Baker & McKenzie LLP 660 Hansen Way Palo Alto, CA 94304 +1 650 856 2400 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Case No. 3:16-cv-03777-LB Facebook’s Opposition to Amended Petition to Enforce Internal Revenue Service Summonses 597864 Scott H. Frewing (SBN 191311) Andrew P. Crousore (SBN 202195) Jay Cha-young Kim (SBN 266360) Brad Clements (SBN 310398) BAKER & McKENZIE LLP 660 Hansen Way Palo Alto, CA 94304-1044 Telephone: +1 650 856 2400 Facsimile: +1 650 856 9299 [email protected][email protected][email protected][email protected]Attorneys for Respondent Facebook, Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION UNITED STATES OF AMERICA, Petitioner, v. FACEBOOK, INC. AND SUBSIDIARIES, Respondent. Case No. 3:16-cv-03777-LB FACEBOOK’S OPPOSITION TO AMENDED PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES DATE: November 17, 2016 TIME: 9:30 am DEPT.: Courtroom 15-C
Transcript
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Case No. 3:16-cv-03777-LB
Facebook’s Opposition to Amended Petition to Enforce Internal Revenue Service Summonses 597864
Scott H. Frewing (SBN 191311) Andrew P. Crousore (SBN 202195) Jay Cha-young Kim (SBN 266360) Brad Clements (SBN 310398) BAKER & McKENZIE LLP 660 Hansen Way Palo Alto, CA 94304-1044 Telephone: +1 650 856 2400 Facsimile: +1 650 856 9299 [email protected][email protected][email protected][email protected] Attorneys for Respondent Facebook, Inc.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
UNITED STATES OF AMERICA,
Petitioner,
v.
FACEBOOK, INC. AND SUBSIDIARIES,
Respondent.
Case No. 3:16-cv-03777-LB
FACEBOOK’S OPPOSITION TO AMENDED PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES DATE: November 17, 2016 TIME: 9:30 am DEPT.: Courtroom 15-C
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TABLE OF CONTENTS
Page(s) I. INTRODUCTION................................................................................................................ 1 II. STATEMENT OF FACTS .................................................................................................. 2
A. The IRS Audit: 2011-2015......................................................................................... 2
B. The IRS Wound Down its Audit in Early 2015 ......................................................... 2
C. The IRS April 2015 Presentation and Facebook’s Response .................................... 3
D. From May 2015 to January 2016, The IRS Stood Still and Did Not Respond to Facebook’s Presentation ........................................................................................ 3
E. IRS Further Demand for Unconditional Extension of Statute of Limitations ........... 4
F. The April 2016 IRS Requests for Information .......................................................... 5
G. Facebook’s Proposed Approach to the April 2016 IDRs ........................................... 6
H. IRS Issued Seven Summonses In the Midst of Meeting and Conferring with Facebook .................................................................................................................... 7
I. Facebook Has Taken Substantial Steps to Comply with the Summonses by the End of 2016 .......................................................................................................... 8
J. The IRS Has Delayed Facebook’s Production of Materials .................................... 10
K. The IRS Simultaneously Issued a Notice of Deficiency That Will Require Parallel Proceedings with Potentially Duplicative Discovery ................................. 10
III. ARGUMENT ...................................................................................................................... 11 A. Following a Case Management Conference, the Court Should Issue a Case
Management Order with a Production and Briefing Schedule ................................ 11
B. The Summonses Are Overbroad and Seek Privileged Information ......................... 12
1. An Overly Broad Summons Is Not Enforceable.......................................... 12
2. The Summonses Are Not Sufficiently Specific to Permit Facebook to Adequately Respond .................................................................................... 13
3. The IRS Is Not Entitled To Compel Production of Privileged Materials ...................................................................................................... 14
IV. CONCLUSION .................................................................................................................. 15
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TABLE OF AUTHORITIES
Page(s)
Cases
Adamowicz v. United States, 531 F.3d 151 (2nd Cir. 2008)...................................................................................................... 14
Fisher v. United States, 425 U.S. 391 (1976) .................................................................................................................... 12
Gudenau v. United States, 98 A.F.T.R.2d (RIA) 6745 (D. Haw. Sep. 11, 2006) ............................................................ 13, 14
Potter v. United States, 2002 U.S. Dist. LEXIS 20031 (S.D. Cal. 2002) ......................................................................... 13
Reisman v. Caplin, 375 U.S. 440 (1964) .............................................................................................................. 12, 15
United States v. Abrahams, 905 F.2d 1276 (9th Cir. 1990), overruled on other grounds, United States v. Jose, 131 F.3d 1325 (9th Cir. 1997) ........................................................................................... 13
United States v. Arthur Young & Co., 465 U.S. 805 (1984) .............................................................................................................. 12, 15
United States v. Beacon Fed. Sav. & Loan, 718 F.2d 49 (2nd Cir. 1983)........................................................................................................ 12
United States v. Coopers & Lybrand, 550 F.2d 615 (10th Cir. 1977) .................................................................................................... 12
United States v. Cox, 73 F. Supp. 2d 751 (S.D. Tex. 1999) .......................................................................................... 12
United States v. Dauphin Deposit Trust Co., 385 F.2d 129 (3rd Cir. 1968) ................................................................................................ 12, 14
United States v. Eaton Corp., 110 A.F.T.R. 2d 5638 (N.D. Ohio 2012) .................................................................................... 15
United States v. Harrington, 388 F.2d 520 (2d Cir. 1968).................................................................................................. 12, 14
United States v. Malnik, 489 F.2d 682, 686 n.4 (5th Cir. 1974) ........................................................................................ 13
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United States v. Powell, 379 U.S. 48 (1964) ................................................................................................................ 11, 12
United States v. Ryan, 402 U.S. 530 (1971) .............................................................................................................. 12, 14
United States v. Rylander, 460 U.S. 752 (1983) .................................................................................................................... 12
Constitutional Provisions
U.S. Const. amend IV ....................................................................................................................... 12
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I. INTRODUCTION
After auditing Facebook, Inc. for more than four years, the Internal Revenue Service
(“IRS”) ended its audit on July 26, 2016, when it issued a Statutory Notice of Deficiency. In its
Notice, the IRS disputes the amount of royalties paid to Facebook, Inc. by its Ireland subsidiary in
connection with certain licenses entered into in September 2010. Facebook has filed a formal
challenge to the IRS Notice in U.S. Tax Court, and that court ultimately will resolve this matter.
