 (916) 974-5007 55 South Market Street, HQ 4630 90 Day. San Jose, CA 95113-2397 Sender: oc Letter 531 (Rev. 10-2016) Catalog Number 40223L Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 24 of 37 San Jose Office Taxpayer Advocate 55 S. Market Street, Stop 0004 San Jose, CA 95113 (408) 283-1500 Fresno Taxpayer Advocate 5045 East Butler Avenue, Stop 1394 Fresno, CA 93888 (559) 442-6400 To learn more about TAS and your basic tax responsibilities, visit www.TaxpayerAdvocate.irs.gov. How to contact us You may write or call the contact person whose name, telephone number, and IRS address are shown in the heading of this letter if you need further assistance. If you write, please include your telephone number, the best times if we need to call you and a copy of this letter to help us identify your account. If you prefer to call and the telephone number is outside your local calling area, there may be a long distance charge to you. Keep the original letter for your records. Sincerely yours, John A. Koskinen . Commissioner by John J Reiter Enclosums: Acting Technical Seírvices Territory Manager Form 4549-A or Form 5278 Form 4089-B 55 South Market Street. HQ 4630 90 Day, San Jose, CA 95113-2397 Sender: Letter 531 (Rev. 10-2015) CataloO Number 40223L Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 25 of 37 Form 4089 oepartment or the Treasury - internai ne venue Service (Rev. January 1983) Notice of Deficiency - Waiver Symbols - SE:S:E:FE:TS:38 Name, SSN or EIN, and Address of Taxpayer(s) FACEBOOK, INC. AKA FACEBOOK, INC. & SUBSIDIARIES 1601 WILLOW ROAD MENLO PARK, CA 94025 Kind of Tax Redacted Copy to Authorized Representative JON M CONTRERAS S250 N PALM AVE STE 300 FRESNO, CA 93704-2200 W CNE DEFICIENCY Tax Year Ended Tax Increase December 31, 2010 $1.733,335.00 Total(s) Penalties 51,733,335.00 See attached explanation for the above deficiencies I consent to the immediate assessment and collection of the deficiencies (increase in tax and penalties) shown above, plus any interest provided by law. Your Signature (Signature) (Date signed) Spouse's Signature (If A Joint Return Was Filed) (Signature) (Date signed) Taxpayer's Representative Sign Here (Signature) (Date signed) Corporate Name: Corporate Officers Sign Here: (Signature) (Title) (Date signed) (Signature) (Title) (Date signed) Note: Ifyou consent to the assessment of the amounts shown in this waiver, please sign and return it to limit the accumulation of interest.and expedite our bill to you. Your consent will not prevent you from filing a claim for refund (after you have paid the tax) if you later believe you are entitled to a refund. It will not prevent us from later determining, if necessary, that you owe additional tax; nor will it extend the time provided by law for either action. Ifyou later file a claim and the Service disallows it, you may file suit for refund in a District Court or in the United States Claims Court, but you may not file a petition with the United States Tax Court. return, both you and your spouse must sign the original and duplicate of this form. Sign your name exactly as it appears on the return. If you are acting under a power of attorney for your spouse, you may sign as agent for him or her. For an agent or attorney acting under power of attorney, a power of attorney must be sent with this form if not previously filed, For a person acting under fiduciary capacity (executor, administrator, trustee), file Form 56, Notice Concerning Fiduciary Relationship, with this form, if not previously filed. For a Corporation, enter the name of the corporation, followed by the signature and title of the officer(s) authorized to sign. Who Must Sign If this waiver is for any year(s) for which you filed a joint if you agree, please sign