Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 1 of 7 1 CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General 2 3 4 5 6 7 JAMES E. WEAVER Senior Litigation Counsel, Tax Division AMY MATCHISON (CA SBN 217022) Trial Attorney, Tax Division United States Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 305-4929 Fax: (202) 307-0054 Email: James.E.Weaver@usdoj.gov Amy.T. Matchison@usdoj.gov 8 Attorneys for the United States of America 9 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA 10 11 UNITED STATES OF AMERICA, 12 13 14 15 16 ) ) Petitioner, ) ) v. ) ) FACEBOOK, INC. AND SUBSIDIARIES ) (a Consolidated Group), ) ) Respondent. ) _______________________________________) Case No. 3:16-cv-0377-LB DECLARATION OF NANCY BRONSON IN SUPPORT OF REPLY TO FACEBOOK’S OPPOSITION TO AMENDED PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES 17 I, Nancy Bronson, pursuant to 28 U.S.C. § 1746, declare as follows: 18 1. I am a Territory Manager for the Transfer Pricing Practice within the Large 19 Business and International (LB&I) Division of the Internal Revenue Service (IRS). The LB&I 20 Division is primarily responsible for the examination of large and complex corporate returns. 21 My responsibilities include overseeing IRS personnel assigned to the examination of transfer 22 pricing issues of large multinational corporations. My territory encompasses the Western United 23 States. I have been a Territory Manager in the Transfer Pricing Practice since February 2012 Declaration of Nancy Bronson In Support of U.S. Reply 1 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 2 of 7 1 when it was first formed, but I have many years of experience as an International Territory 2 Manager within LB&I prior to that. As a senior manager for LB&I, I have significant experience 3 associated with the examination of large multinational corporations designated as “Coordinated 4 Industry Cases.” CIC cases are those that warrant a larger team approach to examination based 5 on certain criteria. Generally these cases assume an on-going or continuous audit relationship 6 between the IRS and the taxpayer. 2. 7 I submit this declaration in support of the United States’ Reply to Facebook’s 8 Opposition to Amended Petition to Enforce Internal Revenue Service Summonses. IRS Revenue 9 Agent Nina Wu Stone, who submitted previous declarations in this matter, is presently 10 unavailable to assist in this matter and is not scheduled to return to the office until early 11 November 2016. 12 3. As the Territory Manager West for the Transfer Pricing Practice, I assigned and 13 supervised some of the IRS employees conducting the income tax examination of the 2010 tax 14 year of Facebook, Inc. and Subsidiaries ("Facebook"). The examination of the 2010 year 15 commenced in January 2013 and was added to the already open 2008 and 2009 examination 16 cycle. 17 4. The examination team has identified and worked diligently to understand 18 significant transfer pricing issues relating to Facebook’s transfers of certain rights to Facebook 19 Ireland pursuant to agreements effective as of September 15, 2010. Given the complexity of 20 these transfer pricing issues, I believe that the length of time taken by the examination team to 21 develop the issues has been reasonable and not out of the ordinary with LB&I practice. In 22 addition, I believe that the number of information document requests (IDRs) issued in connection 23 with transfer pricing issues associated for the audit cycle was reasonable and not out of the Declaration of Nancy Bronson In Support of U.S. Reply 2 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 3 of 7 1 2 ordinary. The same is true for the number of interviews conducted by the examination team. 5. The examination team made a presentation to Facebook on or about April 17, 3 2015 setting forth the IRS’s preliminary position regarding the transfers of certain rights to 4 Facebook Ireland. Although I did not attend the presentation, I reviewed the information that 5 was presented. I was also informed by the examination team of Facebook’s presentation, made 6 in response, on or about May 27, 2015, and I was involved in discussions concerning the need to 7 obtain assistance from outside experts. To expedite efforts, the IRS began a preliminary search 8 to identify possible outside experts before October 1, 2015. However, due to budgetary 9 constraints, the examination team was unable to commence the expert retention process for the 10 audit until the beginning of a new fiscal year on October 1, 2015. The retention process was 11 lengthy, and the IRS was only able to complete the retention process and commence utilizing one 12 of two outside experts as of late March 2016 and the other outside expert as of May 2016. 13 6. I personally participated in several meetings with Facebook personnel and/or 14 Facebook representatives, beginning in February 2016, after Facebook requested a meeting with 15 me and other LB&I senior managers. The request to meet was triggered by correspondence 16 exchanged in January 2016 between the IRS and Ted Price, VP of Tax/Treasurer of Facebook, 17 regarding an extension of the statute of limitations for the audit cycle, which was to expire on 18 July 31, 2016. Facebook’s personnel and representatives appeared agreeable to a statute 19 extension provided the IRS committed to issuing a 30-day letter and a timeline to complete the 20 examination. 21 7. A 30-day letter gives the taxpayer an opportunity to appeal adjustments proposed 22 by Examination personnel to the Office of Appeals. The taxpayer has 30 days to make the 23 request for an appeal. Declaration of Nancy Bronson In Support of U.S. Reply 3 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 4 of 7 1 8. On February 4, 2016, I met with Facebook personnel and representatives. In that 2 meeting, I explained that the IRS was requesting additional time in order to allow the 3 examination team to complete development of a factual record that would, among other things, 4 take into account issues raised by Facebook’s representatives during the May 27, 2015 5 presentation. 