Instead of waiting for discovery to commence in the Tax Court, however, the IRS elected to
burden this Court to enforce seven extraordinarily broad summonses (the “Summonses”). The
Summonses seek hundreds of thousands of documents about virtually every aspect of Facebook’s
core business — documents which cannot inform the now-completed audit. The IRS served the
Summonses at the 11th hour of the audit, demanding that Facebook comply with production
deadlines that the IRS knew were impossible for Facebook to meet.
Any suggestion that Facebook failed to respond to IRS requests is simply untrue. During
the audit, Facebook produced thousands of pages of documents in response to more than 200 IRS
requests, voluntarily extended the statute of limitations five times, and made employees available
for interviews. Facebook also conferred multiple times with the IRS about the requests at issue
now, and stood ready to produce many of the documents within a reasonable amount of time. The
IRS, however, chose to convert its requests into the formal Summonses and rushed to court to seek
immediate enforcement.
Facebook remains ready to comply with the IRS requests, but Facebook believes the
production should proceed on a reasonable schedule that incorporates adequate time for the parties
(and the Court, if necessary) to resolve disputed issues that will inevitably arise relating to the
scope of production and privilege. Accordingly, Facebook respectfully requests that the Court
enter the proposed Case Management Order and Order Pursuant to Fed. R. Evid. 502(d) that it has
submitted with this Opposition.
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II. STATEMENT OF FACTS
A. The IRS Audit: 2011-2015
In November 2011, the IRS initiated an audit of Facebook’s tax years ended December 31,
2008, and December 31, 2009. Declaration of Ronald Dong in Support of Facebook’s Opposition
to Amended Petition (“Dong. Decl.”) ¶ 3. In January 2013, the IRS expanded its audit to include
Facebook’s tax year ended December 31, 2010. Id.; Declaration of IRS Agent Nina Wu Stone
(“Agent Stone Decl.”) ¶ 15. As of June 2016, the IRS had been auditing Facebook for more than
four years.
During the course of the audit, the IRS requested, and Facebook produced, large volumes of
information. The IRS issued more than 240 Information Document Requests (“IDRs”), and in
response, Facebook produced thousands of pages of documents. Dong Decl. ¶ 4. In addition,
Facebook voluntarily made nine employees available for transcribed interviews. Id.
In connection with the audit, the IRS requested six extensions to the statute of limitations.
Facebook agreed to the first five. Specifically:
a. effective August 2, 2011, Facebook agreed to extend the statute of limitations for its
2008 tax year to September 15, 2013;
b. effective March 26, 2013 Facebook agreed to extend the statute of limitations for its
2008 and 2009 tax years to November 30, 2014;
c. effective March 25, 2014, Facebook agreed to extend the statute of limitations for
its 2008, 2009, and 2010 tax years to November 30, 2015;
d. effective February 23, 2015, Facebook agreed to extend the statute of limitations for
its 2008, 2009, and 2010 tax years to January 31, 2016; and
e. effective May 20, 2015, Facebook agreed to extend the statute of limitations for its
2008, 2009, and 2010 tax years to July 31, 2016.
Dong Decl. ¶ 5.
B. The IRS Wound Down its Audit in Early 2015
The IRS largely conducted its audit during 2013 and 2014. See Agent Stone Decl. ¶¶ 21-
22. In January 2015, the IRS issued 16 IDRs, the majority of which were follow-up questions to
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topics that the IRS had previously discussed with Facebook. Facebook promptly responded. Dong
Decl. ¶ 6. At that point, it appeared that the IRS was concluding its audit. Id.
C. The IRS April 2015 Presentation and Facebook’s Response
On April 17, 2015, the IRS made a presentation to Facebook and set forth its preliminary
views regarding the transfer pricing valuation issues at the heart of the audit. Dong Decl. ¶ 7;
Agent Stone Decl. ¶ 22.
On May 27, 2015, Facebook responded to the IRS presentation and explained that the IRS
had made significant and arbitrary errors in its analysis. Dong Decl. ¶ 8. Facebook explained that
once the IRS errors were corrected, the IRS economic model yielded essentially the same value
that Facebook used to prepare its tax returns, or even that Facebook’s tax return position was
overly generous to the IRS. Id.
On June 22, 2015, the IRS responded to Facebook’s May 27 presentation and informed
Facebook that the IRS intended to issue additional IDRs related to Facebook’s presentation and
that the IRS was evaluating, for the first time, whether to engage an outside expert. Dong Decl.
¶ 9; Agent Stone Decl. ¶ 26.
D. From May 2015 to January 2016, The IRS Stood Still and Did Not Respond to Facebook’s Presentation
Contrary to its assertion that it needed more information, from May 27, 2015 through
December 2015, the IRS did not issue any additional requests for information related to
Facebook’s May 27 presentation, nor did the IRS request or conduct a single interview of any
Facebook personnel. Dong Decl. ¶ 10. The IRS merely issued an IDR in July 2015 requesting
copies of a publicly available Facebook blog, and three IDRs on September 30, 2015, unrelated to
Facebook’s presentation and to which Facebook promptly responded on October 14, 2015. Id.
From September 30, 2015 through December 2015, the IRS limited its audit activities to routinely
scheduled meetings with Facebook tax personnel. Throughout this period, Facebook repeatedly
sought to conclude the audit. Id. ¶ 11. In January 2016, the IRS did finally issue several IDRs
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related to Facebook’s May 27 presentation to which Facebook responded in February 2016. Id.
¶ 10.
E. IRS Further Demand for Unconditional Extension of Statute of Limitations
On January 25, 2016, after months of inactivity, the IRS requested that Facebook agree to
extend the statute of limitations for yet a sixth time. Dong Decl. ¶ 12. The IRS requested a one-
year extension to July 31, 2017. Id. The IRS declined to provide Facebook an audit plan for the
extended period, despite such audit plans being required by IRS procedures. Id.; see IRS Internal
Revenue Manual § 4.46.3 (stating that IRS audit plans should at a minimum include detailed steps
for each selected issue, timeline(s) with milestone dates, and dates and decision points used to risk
assess issues being examined). The IRS justified its request for a sixth extension by stating that
after Facebook explained the errors in the proposed IRS adjustment, the IRS needed to continue
gathering more information from Facebook and to secure outside experts. Dong Decl. ¶ 12. As
noted above, the IRS had made no requests for information related to Facebook’s May 27
presentation during the eight months after the presentation and prior to asking for this extension.
Rather than grant an unqualified extension through July 31, 2017, Facebook asked the IRS
to consider a shorter extension to October 31, 2016. Dong Decl. ¶ 13. Facebook asked the IRS to
commit to issuing a 30-day letter (a necessary procedural step to allow a taxpayer to bring disputed
issues to a next-level review with IRS Appeals) by May 1, 2016. Id. The IRS declined Facebook’s
offer of an extension conditioned upon the IRS completing its examination in six months. Id.
