By Dave Hendrick

Newswise — A years-long court battle between Amazon and the Internal Revenue Service came to a close in March, with a U.S. Tax Court judge largely ruling against the IRS in its attempt to wrest more than $1 billion in back taxes from the online retailer.

While generally portrayed as a clear victory for Amazon in the popular press, the ruling was not a complete loss for the IRS. Expert testimony by University of Virginia Darden School of Business Professor Ron Wilcox on behalf of the IRS was responsible for a roughly $77 million swing in Judge Albert Lauber’s ruling.

Although the final tax amount has not yet been made clear, in regulatory filings Amazon previously warned that an adverse ruling could result in additional federal tax of approximately $1.5 billion. Amazon’s tax tally will not be nearly so large following the ruling, although neither will it be as low as the company sought.

“On the one hand the IRS lost, on the other hand Amazon is going to pay a lot more in taxes,” said Wilcox.

At issue was Amazon’s 2004 initiative to transfer the intangible assets required to operate its business in Europe to a new company subsidiary based in Luxembourg, with the goal of seeing its European commerce taxed at Luxembourg’s advantageous rates.

The Luxembourg-based European subsidiary held inventory sold in Europe, licensed Amazon’s intellectual property, maintained call centers and customer lists from subsidiaries such as Amazon Germany and Amazon France, and eventually reported — for U.S. tax purposes — all of the income and expenses connected with Amazon’s European businesses.

In doing so, the IRS claimed Amazon was substantially undervaluing the value and tax obligations of the property held by the subsidiary, and the trial featured scores of experts testifying as to the proper value of the assets.

In testimony that Lauber, in his 207 page ruling, deemed “persuasive,” Wilcox spoke to the value of the Amazon brand, testifying that brands simplified consumers’ decision making and were important in the online world. Wilcox also noted Amazon’s strong brand in Europe at the time of the transfer of assets to the Luxembourg subsidiary.

The case hinged in part on the length of the “useful life” of the transferred marketing intangibles, with the IRS deeming them useful in perpetuity and Amazon claiming a much shorter window.

Although Wilcox did not testify as to the length of useful life, the judge used the Darden professor’s reasoning in deeming a useful life near the high-end of the range offered by other experts.

“We agree with Dr. Wilcox that Amazon at year-end 2004 had a very strong brand in Europe and that the strength of its brand supports a relatively long useful life,” Lauber wrote.

Wilcox also testified to the value of customer lists transferred to the new subsidiary, with Lauber agreeing with Wilcox’s assessment that “average spending” should be the metric by which customer lists should be valued.

Although experts testifying on behalf of Amazon pegged the value of the customer referral information at $51.9 million, Lauber found that Wilcox’s estimate of $129 million — which took into account the predisposed brand loyalty of the customers — represented the accurate value of the customer information.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business delivers the world’s best business education experience to prepare entrepreneurial, global and responsible leaders through its MBA, Ph.D. and Executive Education programs. Darden’s top-ranked faculty is renowned for teaching excellence and advances practical business knowledge through research. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.