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Google Sues IRS for $83.5 Million Tax Refund

Google Inc. (GOOG), owner of the most popular Internet search engine, sued the U.S. Internal Revenue Service for an $83.5 million refund, claiming it was improperly denied a deduction for a 2004 stock transaction with America Online Inc.

The IRS erred in disallowing a $238.6 million deduction claimed for the difference between the price AOL paid to exercise a warrant for Google stock and the value of the shares, according to the complaint in U.S. Tax Court.

“Google’s actual cost for issuing the AOL warrant was $238,667,835, which equaled the spread between the $21,642,985 it received from AOL to exercise the AOL warrant and $260 million in value” of the stock, Google said in the complaint.

Google disclosed its intention to file a challenge to the IRS over a domestic tax issue, though not the substance, in a filing with the Securities and Exchange Commission on Jan. 29.

“We hope to have it resolved soon,” Niki Fenwick, a spokeswoman for Google, said in a phone interview.

Google, based in Mountain View, California, issued the warrant for its “series D preferred stock” in June 2002 in recognition of AOL efforts to promote Google’s search engine among its users, according to the complaint.

Quality Control

AOL provided multiple services to Google “including quality control services that maintained certain standards and limited the amount of spam hits provided to Google,” and “services that further enhanced Google’s targeting of sponsored links,” Google’s lawyers wrote.

AOL exercised the warrant in May 2004, about 3 1/2 months before Google priced its initial public offering and its common stock began trading on the Nasdaq stock market, according to the suit.

Dean Patterson, an IRS spokesman, didn’t immediately reply to an e-mail seeking comment on the lawsuit.

AOL’s parent, Time Warner Inc., filed a tax court petition on May 6 over the same transaction, challenging an IRS ruling that it owed $4.6 million, according to Bloomberg BNA.

The IRS contends that Time Warner owed tax on the difference between what AOL paid for the Google shares, and their fair market value in May 2004. That difference is $234 million, according to the Time Warner complaint cited by BNA.

Time Warner is seeking to have the warrant taxed at its value in 2002, $37.4 million, BNA reported.

The Google case is Google Inc. v. U.S. Internal Revenue Service, 014061-13, U.S. Tax Court (Washington). The AOL case is Time Warner Inc. (TWX) v. U.S. Internal Revenue Service, 9927-13, U.S. Tax Court (Washington).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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