Without any audit plan at all, and after five extensions over four years, Facebook sought reasonable
closure of the audit.
Subsequently, on two separate occasions, Facebook offered alternatives for an extension of
the statute of limitations, and the IRS rejected each one. Dong Decl. ¶ 14. As recently as May
2016 Facebook proposed an extension to January 31, 2017, which Facebook had offered subject to
similar reasonable conditions. Id. The IRS rejected Facebook’s May 2016 offer. Id.
The IRS claims that it wished to continue the audit, and that its delay was justified by
“budgetary constraints” that prevented it from being able to retain an expert. Agent Stone Decl.
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¶ 26. The IRS submission fails to acknowledge, however, that (a) the IRS conducted nine
interviews of Facebook employees between 2013-2014; (b) the IRS had already issued and
received responses to over 200 IDRs between 2013-2015; (c) Facebook made multiple
presentations to the IRS about the Facebook business; and (d) Facebook was willing to provide a
reasonable extension of the statute of limitations if the IRS agreed to provide Facebook an audit
plan and committed to allow Facebook to proceed to IRS Appeals if an issue remained disputed.
F. The April 2016 IRS Requests for Information
On April 7, 2016, the IRS issued IDRs IE-178 through IE-187,1 which included more than
100 requests for documents, including electronically stored information (“ESI”), about virtually all
aspects of Facebook’s business during a five-year period (“April 2016 IDRs”). Dong Decl. ¶ 15;
Agent Stone Decl. ¶ 30. The information requested in these IDRs largely forms the basis of the
Summonses at issue in this matter. The IRS did not provide Facebook drafts of IDRs IE-178
through IE-187, contrary to its own internal procedures requiring that the IRS do so to permit the
taxpayer to confer about the scope of the requests and the timetable for responding. Dong Decl.
¶ 15 see also IRS Directive LB&I-04-0214-004 (requiring IRS examination teams to consult with
taxpayers prior to issuing IDRs).
The IRS gave Facebook only three weeks to respond to the April 2016 IDRs. Dong
Decl. ¶ 16. Most of the IRS requests sought “any and all documents” related to broadly-worded
topics. For example, two of the questions requested the following:
All Documents constituting or reflecting discussions or communications by
any of the Taxpayer’s executives or managers, including, but not limited to,
any of the managers overseeing Taxpayer’s finance, sales and marketing,
growth, product development and/or engineering divisions, of any of the
barriers to the growth of Taxpayer’s social networking community of
users. Please provide all such documents created, obtained or circulated in
1 IDRs are informal IRS information requests issued during an audit. The “IE” designation in IRS IDRs refers to IDRs issued by an IRS International Examiner. Other IRS IDRs may be issued by domestic IRS agents, economists, or engineers. As a result, IDRs IE-178 through IE-187 are a subset of the more than 240 IDRs issued during the audit.
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2008-2012.
See Agent Stone Decl., Summons 2, Question 18 (emphasis added).
All Documents constituting and reflecting any communications made to or
by any of Taxpayer’s business executives or managers including, but not
limited to, any managers overseeing Taxpayer’s finance, sales and
marketing, growth, product development and/or engineering divisions, that
refer to the value, importance or significance of the acquisition, retention,
and/or satisfaction to Taxpayer of users in its social networking
community through products, tools, or features. Please provide all such
documents created, obtained or circulated in 2008-2012.
See Agent Stone Decl., Summons 4, Question 1 (emphasis added).
On their face, just these two questions require Facebook to identify and produce tens of
thousands of documents from among tens of millions of emails. The questions require “any and all
documents” regarding “barriers to growth” and the “importance” of users from among all of the
ESI held by Facebook, including multiple years of employee email. Neither the April 2016 IDRs
nor the Summonses provide any guidance for identifying such documents. Almost all of the
questions in the April 2016 IDRs were equally as broad.
G. Facebook’s Proposed Approach to the April 2016 IDRs
Facebook worked diligently to respond to the April 2016 IDRs by identifying potential
locations and custodians of responsive documents and developing search terms. Dong Decl. ¶¶ 17-
21. First, Facebook identified documents other than email that may be responsive to the
Summonses (collectively “Non-Email Records”). Dong Decl. ¶ 20. Beginning in April
(immediately after receiving the April 2016 IDRs), Facebook identified potential custodians,
located potentially responsive materials, and manually reviewed the records for responsiveness and
privilege. Id.; Declaration of Jay Cha-young Kim in Support of Facebook’s Opposition to
Amended Petition To Enforce Internal Revenue Service Summonses (“Kim Decl.”) ¶ 9. As of
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August 19, 2016, Facebook had substantially completed its review of Non-Email Records and
offered to produce the responsive documents to the IRS. Kim Decl. ¶ 14.
Second, Facebook began identifying relevant documents in its archive database of
employee email (“Email ESI”). Dong Decl. ¶ 21. Because of the volume of Email ESI and the
search capabilities of the system, searching and exporting email takes a considerable amount of
time and resources. Id. ¶ 27. Facebook promptly identified potential custodians by functional
areas. Id. Facebook also developed a list of search terms based on the April 2016 IDRs. Id. ¶ 21.
Facebook determined that searches of Email ESI related to April 2016 IDRs would yield
hundreds of thousands of documents. Kim Decl. ¶ 12. Facebook began an active review of the
documents for responsiveness and privilege and was ready to commence production to the IRS on
a rolling basis. Id. ¶¶ 11-12
H. IRS Issued Seven Summonses In the Midst of Meeting and Conferring with Facebook
Facebook also sought to confer with the IRS about the April 2016 IDRs. Dong Decl. ¶ 23.
On April 27, 2016, Facebook provided the IRS a detailed 60-page letter providing a list of email
custodians and proposed search terms for responding to the April 2016 IDRs. Dong Decl. ¶ 22; see
Agent Stone Decl. ¶ 31. Cognizant that the IRS might convert the IDRs to summonses, and that
any dispute would come before this Court, Facebook’s letter and proposed process sought to
comply with the Northern District of California’s Guidelines for the Discovery of Electronically
Stored Information.2
Facebook and the IRS met in person on three occasions, on May 10, 2016, May 13, 2016,
and June 14, 2016, for a total of more than 15 hours to discuss search terms. Dong Decl. ¶ 23.
After three days of meetings in May and June 2016, the IRS had not made any proposals in writing
to narrow its requests. Id.
