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Originally published December 24, 2014 at 1:25 PM | Page modified December 24, 2014 at 7:46 PM

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IRS demands Ballmer, other Microsoft leaders testify in corporate tax audit

The Internal Revenue Service has sued former Microsoft CEO Steve Ballmer and a slate of other former and current executives, seeking to compel them to testify in a long-running investigation into how the company’s sales through subsidiaries affected its taxable income.


Seattle Times technology reporter

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The Internal Revenue Service has sued former Microsoft Chief Executive 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 Friday in federal court in Seattle, are the latest salvo in a long-running IRS investigation of Microsoft’s corporate structure.

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 placed on such transfers has “billions of dollars of impact” on the company’s taxable income between 2004 to 2006, the IRS said in that suit.

In response, Microsoft’s lawyers said 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, former 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. Ballmer’s summons was left with his wife at their Hunts Point home.

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

In a statement 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 by other maneuvers.

Microsoft said at the time that it 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 between 2004 and 2006 since January 2007.

Microsoft earlier this year asked to begin talks 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.

The IRS in May hired business-litigation law firm Quinn Emanuel Urquhart & Sullivan to provide services related to the tax audit. Microsoft later sued in federal court to force the IRS to comply with a public-records request seeking the terms of that contract.

The IRS this summer told Microsoft it was weighing designating the tax case for litigation, the company said, a step that prevents the agency from settling unless the company agrees to the full liability assessed by the IRS.

The statute of limitations governing the audit expires at the end of this month, Microsoft said in a filing. The company expected the IRS to give Microsoft its assessment of the additional taxes owed earlier this month.

Other former employees the IRS wants to interview include former partner-program executive Jon Roskill, Windows marketing and business-development head Bill Veghte and marketing chief Mich Matthews.

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

Matt Day: 206-464-2420 or mday@seattletimes.com. On twitter: @mattmday



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