On May 22, 2025, the Tax Court issued a much-anticipated opinion in the transfer pricing dispute between Facebook, Inc., and the Internal Revenue Service (IRS). Facebook, Inc. v. Commissioner, 164 T.C. No. 9 (2025). The opinion is the first to address the validity and application of the 2009 temporary cost sharing regulations (Temp. Treas. Reg. § 1.482-7T), which were finalized in 2011. While the Tax Court endorsed the regulatory income method used by the IRS, as well as the regulations more generally, it rejected key inputs by the IRS into the income method.  

Facebook and its Irish affiliate entered into a cost sharing arrangement (CSA) in September 2010. Facebook contributed the technology behind the Facebook operating platform to the CSA (a "platform contribution transaction" or PCT) and licensed its user data and marketing intangibles to its Irish affiliate for use outside of the U.S. and Canada. 

The IRS valued the PCT and the license using the income method, a specified method under the cost sharing regulations that incorporates a discounted cash flow analysis. The Tax Court held that the income method was the best method, but that the IRS's application was unreasonable. Therefore, the Tax Court made significant adjustments to the IRS's application of the income method to derive an arm's length result. First, the Tax Court adjusted the forecasted cash flows used by the IRS to exclude (i) projected "Other Revenue" that the Tax Court found was an aspirational or "future unknown revenue source," and (ii) adjustments for the cost of future acquisitions. Second, the Tax Court increased the discount rate applied to forecasted cash flows to better reflect the Irish affiliate's market-correlated risks of participating in the CSA. Third, the Tax Court increased the return permitted to the Irish affiliate for local sales and marketing activities to reflect a licensee return. While the final result of these adjustments will not be known until Rule 155 computations are complete, these methodological changes appear to result in a PCT value far closer to Facebook's reporting position than to the IRS's asserted value.

The Tax Court dismissed several arguments advanced by Facebook regarding the validity and application of the 2009 temporary cost sharing regulations. It upheld the validity of the regulations, including the income method and the underlying investor model, as consistent with the broad statutory language of section 482, citing the Ninth Circuit's decision in Altera favorably (notwithstanding the Supreme Court's subsequent decision in Loper Bright, which could cast doubt on Altera). The Tax Court also found that the regulations survived Facebook's challenge under the major questions doctrine. In addition, the Tax Court held that the mechanical periodic adjustment rules in the regulations did not provide a safe harbor for taxpayers to avoid adjustments to PCT payments.

The Tax Court's opinion is significant in a number of respects. The court's endorsement of the principles of the 2009 temporary cost sharing regulations, which were intended to reverse government losses in previous cases such as Veritas and Amazon, is noteworthy. The Tax Court's rejection of the IRS's unreasonable inputs into the income method is equally noteworthy. While the discussion of projected cash flows and discount rates is specific to each case, the reasoning of the Tax Court was based on principles that can be applied across fact patterns. This decision is unlikely to be the last word on these issues given their importance and the magnitude of the amounts at issue in transfer pricing cases involving CSAs. Taxpayers should continue to monitor this case for possible appeal, which could further bear on the interpretation of the cost sharing regulations. 

For more information, please contact:

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Lisandra Ortiz, lortiz@milchev.com, 202-626-5841

Jaclyn Roeing, jroeing@milchev.com, 202-626-5929

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