2 IRS authority to issue an administrative summons is codified in 26 U.S.C. § 7602. In corporate tax audits it is reasonably common for the IRS to issue a summons when the IRS and the taxpayer cannot promptly resolve informal IRS IDRs. During the audit, Facebook responded to more than 200 IRS IDRs without the IRS issuing a summons. See Dong Decl. ¶ 4.
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On June 1, 2016, in the midst of meeting and conferring with Facebook about the April
2016 IDRs, the IRS issued six summonses due 16 days later (June 17, 2016). Dong Decl. ¶ 24. On
June 8, 2016, the IRS issued a seventh summons due 21 days later (June 29, 2016). Id.
Collectively, these Summonses generally demand the same information as the more than 100
requests in the April 2016 IDRs. Id. ¶ 25; Agent Stone Decl. ¶¶ 33-37.
On July 6, 2016, the United States filed its Petition to Enforce compliance with the first six
Summonses. Subsequently, the government amended its petition to include the seventh summons.
I. Facebook Has Taken Substantial Steps to Comply with the Summonses by the End of 2016
Facebook has taken substantial steps to comply with the Summonses. Kim Decl. ¶¶ 3-14.
On August 19, 2016, Facebook offered to produce approximately 7,000 responsive, non-privileged
Non-Email Records if the IRS agreed that the Non-Email Records would be subject to an
agreement pursuant to Fed. R. Evid. 502(e) and any court order entered pursuant to Fed. R. Evid.
502(d). Kim Decl. ¶ 14. On September 20, 2016, Facebook offered to produce to the IRS by
October 7, 2016, approximately 50,000 documents of Email ESI responsive to Summonses 1 and
2,3 again subject to a court order pursuant to Fed. R. Evid. 502(d). Facebook reiterated that offer
on September 29, 2016. Id. ¶¶ 15-16.
Facebook has also made substantial progress towards complying with the remainder of the
Summonses, but its review and production will still require several months. Dong Decl. ¶ 27; Kim
3 Facebook and the IRS previously agreed to a numbering system for the six Summonses. The summons questions corresponding to IDRs 171-173 would be known as Summons 1. Because there were seven questions in Summons 1, the numbering for the questions is Summons 1.01-1.07. A similar numbering system was applied to all six Summonses as follows:
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Decl. ¶¶ 12-13. For each summons, Facebook must (1) select appropriate search terms, custodians,
and date ranges; (2) search for, export, and process the Email ESI from Facebook’s email database;
and (3) review the Email ESI documents for responsiveness and privilege. Kim Decl. ¶ 9.
Facebook has completed the first step and is currently carrying out the second and third
steps on a rolling basis, summons by summons. Kim Decl. ¶¶ 11-12. This sequencing allows
attorney review of documents potentially responsive to one summons to occur while searching and
processing of email potentially responsive to other summonses continues. Id.
For the second step, Facebook applies search terms and date ranges to each custodian’s
emails and exports the identified emails to an e-discovery tool for further searching and review. Id.
As an example, Summons 2, consisting of 20 questions, required almost three weeks to complete
the targeted searches and export the results. Id. During this time, no attorney review of the
documents was possible. Id. Facebook uses a third-party service provider to process documents
and is charged based on certain hourly fees and the volume of data. Id. Facebook estimates the
total third-party data processing costs for compliance with the seven Summonses will likely exceed
one million dollars. Dong Decl. ¶ 27.
Third, Facebook will conduct attorney review of the Email ESI responsive to the searches
for each summons. Facebook’s searches for just Summons 2, again consisting of 20 questions,
produced approximately 210,000 potentially responsive documents for review. Kim Decl. ¶ 12.
Extrapolating from these 20 questions to the total of 135 questions in all seven Summonses
suggests that Facebook may need to review more than one million documents for responsiveness
and privilege. Id. ¶ 13. By any measure, this will be a considerable undertaking. Facebook is
devoting substantial resources to the attorney review process and has informed the IRS that it will
produce responsive, non-privileged Email ESI on a rolling basis, summons by summons. Id. ¶ 14.
Facebook expects to produce to the IRS substantially more than 100,000 thousand documents over
the next three months, and this number may increase as Facebook completes its review by January
2017.
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J. The IRS Has Delayed Facebook’s Production of Materials
The IRS itself has delayed Facebook’s production in three ways. First, the IRS could have
requested the documents at any time during an audit that began in November 2011. The IRS
elected to wait until April 2016 to issue the April 2016 IDRs (which, in June, became the
Summonses).
Second, prior to September 23, 2016, the IRS did not provide written comments to
Facebook’s proposed Email ESI search terms. Kim Decl. ¶¶ 7, 16. If the IRS had proposed its
own search terms in April, or promptly replied to Facebook’s proposed search terms, Facebook
could have begun searching using agreed search terms substantially earlier.
Third, from April 2016 through September 2016, the IRS repeatedly declined to enter into
an agreement or stipulate to a court order pursuant to Fed. R. Evid. 502.4 Kim Decl. ¶ 15; see
Agent Stone Decl. ¶ 31. The purpose of a Rule 502(e) agreement is to allow Facebook to produce
responsive documents pursuant to the broad requests in the Summonses, while still allowing
Facebook to retain its privilege claims, without waiver, in the event privileged communications are
unintentionally produced. Facebook has separately filed a motion seeking an order pursuant to
Fed. R. Evid. 502(d).
K. The IRS Simultaneously Issued a Notice of Deficiency That Will Require Parallel Proceedings with Potentially Duplicative Discovery
On July 26, 2016, the IRS issued a Statutory Notice of Deficiency proposing adjustments to
Facebook’s 2010 tax year. This notice completed the IRS audit prior to the statute of limitations
for the 2008-2010 tax years expiring five days later on July 31, 2016. On October 11, 2016,
Facebook filed a petition with the U.S. Tax Court disputing the IRS’s deficiency determination.
The Summonses provide an early discovery device for the IRS in the Tax Court proceeding.
Discovery will not commence, without leave of the Tax Court, until 30 days after the IRS answers
4 Beginning in August 2016, Facebook has had substantially more constructive discussions with the U.S. Department of Justice regarding search terms and a potential order pursuant to Fed. R. Evid. 502(d). These discussions have not yet resolved the issues between the parties, but Facebook is confident they will continue and lead to some constructive resolutions. In an effort to address the issue of an order pursuant to Fed. R. Evid. 502, Facebook has simultaneously filed a motion asking this Court to issue such an order.