6 9. During the February meeting, I further explained that additional time was needed 7 in order to obtain the insight and assistance of outside experts. I explained that because the 8 contracting process required to obtain outside experts had not been completed, any specific 9 timeline that the IRS might provide for completion of the examination at that time would not be 10 reliable. I indicated that the IRS would be willing to provide an estimated timeline for 11 completion of the examination once experts had an opportunity to review the record and consider 12 the need for additional information. 13 10. During the February meeting, I also made it clear that although the IRS could not 14 commit to issuance of a 30-day letter at the conclusion of the examination, the IRS had not ruled 15 out issuance of such a letter, nor made any decision with respect to litigation. Consideration of 16 such matters could not be made until the factual record was complete. 17 11. IRS procedures to designate for litigation non-docketed cases in Exam’s 18 jurisdiction are rigorous. Such designation forecloses the issuance of a 30-day letter. At no time 19 did I initiate any request to designate Facebook for litigation. 20 12. On May 18, 2016, I met with Facebook personnel and representatives to ask them 21 to reconsider their decision not to extend the statute. They were unwilling to extend the statute 22 unless the IRS committed to a completion date for the examination and guaranteed issuance of a 23 30-day letter. Declaration of Nancy Bronson In Support of U.S. Reply 4 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 5 of 7 1 13. On May 19, 2016, I received a letter from Ted Price, VP Tax/Treasurer of 2 Facebook, in which he expressed Facebook’s willingness to grant a statute extension to January 3 31, 2017 if, in return, the IRS refrained from issuing a designated summons. 4 14. On May 23, 2016, I again met with Ted Price and Ronald Dong, Tax Counsel for 5 Facebook. We discussed Facebook’s May 19 proposal. Though the decision on giving up the 6 right to issue a designated summons was not mine to make, I explained my reservations with 7 giving up that right given the difficulties in obtaining information in a timely manner and the 8 short period of the proposed statute extension. 9 15. Because the IRS and Facebook could not reach an agreement to extend the statute 10 of limitations for 2010, the IRS issued a statutory notice of deficiency on July 26, 2016. The 11 examination team had not completed its fact gathering efforts when the notice was issued. The 12 determinations in the notice are subject to revision or amendment, if information still needed to 13 complete and support the determinations made in the notice require it. 14 16. On April 27, 2016, I received a letter from Facebook’s representative Drew 15 Crousore. The letter addressed IDRs 178-187 issued on April 7, 2016, and attached proposed 16 search terms and custodians for many of the IDRs. 17 17. In response to the April 27, 2016 letter I participated in three meetings with 18 Facebook representatives to discuss how best to facilitate the production of documents 19 responsive to IDRs 178-187. Those meetings occurred on May 10, 2016, May 13, 2016 and June 20 14, 2016. One of the goals for these meetings was for the IRS to better understand how 21 Facebook stored their records and to facilitate a process that would lead to an efficient 22 production of documents. 23 18. Based on the meetings with Facebook’s personnel and representatives, I gained Declaration of Nancy Bronson In Support of U.S. Reply 5 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 6 of 7 1 the impression that Facebook did not have a centralized records system, archival record retention 2 policies, or easily locatable hard copy files or shared drives of departments from which 3 responsive documents could be retrieved. I recall learning from Facebook’s representatives that 4 the only reliable way to find responsive documents was through an Outlook search of particular 5 custodians. I recall Facebook’s representatives indicating that the searches (theirs and ours) 6 would produce large volumes of documents many of which would be non-responsive and 7 perhaps overwhelm the IRS. I was given the impression that Facebook intended to produce to 8 the IRS documents returned by these searches unfiltered for responsiveness to particular 9 document requests in IDRs 178-187. This impression was consistent with my understanding of 10 Facebook’s desire for a 502 agreement. 19. 11 During the meetings, significant time and effort was spent discussing search terms 12 and custodians with respect to the document requests. The IRS attempted to understand the 13 search capabilities of the Outlook database on which searches would be conducted to determine 14 how effective searches could be created to identify and produce relevant and responsive 15 documents. In these discussions, there was some confusion as to the capabilities of the search 16 system. 20. 17 While we were still attempting to obtain and evaluate information that would 18 enable us to formulate acceptable search terms and custodians, Facebook issued a letter dated 19 June 17, 2016 indicating that it was unilaterally moving forward to conduct the searches outlined 20 in its April 27, 2016 letter. That letter followed issuance of a letter on June 16, 2016 by IRS 21 counsel to a Facebook representative outlining the continuing concerns of the IRS. 22 // 23 // Declaration of Nancy Bronson In Support of U.S. Reply 6 Case 3:16-cv-03777-LB Document 23-1 Filed 10/25/16 Page 7 of 7 I declare under the penalty of perjury that the foregoing is true and correct. Executed this day of October 2016, in San Jose, California. wm?w NANCY INSON Internal enue Service Territory Manager Transfer Pricing Practice (West, Declaration of Nancy Bronson In Support ofU.S. Reply