one copy and return it; keep the other copy for your records. Cat. No. 22650Y Sender; oc www.irs.gov Fonn 4089 (Rev.1-1983) Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 26 of 37 Form 4089 Depar'=ent or the Treasury - internai Revenue service (Rev. January 1983) Notice of Deficiency - Waiver symbols SE:S:E:FE:TS:38 Name, SSN or EIN, and Address of Taxpayer(s) FACEBOOK, INC. AKA FACEBOOK, INC. & SUBSIDIARIES 1601 WILLOW ROAD MENLO PARK, CA 94025 Kind of Tax Redacted Copy to Authorized Representative DONALD CARLOCK 5250 N PALM AVE STE 300 FRESNO, CA 93704-2200 INCOME DEFICIENCY Tax Year Ended Tax Increase December31,2010 $1,733,335.00 Total(s) Penalties 51,733,335.00 See attached explanation for the above deficiencies I consent to the immediate assessment and collection of the deficiencies (increase in tax and penalties) shown above, plus any interest provided by law. Your Signature (Signature) (Date signed) Spouse's Signature (If A Joint Return Was Filed) (Signature) (Date signed) Taxpayer's Representative Sign Here (Signature) (Date signed) Corporate Narne: Corporate Ofucers Sign Here: (Signature) (Title) (Date signed) (Signature) (Title) (Date signed) Note: If you consent to the assessment of the amounts shown in this waiver, please sign and return it to limit the accumulation of interest and expedite our bill to you. Your consent will not prevent you from filing a claim for refund (after you have paid the tax) if you later believe you are entitled to a refund. It will not prevent us from later determining, if necessary, that you owe additional tax; nor will it extend the time provided by law for either action. Ifyou later file a claim and the Service disallows it, you may file suit for refund in a District Court or in the United States Claims Court, but you may not file a petition with the United States Tax Court. return, both you and your spouse must sign the original and duplicate of this form. Sign your name exactly as it appears on the return. If you are acting under a power of attorney for your spouse, you may sign as agent for him or her. For an agent or attorney acting under power of attorney, a power of attorney must be sent with this form if not previously filed. For a person acting under fiduciary capacity (executor, administrator, trustee), file Form 56, Notice Concerning Fiduciary Relationship, with this form, ifnot previously filed. For a Corporation, enter the name of the corporation, followed by the signature and title of the.officer(s) authorized to sign. Who Must Sign if this waiver is for any year(s) for which you filed ajoint If you agree, please sign one copy and return it; keep the other copy for your records. Cat. No. 22650Y Sender: oc www.irs.gov Fonn 4089 (Rev.1-1983) Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 27 of 37 NOTICE OF DEFICIENCY - STATEMENT Facebook inc. & Subsidiaries EIN: Redacted Tax Year Ended: 201012 Attachment to Form 4089-A: Affiliations Statement PARENT COMPANY: Facebook, Inc. & Subsidiaries SUBSIDIARY COMPANIES: EIN Parakey, Inc. Facebook Sales, Inc. Connect U, Inc. Canada Acquisition Corporation Facebook Global Holdings I, LLC FriendFeed inc Facebook Global Holdings 11, LLC Facebook Services, Inc. Facebook Payments, Inc. Andale, Inc. Andale Acquisition Corp. Chai Labs, Inc. Hero Acquisition Corp. Facebook Global Holdings I, Inc. Disco Acquisition Corp. Redacted Seltzer Acquisition Corp. Allegro USA, Inc. The tax liability of Facebook Inc. and each subsidiary company named above is stated as provided for by regulations prescribed under Section 1502 of the Internal Revenue Code. The deficiency shown will be assessed severally against each corporation named above in accordance with regulations under Section 1502 of the internal Revenue Code. Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 28 of 37 'Form 4549-A (Rev. May 2008) Department of the Treasury-Internal Revenue Service income Tax Discrepancy Adjustments Name and Address of Taxpayer Facebook, Inc. and Subsidiaries 1601 Willow Road Menlo Park, CA 94025 1. Adjustments to income a. Gross Royalties b. Other Deductions c. CALC04 - Net Operating Loss Deduction Tl Before NOLD/ NOLS ABSORBED IN CURRENT YEARS: Carryovers and Carrybacks From/: From [12-2007) From 12-2012 AFTER CONSTRAINED NOL DEDUCTION: Tl Before S199/After Constrained NOLD BNA Corporate Tax Analyzer 2015.1.002 1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Diff: 6-1 12-31-2010 629,226,367 n/a 629,226,367 719,531,759 n/a 719,531,759 90,305,392 O 90,305,392 -1,285,378 0 0 -719,531,759 1,285,378 -719,531,759 627,940,989 0 -627,940,989 ============ ============ ============ Page: 2 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 32 of 37 ______________.--------------------- Regular NOL Carryovers/Carrybacks ------------------------------------1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Year Ending: NOL CARRYOVERS FROM: [12-31-2007] Total NOL COs Before Adjustment Total NOL Carryovers Diff: 6-1 12-31-2010 1,285,378 0 -1,285,378 1,285,378 0 -1,285,378 1,285,378 0 -1,285,378 ============ ============ ============ NOL CARRYBACKS FROM: 12-31-2012 Total NOL CBs Before Adjustrnent Total NOL Carrybacks 0 6,959,899,787 6,959,899,787 0 6,959,899,787 6,959,899,787 0 6,959,899,787 6,959,899,787 ============ ============ ============ NOL DEDUCTION: Total NOL Carryovers Total NOL Carrybacks 1,285,378 0 -1,285,378 0 6,959,899,787 6,959,899,787 NOL Deduction 1,285,378 6,959,899,787 6,958,614,409 ============ ============ ============ Regular NOL Absorbed ======== 1: As Filed ========= == 6: Per TP All Adjustrnents === ========= Diff: 6-1 ========= Year Ending: [12-31-2007] CURRENT NOL: Net Operating Loss NOL CARRYOVERS: Balance After Carrybacks Balance After User Entries Absorbed by Carryover to: 12-31-2009 12-31-2010 EXPIRED/UNUSED NOL: Expired Unused Net Operating Loss 12-31-2010 {12-31-2007] 12-31-2010 (12-31-2007] 12-31-2010 1,332,241 0 2,215,894 0 883,653 0 1,332,241 0 2,215,894 0 883,653 0 1,332,241 0 2,215,894 0 883,653 0 0 1,285,378 0 0 883,653 0 0 0 883,653 -1,285,378 0 0 0 0 0 0 0 0 46,863 0 0 1,285,378 0 1,332,241 ============ ============ ============ ============ ============ ============ Regular NOL Absorbed BY Current Year , 1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Year Ending: NOL Carryovers Absorbed by Current Year from: [12-31-2007] Carryovers Absorbed Total NOL Absorbed BNA Corporate Tax Analyzer 2015.1.002 - 1,285,378 0 -1,285,378 1,285,378 0 -1,285,378 0 719,531,759 719,531,759 0 719,531,759 719,531,759 1,285,378 719,531,759 718,246,381 ============ ============ ============ NOL Carrybacks Absorbed by Current Year from: 12-31-2012 Carrybacks Absorbed Diff: 6-1 12-31-2010 ============ ============ ============ ============ ============ ============ Page: 2 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 33 of 37 ______..________ · ______2_______________.------Aternatve MinimumTax----------------------r-----------------------1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Year Ending: SMALL CORPORATION: Qualifies for AMT Repeal TENTATNE MINIMUM TAX: Attemative Minimum Taxable income Annualization Factor for AMTl Diff: 6-1 12-31-2010 No No No 614,359,438 1 65,693,607 1 -548,665,831 0 AMTl - Annualized Less: Exemption 614,359,438 0 65,693.607 0 -548,665,831 0 Excess AMTl 614,359,438 65,693,607 -548.665,831 Pre-Credit TMT Overall AMT FTC'Limitation AMT Foreign Tax Credit 122,871,888 122,871,888 0· 13,138,721 13,138,721 0 -109,733,167 -109,733,167 0 TMT - Annualized Un-Annualization