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Facebook’s petition, which is not due until 60 days after the petition is served. See Tax Court
Rules 38 and 70. The Tax Court significantly limits IRS access to taxpayer materials, including
ESI, more than typical summons enforcement proceedings. See Tax Court Rule 70, 72;5 see also
Fed. R. Civ. P. 26(b)(1) (limiting discovery “proportional to the needs of the case”).
III. ARGUMENT
Facebook does not challenge the IRS’s nominal ability to enforce the seven Summonses
pursuant to United States v. Powell, 379 U.S. 48, 57-58 (1964) (providing factors for enforcement
of IRS summons), but Facebook does oppose the scope of the requests and the compliance
timetable the IRS demanded. As explained below, Facebook respectfully asks this Court to set a
reasonable timetable for reviewing and producing documents and for dealing with disputed issues
related to scope and privilege.
A. Following a Case Management Conference, the Court Should Issue a Case Management Order with a Production and Briefing Schedule
Concurrent with this Opposition, Facebook has filed a motion requesting the Court to
schedule a Case Management Conference on the same date and time as the hearing on the IRS’s
Petition. See Civil L. R. 16-7.6 Facebook respectfully requests that the Court issue a Case
Management Order setting forth a reasonable schedule for the production of documents and
relating to the resolution of disputes over scope and privilege.
As described above, the Summonses require Facebook to search and export millions of
documents. Even with reasonable search terms, the process will require considerable time to
identify and review documents for responsiveness and privilege. Facebook also believes the IRS
may object to Facebook’s production of Email ESI, including challenging Facebook’s search
5 The Tax Court can limit discovery if (a) it is unreasonably cumulative or duplicative; (b) it is obtainable from some other source that is more convenient, less burdensome, or less expensive; (c) the party seeking discovery had ample opportunity by discovery in the action to obtain the information sought; or (d) it is unduly burdensome or expensive, taking into account the needs of the case, or the amount in controversy. 6 An action to enforce an administrative summons is exempt from the initial disclosure obligations under Fed. R. Civ. P. 26(a)(1)(B)(v). But under Local Rule 16-7, the Court may schedule a Case Management Conference or issue a Case Management Order without such conference. Civil L. R. 16-7.
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terms, custodians, and privilege assertions. As the document review process continues and Email
ESI production begins, this Court will likely need to resolve disputes regarding scope, burden, and
privilege.
Facebook will confer with the government in hopes of arriving at a Joint Case Management
Statement that the Court will be able to adopt as its Case Management Order. See Civil L. R. 16-
9(a). In the event the parties are unable to reach an agreement, Facebook asks that the Court adopt
Facebook’s [Proposed] Case Management Order. See id.
B. The Summonses Are Overbroad and Seek Privileged Information
1. An Overly Broad Summons Is Not Enforceable
Not only must the IRS comply with the elements for summons enforcement established in
Powell, 379 U.S. at 48, the IRS may not enforce a summons that is overly broad or seeks
information protected by a legal privilege. See Reisman v. Caplin, 375 U.S. 440, 449 (1964);
United States v. Beacon Fed. Sav. & Loan, 718 F.2d 49, 53-55 (2nd Cir. 1983); United States v.
Cox, 73 F. Supp. 2d 751, 758 (S.D. Tex. 1999); see also Fisher v. United States, 425 U.S. 391, 401
n.7 (1976) (Fourth Amendment limits scope of IRS summonses). “The IRS is not entitled to go on
a fishing expedition…[and] must identify with some precision the documents it wishes to inspect.”
United States v. Dauphin Deposit Trust Co., 385 F.2d 129, 131 (3rd Cir. 1968); United States v.
Coopers & Lybrand, 550 F.2d 615, 619 (10th Cir. 1977) (“IRS does not, as it appears to assume on
this appeal, have carte blanche discovery.”).
Although the IRS is entitled to obtain information that may be relevant to the correctness of
Facebook’s return, United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), it is not
entitled to every bit of information about Facebook and every document about every aspect of
Facebook’s business over its history. See United States v. Harrington, 388 F.2d 520, 524 (2d Cir.
1968) (relevance must be a “realistic expectation rather than an idle hope”). And while a summons
requires an individual to make a good faith “reasonable” effort to obtain records, United States v.
Ryan, 402 U.S. 530, 534 (1971), she cannot be required to do the impossible. See United States v.
Rylander, 460 U.S. 752, 757 (1983).
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In the Ninth Circuit, “overbreadth” has been construed as addressing “concerns about
excessive burden and lack of specificity, rather than relevance.” See United States v. Abrahams,
905 F.2d 1276, 1281 n.6 (9th Cir. 1990), overruled on other grounds, United States v. Jose, 131
F.3d 1325 (9th Cir. 1997). Hence, district courts in the Ninth Circuit interpret an overbreadth
challenge as an allegation that a summons lacks the required specificity. See, e.g., Gudenau v.
United States, 98 A.F.T.R.2d (RIA) 6745, 6751 (D. Haw. Sep. 11, 2006) (citing and applying
United States v. Malnik, 489 F.2d 682, 686 n.4 (5th Cir. 1974) for the proposition that “[t]he
documents must be described only with ‘reasonable particularity’ so as to give the witness
sufficient information to determine which records are to be produced.”); Potter v. United States,
2002 U.S. Dist. LEXIS 20031, *24 (S.D. Cal. 2002) (partially granting taxpayer’s motion to quash
with respect to documents protected by the attorney-client privilege, after also conducting an
independent review to determine if summonses were overbroad).
2. The Summonses Are Not Sufficiently Specific to Permit Facebook to Adequately Respond
Many of the requests in the Summonses are worded so broadly that they do not provide
Facebook with sufficient guidance to determine which documents are, or are not responsive. The
following is an illustrative example of one of the IRS requests:
All Documents constituting or reflecting the actual growth numbers or
growth data of the online social networking community of users. Please
provide all such documents created, obtained or circulated in 2008-2012.
See Agent Stone Decl., Summons 3, Question 3.
The question requires production of any document, over a five-year period, mentioning
Facebook’s growth data. As a company focused intently on the satisfaction, retention, acquisition,
and, ultimately, growth, of people using Facebook during this time period, almost any Facebook
employee could conceivably have referred to growth data in one or more communications.
Facebook could not produce “all” responsive documents unless it examined almost every document
sent or received by every Facebook employee between 2008 through 2012. Facebook had
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approximately 2,127 employees as of December 31, 2010 and 3,200 as of December 31, 2011.
Dong Decl. ¶ 16. As drafted, this summons question (and many like it) is impractical and
unreasonable.
