IRS suit seeks current, former Microsoft leaders’ testimony

SEATTLE – The Internal Revenue Service has sued former Microsoft Chief Executive Officer Steve Ballmer and a slate of other former and current executives, seeking to compel them to testify in an investigation into the company’s tax practices.

The lawsuits, filed in federal court in Seattle, are the latest salvo in a long-running investigation of Microsoft’s tax practices. At issue is whether the company’s various subsidiaries properly followed tax law in transferring software-selling rights to countries and U.S. territories with lower taxes.

The IRS earlier this month sued Microsoft itself to compel the company to turn over a trove of documents as part of its inquiry into how Microsoft valued agreements with subsidiaries in Puerto Rico and Bermuda. The value Microsoft placed on such transfers has “billions of dollars of impact” on the company’s taxable income from 2004 to 2006, the IRS said in that suit.

Microsoft’s lawyers said in response the company was already cooperating with the latest requests, after previously turning over 1.2 million pages of documents and making more than 50 employees available for interviews.

Company lawyers accused the IRS of trying to force Microsoft to the negotiating table with overly burdensome requests and an “eleventh-hour barrage of summonses.”

According to the latest court filings, IRS agents last month sent summonses to Ballmer and nine other current and former Microsoft executives, including former chief strategy officer Craig Mundie, longtime Microsoft executive and retired Bill & Melinda Gates Foundation head Jeff Raikes and former Windows and server development chief Jim Allchin.

The tax agency wants the executives to be quizzed by IRS agent Walter Choi at its downtown Seattle office.

A Microsoft attorney told the IRS that the company wouldn’t make the executives available for testimony until the parties could agree on the terms for the interviews.

In a statement on Wednesday, a Microsoft spokesman said the company was reviewing the court filings, but does not comment on pending audits. “As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate,” the spokesman said.

A spokesman for the IRS in Washington, D.C., referred questions to the agency’s regional office. The spokesman for the local branch didn’t immediately return a call seeking comment.

The IRS for years has been looking into how Microsoft and other companies deal with “transfer pricing,” or the accounting behind goods and services bought and sold between subsidiaries.

Under transfer pricing law, companies are required to charge a reasonably fair market rate for the goods and services they buy and sell between their international arms. The intention is to keep companies from shipping valuable property overseas at steep discounts solely for the purpose of avoiding U.S. taxes.

A 2012 U.S. Senate subcommittee report used Microsoft as an example of offshore profit shifting, saying the company had avoided paying about $6.5 billion in U.S. taxes by selling the rights to sell its products to overseas subsidiaries and other maneuvers. Microsoft said at the time that the company complied with tax laws, and that the U.S. tax code was in need of a retooling to promote investment in the U.S.

The agency has been looking into the taxes Microsoft paid from 2004 to 2006 since January 2007.

Microsoft earlier this year asked to begin talks with the IRS to settle the case, the company said in court papers. But those discussions fell apart after the tax agency’s transfer pricing group wanted to negotiate on the IRS’ estimated value of Microsoft’s property transfers without a discussion of the company’s legal liability.

Current Microsoft employees who received summonses include emerging markets chairman Orlando Ayala and David Guenther, director of transfer pricing.