Factor for TMT 122,871,888 1 13,138,721 1 -109,733,167 0 122,871,888 13,138,721 -109.733,167 Tentative Minimum Tax REGULAR TAX: Federal Income Tax Less: FTC/Possessions Credit Regular Tax After FTC ALTERNATIVE MINIMUM TAX: AMT Before Adjustment Adjustment to AMT Alternative Minimum Tax BNA Corporate Tax Analyzer 2015.1.002 ============ ============ ============ 217,677,986 0 0 0 -217,677,986 217,677,986 0 -217,677,986 0 0 13,138,721 0 13,138,721 0 0 13,138,721 13,138,721 0 ============ ============ ============ ============ ============ ============ Page: 4 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 34 of 37 ------------------------------------- A temat ve Minimum Taxab e.Income --------------------------------------1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Year Ending: SMALL CORPORATION: Qualifies for AMT Repeal PREADJUSTMENT AMTI: Taxable income Before S199 Add: Regular NOL Deduction No No Diff: 6-1 12-31-2010 No 627,940,989 -6,240,368,028 -6,868,309,017 1,286,378 6,959,899,787 6,958,614,409 Taxable income Before Regular NOLD Add: Adjustments/Preference items Before S199 629,226,367 -2,556,822 719,531,759 -2,556,822 90.305,392 0 Preadjustment AMTl 626,669,545 716,974,937 90,305,392 0 0 0 . 626,669,545 716,974,937 90,305,392 ADJUSTMENTS: ACE Adjustment AMTl Before AMT NOLD AMT NET OPERATING LOSS: AMT NOL Carryovers AMT NOL Carrybacks AMT NOLD Limitation 6,306,220 0 -6,306,220 0 6,959,899,974 6,959,899,974 6,306,220 645,277,443 638,971,223 AMT NOL Deduction ALTERNATIVE MINIMUM TAXABLE INCOME: AMTl Before Section 199 Deduction Less: Section 199 Deduction for AMTl AMTl Before Other Add: Other AMTl Alternative Minimum Taxable income 6,306,220 645,277,443 638,971,223 620,363,325 6,003,887 71,697,494 6,003,887 -548,665,831 0 614,359,438 0 65,693,607 0 -548,665,831 0 614,359,438 65,693,607 -548,665,831 ============ ============ ============ AMT NOL C m anary 1: As Filed 6: Per TP All Adj Year Ending: BEFORE AMT NOL DEDUCTION: AMTl Before AMT NOLD Additional AMTl Before AMT NOLD/: From [12-2007j From 12-2008 From 12-2012 INCREASE/DECREASE AMT NOL CARRYOVERS: AFTER AMT NOL DEDUCTION: AMTl After AMT NOLD BNA Corporate Tax Analyzer 2015.1.002 Diff: 6-1 12-31-2010 12-31-2010 12-31-2010 626,669,545 n/a 626,669,545 716,974,937 n/a 716,974,937 90,305,392 O 90,305,392 -961,977 -5,344,243 0 0 0 -645,277,443 961,977 5,344,243 -645,277,443 620,363,325 71,697,494 -548,665,831 ============ ============ ============ Page: f Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 35 of 37 _____ _ ______________________.----------- AMT NOL Carryovers/Carrybacks ---------------------------------------------1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Year Ending: Carryovers Available from: [12-31-2007] 12-31-2008 AMT NOL Carryovers Diff: 6-1 12-31-2010 961,977 5,344,243 0 0 -961,977 -5,344,243 6,306,220 0 -6,306,220 . Carrybacks Available from: 12-31-2012 AMT NOL Carrybacks 0 6,959,899,974 6,959,899,974 0 6,959.899.974 6,959,899,974 ============ ============ ===_-====_-=== AMT NOL Absorbed ======== 1: As Filed ========= == 6: Per TP All Adjustments === ========= Diff: 6-1 ========= Year Ending: [12-31-2007] 12-31-2010 [12-31-2007] 12-31-2010 [12-31-2007] 12-31-2010 CURRENT AMT NOL: AMT Net Operating Loss AMT NOL CARRYOVERS: Balance After Carrybacks 961,977 0 1,932,651 0 970,674 0 961,977 0 1,932,651 0 970,674 0 Balance After User Entries 961,977 0 1,932,651 0 970,674 0 0 961,977 0 0 883,653 0 0 0 883,653 -961,977 0 0 0 0 0 0 0 0 0 0 1,048,998 0 1,048,998 0 1: As Filed 6: Per TP All Adj 12-31-2010 12-31-2010 Diff: 6-1 12-31-2010 Absorbed by Carryover to: 12-31-2009 12-31-2010 EXPlREDIUNUSED NOL: Expired Unused AMT NOL ============ ============ ============ ============ ============ _-=========== General Business Credit - Summary Year Ending: STANDARD GBC GENERATED THIS YEAR: Current Standard GBC Less: Allowed This Year Available for CO/CB ABSORBED BY CO/CB TO CURRENT YEARS: Carryovers and Carrybacks /To: From 12-2010 STANDARD GBC ALLOWED THIS YEAR: Standard GBC Limitation Standard GBC Allowed This Year: Refundable Standard GBC Nonrefundable Standard GBC: From This Year From Other Years Total Nonfundable TOTAL GBC ALLOWED THIS YEAR: Nonrefundable Standard GBC Allowed Zone Credits Allowed Specified Credits Allowed Eligible Small Business Credits Allowed Total GBC Before Adjustment Adjustment to Total GBC Total Nonrefundable GBC Allowed BNA Corporate Tax Analyzer 2015.1.002 7,156,209 7,156,209 0 7.156,209 0 7,156,209 0 -7,156,209 7,156,209 0 -7,156,209 -7,156,209 94,806,098 0 -94,806,098 n/a n/a 0 7,156,209 0 0 0 -7,156,209 0 7,156,209 0 -7,156,209 7,156,209 0 0 0 0 0 0 0 -7,156,209 0 0 0 7.156,209 0 0 0 -7,156,209 0 7,156,209 0 -7,156,209 ============ ============ ============ Page: 254 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 36 of 37 Facebook inc. and Subsidiaries Notice Of Deficiency Redacted EXPLANATION OF ADJUSTMENTS Tax Year Ending December 31, 2010 Line 1. Adjustments to income a) Gross Royalties Tax Period Reported Gross Royalties Corrected Gross Royalties Adjustment 2010 100,000,000 184,915,248 84,915,248 You transferred intangible property effective September 15, 2010 to Facebook Ireland Holdings Unlimited (formerly known as Facebook freland Holdings Limited), a commonly owned or controlled entity within the meaning of internal Revenue Code § 482. You agreed to a form of payment in annual contingent amounts for the transferred intangible property. You also determined an approximate net present value (NPV) of $6.7 billion for the transferred intangible property. Pursuant to Section 482, we have determined that the NPV of the transferred intangible property is $13,883,630,000. As a result, we have determined that your income, in the form of Gross Royalties, is increased by $ 84,915,248 for 2010, using a form of payment period of six years. b) Other Deductions Tax Period Reported Other Deductions Corrected Other Deductions Adjustment 2010 444,777,926 439,387,782 5,390,144 We have determined that you did not properly calculate your reasonably anticipated benefits under the rules of Internal Revenue Code § 482 and therefore did not properly allocate intangible development costs between participants in your cost sharing arrangement. Consequently, we have decreased your allowable Other Deductions by $5,390,144 resulting in an increase in your taxable income. c) CALC 04-Net Operating Loss (NOL) Deduction Tax Period 2010 Reported Corrected NOL Deduction NOL Deduction 1,285,378 719,531,759 Page 1 of 2 Adjustment -718,246,381 Case 3:17-cv-06490-LB Document 19-1 Filed 02/09/18 Page 37 of 37 Facebook inc. and Subsidiaries Notice Of Deficiency Redacted EXPLANATION OF ADJUSTMENTS Tax Year Ending December 31, 2010 We adjusted your return to increase the NOL Deduction by $718,246,381, as shown on the attached computation report. Line 1. Adjustments to income, cont'd, d) CALC 31-Domestic Production Activities Deduction (DPAD) Tax Period 2010 Reported Corrected DPAD DPAD 6,003,887 0 Adjustment 6,003,887 We adjusted your return to decrease your Domestic Production Activities Deduction pursuant to Internal Revenue Code Section 199 by $6,003,887, as shown on the attached computation report. Line 8. Less Credits c) General Business Credit Tax Period Reported General Business Credit Corrected Adjustment General Business Credit 2010 7,156,209 0 7,156,209 We adjusted your return to decrease the General Business Credit by $7,156,209 to 0, as shown on the attached computation report. Page 2 of 2