Facebook nevertheless has sought to respond to this question (and all the others) by
conducting searches within the files of a reasonable number of custodians using targeted terms
such as “grow” and “active user,” as well as abbreviations like “DAU” (daily active users) and
“MAU” (monthly active users) regularly used by Facebook. Facebook discussed these proposed
search terms, custodians, and date range with the IRS. Id. ¶ 23. The IRS only offered verbal
suggestions of modifications that would further broaden (not narrow) the search terms and
custodians. Id. Prior to September 23, 2016, the IRS had not reduced to writing its proposed
search terms, custodians, and date ranges. Id.
Facebook’s Email ESI search strategy is a good faith “reasonable” effort to provide records.
See Ryan, 402 U.S. at 534. A strict reading of the IRS’s overly broad Summonses would be asking
Facebook to do the impossible. See Harrington, 388 F.2d at 524. Facebook intends to use
reasonable search terms to provide much-needed definition and precision to the scope of the
Summonses, so Facebook can adequately respond. See Adamowicz v. United States, 531 F.3d 151,
As written, the overly broad Summonses would require the production of numerous
documents protected by these privileges. Preliminary searches of potentially responsive documents
for the Summonses demonstrate that hundreds of thousands of documents will need to be reviewed
for privileges, and Facebook will indeed assert privileges for a significant number of documents.
Kim Decl. ¶ 11. The full extent of privileged communications is not yet known at this time. Id.
The IRS is not entitled to all of the documents it has requested in its broad Summonses.
Facebook is allocating ample resources to properly conduct a privilege review of the potentially
responsive Email ESI records. Kim Decl. ¶¶ 10-12. Facebook estimates that it will take until at
least January 2017 to fully complete the review of the potentially responsive documents for all
seven Summonses. Dong Decl. ¶ 27; Kim Decl. ¶ 13. The Case Management Order should set a
production and briefing schedule that provides Facebook sufficient time to complete its document
review, create a privilege log, and allow the Court and parties to revisit issues relating to privilege
and overbreadth at a later date if the IRS challenges Facebook’s production.
IV. CONCLUSION
Facebook has cooperated throughout the IRS audit and intends to comply with the 11th-
hour barrage of Summonses, even though they are overbroad and ultimately unnecessary in light of
the Statutory Notice of Deficiency that the IRS issued and the parallel proceedings in the Tax
Court. Facebook has identified custodians, run searches using reasonable search terms, and has
7 The tax practitioner privilege under 26 U.S.C. § 7525 is a relevant privilege in this matter. Section 7525(a)(1) provides that “[w]ith respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” A “federally authorized tax practitioner” is “any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.” 26 U.S.C. § 7525(a)(3)(A).
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offered to produce documents immediately upon the issuance of an order pursuant to Fed. R.
Evid. 502(d). Facebook requests the Court facilitate the production process by convening a Case
Management Conference and providing a Case Management Order that sets a reasonable timetable
for review and production of documents and for briefing of potentially disputed issues.
Dated: October 11, 2016.
BAKER & McKENZIE LLP
/s/ Scott Frewing Scott H. Frewing
/s/ Drew Crousore Andrew P. Crousore
Attorneys for Respondent FACEBOOK, INC.
Case 3:16-cv-03777-LB Document 10 Filed 10/11/16 Page 20 of 20
1 Scott H. Frewing (SBN 191311) Andrew P. Crousore (SBN 202195)
2 Jay Cha-young Kim (SBN 266360) Brad Clements (SBN 31 0398)
3 BAKER & McKENZIE LLP 660 Hansen Way
4 Palo Alto, CA 94304-1044 Telephone: + 1.650.856.2400
DECLARATION OF JAY CHA-YOUNG KIM IN SUPPORT OF FACEBOOK'S OPPOSITION TO AMENDED PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES
DATE: November 17,2016 TIME: 9:30 am DEPT.: Courtroom 15-C 18
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22 1. I am an attorney with Baker & McKenzie LLP. Beginning in January 2013, I have
23 advised Facebook, Inc. ("Facebook") regarding the Internal Revenue Service ("IRS") audit of
24 Facebook's taxable years ended December 31 , 2008, December 31,2009, and December 31,2010
25 (the "2008-20 10 tax audit"). Throughout the 2008-2010 tax audit, I have assisted Face book in
26 responding to IRS Information Document Requests ("IDRs") and summonses, and making
27 presentations to the IRS. I have personal knowledge ofthe matters set forth in this declaration.
28 2. On April 7, 2016, the IRS issued to Face book IDRs IE-178 through IE-187 (the 1
13nker & McKenzie LL I'
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Case 3:16-cv-03777-LB Document 10-1 Filed 10/11/16 Page 1 of 4
"April 2016 IDRs"). Upon receipt of the April 2016 IDRs, Baker & McKenzie colleagues and I
2 began assisting Facebook identify potential custodians of responsive documents, and to develop
3 search terms for electronically stored information ("ESI") responsive to the April2016 IDRs.
4 3. During the period from April 8, 2016 through April 26, 2016, Baker & McKenzie
5 colleagues and I met with Facebook's e-discovery and legal team, as well as individual Facebook
6 employees that we identified as potential custodians of responsive documents. My colleagues and
7 I focused on both locating responsive non-email records as well as methods for searching for
8 responsive email records.
9 4. In addition, during April 2016, I worked with Face book personnel to identify
1 0 potential groups of email custodians by relevant functional areas such as "Core Management" and
11 "International Sales and Marketing."
12 5. My colleagues and I also developed a list of search terms using the words in the
13 April 2016 IDRs as well as related terms that various Face book employees determined could
14 identify potentially responsive documents.
15 6. On April 27, 2016, Baker & McKenzie sent to the IRS a detailed 60-page letter with
16 a list of email custodians, proposed search terms, and date ranges for identifying documents
17 responsive to the April2016 IDRs.
18 7. On May 10, 2016, May 13,2016, and June 14, 2016, I participated in meetings with
19 the IRS for a total of approximately 15 hours to discuss search terms and document custodians.
20 During those meetings, it appeared that IRS personnel did not have a unified view of the type of
21 documents the IRS was seeking. After three days of meetings, the IRS had not agreed in writing to
22 any search terms or any proposals to narrow its requests.
23 8. On June 1, 2016, the IRS issued to Face book six summonses which in substantial
24 part requested the same documents as the April 2016 IDRs. On June 8, 2016, the IRS issued a
25 seventh summons to Facebook.
26 9. Since the May and June meetings with the IRS, I have continued to work with my
27 colleagues and Facebook to identify, review, and prepare to produce documents responsive to the
28 IRS summonses. For email, we have followed the following process: (1) understanding the
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1 summons and selecting appropriate search terms, custodians, and date ranges; (2) searching for and
2 exporting the email ESI from Facebook's email archives to a third-party document processing
3 vendor, and refining the searches; and (3) reviewing the potentially responsive email ESI
4 documents for responsiveness and privilege.
