Facebook Inc: Will an IRS Investigation Hammer FB Stock?

Dont Lose Faith in FB StockDon’t Lose Faith in FB Stock

Some investors are getting nervous about the Internal Revenue Service (IRS) investigation into Facebook Inc (NASDAQ:FB), but there’s no need to panic—the same thing has already happened to Apple Inc., Microsoft Corporation, and Amazon.com, Inc. FB stock is safe.

We’ve seen this routine before. The big, bad IRS comes knocking on Silicon Valley’s door, asking why tech companies keep their cash overseas. But they’re not really looking for an answer; they just want to raise the amount of taxes they collect. (Source: “IRS Takes Facebook to Court, Signaling Start of Tougher Approach,” Bloomberg, July 8, 2016.)

It’s true that companies like Apple and Facebook funnel intellectual property to subsidiaries in Ireland, and yes, they do this because the tax rate is absurdly low there.

It’s not like they’re doing anything illegal. They do business worldwide and choose to keep some assets where tax liability is lowest. That’s just smart business.

Let’s say you lived in a condo building, but had to pay extra for parking. One day, while driving, you notice another parking lot across the street. They’re charging less than half of what your building is asking for, so you start leaving your car there.

Can the building management force you to park inside? Can they charge you a fee for not doing it? Of course they can’t, that would be utterly ridiculous. They’re the ones who failed to price the parking fees appropriately.

This analogy maps onto the Facebook-IRS standoff pretty well. Facebook is just looking to park its funds at the lowest rate, and the IRS is upset about that. It even filed a court order to access internal Facebook records for the 2010 tax year.

At that time, Facebook shifted much of its IP over to its Irish branch. The IRS claims it has repeatedly asked Facebook for these documents, but the company missed the June 17 deadline for submission, so they had to bring out the big guns.

In all honesty, I’m skeptical of the IRS argument here. Everyone knows that the U.S. tax code is a mess. It’s no secret that Congress needs to clean it up and lower the corporate rate, but that’s not Facebook’s fault, nor is it Apple’s or Amazon’s.

This is a problem for the government to fix, not companies. Facebook has a responsibility to shareholders to minimize costs and maximize profits. The company has done that and by all accounts, it has done it legally. The IRS, it seems to me, is just grasping at straws.

Next up is when the statute of limitations on Facebook’s 2010 tax year runs out on July 31. Unless the IRS finds a silver bullet before then, this case is likely going nowhere.