5 10. Facebook has completed the first step (identifying custodians and search terms) for
6 six out of the seven IRS summonses. Face book and Baker & McKenzie are currently carrying out
7 the second and third steps on a rolling basis, summons by summons. This sequencing allows
8 attorney review of documents potentially responsive to one summons to occur while the searching
9 and processing of email potentially responsive to another summons continues.
10 11. Searching for responsive email requires a substantial amount of time. As an
11 example, one of the summonses (referred to as Summons 2 in communications with the IRS)
12 consists of 20 questions, and required almost three weeks to perform the initial search in
13 Facebook's email archives, export the data to an e-discovery tool, and complete more targeted
14 searches within the e-discovery tool. This three-week period did not include any time for attorney
15 review of the documents. During this time, no attorney review of documents is possible. Attorney
16 review of the documents identified by the searches for responsiveness and privilege required
17 approximately an additional four weeks.
18 12. Facebook and Baker & McKenzie have completed searching for and reviewing the
19 documents collected for two of the summonses. The table below summarizes the number of
20 documents collected as a result of searches performed and the number of documents determined to
21 be responsive. In addition, we have determined that a number of the documents are privileged.
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1 13. Based on my experience with this document rev1ew effort, as well as similar
2 projects in the past, I estimate that we may need to review more than one million documents for
3 responsiveness and privilege, and the collection and review of the remaining documents will
4 require until approximately January 2017 to complete.
5 14. On August 19, 2019, Baker & McKenzie sent to Department of Justice ("DOJ")
6 counsel a letter offering to produce the approximately 7,000 non-email documents that Facebook
7 and its advisors have determined were responsive to the seven summonses. The letter conditioned
8 production of these documents upon the IRS agreeing that the production would be subject to an
9 agreement pursuant to Fed. R. Evid. 502(e) and any subsequent order entered by this Com1
10 pursuant to Fed. R. Evid. 502( d).
11 15. On September 20, 2016, I participated in a telephone call with DOJ counsel
12 representing the IRS. My colleagues and I informed DOJ counsel that on October 7, 2016,
13 Facebook would be prepared to produce an additional approximately 50,000 documents responsive
14 to Summonses 1 and 2. My colleagues and I conditioned production of these documents upon
15 entry of an order pursuant to Fed. R. Evid. 502(d). We also informed DOJ counsel that Facebook
16 was in the process of performing searches and reviewing documents for Summonses 3 and 4.
17 16. On September 23, 2016, DOJ counsel sent to Baker & McKenzie a letter with IRS
18 proposed edits to the search terms and custodians for Summons 5 that Facebook had proposed in
19 Baker & McKenzie 's April 27 letter. During a phone call on September 29, 2016, my colleague
20 and I discussed with DOJ counsel the IRS proposed revisions to the Summons 5 search terms.
21 I declare under penalty of perjury under the laws of the United States that the foregoing is
22 true and correct. Executed on the 11th day of October 2016 at Palo Alto, California.
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Scott H. Frewing (SBN 191311) Andrew P. Crousore (SBN 202195)
2 Jay Cha-young Kim (SBN 266360) Brad Clements (SBN 31 0398)
3 BAKER & McKENZIE LLP 660 Hansen Way
4 Palo Alto, CA 94304-1044 . Telephone: + 1.650.856.2400
DECLARATION OF RONALD DONG IN SUPPORT OFF ACEBOOK'S OPPOSITION TO AMENDED PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES
DATE: November 17,2016 TIME: 9:30am DEPT.: Courtroom 15-C
21 1. I am Facebook's Tax Counsel and have served in that capacity since May
22 2013. Since joining Facebook, I have been the primary Facebook employee responsible for the
23 Internal Revenue Service ("IRS") audit of Facebook's taxable years ended December 31, 2008,
24 December 31, 2009, and December 31, 2010. I have personal knowledge ofthe matters set forth in
25 this declaration.
26 2. I have been the primary Facebook employee responsible for meeting with the IRS
27 and responding to IRS Information Document Requests ("IDRs"). Throughout the audit of
28
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1 information requests and the progress of the audit.
2 3. Based on my participation in the IRS audit and the documents I have reviewed, I am
3 aware that the IRS audit of Facebook's 2008-2009 tax years began in November 2011. I am also
4 aware that in January 2013, the IRS opened an examination of Facebook's 2010 tax year, which
5 continued for more than three years. The IRS conducted the audit of Facebook's 2008-2010 tax
6 years as a single audit "cycle."
7 4. Face book cooperated with the IRS throughout the 2008-2010 audit. The IRS issued
8 more than 240 Information Document Requests ("IDRs"), and in response Facebook produced
9 thousands of pages of documents. In addition, pursuant to IRS requests, Facebook voluntarily
1 0 made nine employees available for transcribed interviews.
11 5. On five occasions in connection with the audit, the IRS requested that Facebook
12 extend the statute of limitations for the audit, and Face book agreed to do so. Specifically:
13 a. effective August 2, 2011, Facebook agreed to extend the statute of limitations for
14 its 2008 tax year to September 15, 2013;
15 b. effective March 26, 2013 Facebook agreed to extend the statute of limitations for
16 its 2008 and 2009 tax years to November 30, 2014;
17 c. effective March 25, 2014, Facebook agreed to extend the statute of limitations for
18 its 2008,2009, and 2010 tax years to November 30, 2015;
19 d. effective February 23 , 2015, Facebook agreed to extend the statute of limitations
20 for its 2008, 2009, and 2010 tax years to January 31, 2016; and
21 e. effective May 20, 2015, Face book agreed to extend the statute oflimitations for its
22 2008, 2009, and 2010 tax years to July 31, 2016.
23 6. In January 2015, the IRS issued 16 IDRs, the majority of which were follow-up
24 questions to topics that the IRS had previously discussed with Facebook. It appeared to me that as
25 of January 2015 the IRS was concluding its audit of Face book.
26 7. Consistent with the IRS concluding its audit in 20 15, on April 17, 2015, the IRS
27 made a presentation to Facebook and set forth its preliminary views regarding the transfer pricing
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1 valuation issues at the heart of the audit. I know from my experience that this is a typical step in
2 concluding such an audit.
3 8. On May 27, 2015, Facebook responded to the IRS presentation and explained that
4 the IRS had made significant and arbitrary errors in its analysis. Facebook explained that once the
5 IRS errors were corrected, the IRS economic model yielded essentially the same value that
6 Facebook used to prepare its tax returns.
7 9. On June 22, 2015, the IRS responded to Facebook's May 27 presentation and
8 informed Facebook that the IRS intended to issue additional IDRs related to Facebook's
9 presentation and that the IRS was evaluating, for the first time, whether to engage an outside
10 expert.
11 10. From May 27, 2015 through December 2015, the IRS did not issue any additional
12 requests for information, nor request or conduct a single interview, except for an IDR in July 2015
13 requesting copies of a publicly available Facebook blog, and three IDRs on September 30, 2015,
14 which Facebook promptly responded to on October 14, 2015. The IRS activity during this period
15 contradicted the IRS suggestion in June 2015 that the IRS wished to ask additional questions about
16 Facebook's response to the IRS proposed adjustment. In January 2016, the IRS issued several
17 IDRs purporting to request information related to Facebook's March 2015 presentation, and
18 Facebook responded to those IDRs in February 2016.
19 11. From September 30, 2015 through March 2016, I was in regular contact with the
20 IRS team. The IRS limited its activities to routinely scheduled meetings with me and other
21 Face book tax personnel. At those meetings the IRS did not request additional information (other
22 than as described above in paragraph 1 0), and I regularly informed the IRS that Face book wished
23 to conclude the audit on or before June 30,2016.
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12. On January 25, 2016, I met with the IRS, along with Ted Price, Facebook's Vice
President of Tax, and our outside counsel from Baker & McKenzie. During the January 25, 2016
meeting the IRS requested that Face book agree to extend the statute of limitations for an additional
year. In response, Facebook requested the IRS provide an audit plan which the IRS declined to
provide. The IRS justified its request for a further extension by stating that after Facebook's
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1 response to the proposed IRS adjustment, the IRS needed additional time to continue gathering
2 more information and to retain outside experts.
3 13. Rather than grant an unqualified extension through July 31, 2017, Face book asked
4 the IRS to consider a shorter extension to October 31, 2016. Facebook asked the IRS to commit to
5 issuing a 30-day letter (a necessary procedural step to allow a taxpayer to bring disputed issues to a
6 next-level review with IRS Appeals) by May 1, 2016. The IRS declined Facebook's offer of an
7 extension conditioned upon the IRS ensuring Facebook it would be permitted to go to IRS Appeals.
8 14. Subsequently, on two separate occasions, Facebook again discussed with the IRS
9 possible extensions of the statute of limitations. For example, in May 2016, Facebook proposed an
10 extension to January 31, 2017, subject to reasonable procedural conditions. The IRS rejected
11 Facebook's May offer to extend the statute oflimitations.
12 15. On April 7, 2016, with fewer than 90 days remaining before the expiration of the
13 statute oflimitations, the IRS issued IDRs IE 178 through IE 187, which included 120 requests for
14 Facebook documents, including Electronically Stored Information ("ESI"). Contrary to the
15 established protocols through the four year audit, and published IRS procedures, the IRS did not
16 first provide Face book drafts ofiDRs IE 178 through IE 187.
17 16. The IRS issued IDRs IE 178 through IE 187 with due dates that provided Facebook
18 three weeks to respond to the 120 requests which sought broad categories of Facebook records for
19 multiple years. A literal reading of the IRS questions could have required Facebook to review
20 every email sent and received by every employee over a five- to seven-year period. Facebook had
21 approximately 2,127 and 3,200 employees as of December 31, 2010 and December 31, 2011
22 respectively. 1
23 17. Upon receipt of the last-minute April IDRs, I immediately worked diligently with
24 other Facebook employees and our external counsel to understand the IDRs and identify potential
25 locations and custodians of responsive documents as well as search terms for ESI.
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18. Generally speaking, Facebook has two categories of information responsive to the
1 I have relied upon Facebook's S-1, fi led with the Securities and Exchange Commission, for these figures.
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1 April IDRs (that later became summonses). First, Facebook employees retain limited numbers of
2 documents other than e-mail (collectively "Non-Email Records").
3 19. Second, Facebook maintains an archive of employee email for a certain number of
4 pnor years. This email archive is a single large database of electronically stored information
5 ("Email ESI").2 Facebook is capable of running simple search term queries against the database
6 which, due to the vast size of the Email ESI database, can each take a considerable amount of time
7 that varies with the size and complexity of each individual search.
8 20. Facebook pursued distinct approaches to respond to the April requests for the two
9 different types of information -- (i) Non-Email Records and (ii) Email ESI. For Non-Email
10 Records, beginning in April 2016 (two months prior to the IRS issuing the summonses), Facebook
11 initiated a process of identifying potential custodians, locating potentially responsive materials, and
12 manually reviewing the records for responsiveness and privilege.
13 21. For Email ESI, Facebook also began, in April, assessing how to search the large
14 universe of potential documents. Face book identified potential groups of Email ESI custodians by
15 functional areas such as "Core Management" and "International Sales and Marketing." Facebook
16 also developed a list of search terms using the words in the IRS April IDRs as well as related terms
17 that Facebook determined would identify potentially responsive documents.
18 22. On April 27, 2016, Facebook's outside counsel provided the IRS a detailed 60-page
19 letter providing a list of email custodians and proposed search terms for responding to the April
20 IDRs.
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23. Facebook requested to meet with the IRS regarding the April IDRs. Facebook's
outside counsel and I met in-person with the IRS on three occasions, on May 10, 2016, May 13,
2016, and June 14, 2016, for a total of more than 15 hours to discuss search terms. After three days
of meetings spread over a three-week period, the IRS had not agreed in writing to any proposals to
narrow its requests. At these meetings, the IRS also repeatedly declined to enter into an agreement
pursuant to Federal Rule of Evidence 502(d).
2 Almost all of the responsive information to the summonses is ESI because (1) the Non-Email Records component is relatively very small , and the Email ESI component (which is by definition ESI) is relatively very large, and (2) the Non-Email Records are also largely comprised ofESI.
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1 24. On June 1, 2016, within 60 days of the statute oflimitations expiring, the IRS issued
2 six summonses with a response date of June 17, 2016. Subsequently, on June 8, the IRS issued a
3 seventh summons. In total, the seven summonses included 135 different requests.
4 25. The summonses generally request the same information previously requested in the
5 April IDRs. During the in-person meeting between Facebook and the IRS on June 14, 2016, the
6 parties discussed the then six summonses the IRS had issued and whether the IRS would agree to
7 the Email ESI search terms proposed by Face book. During the meeting on June 14, 2016, like the
8 earlier meetings, the IRS team demonstrated that it did not have a unified view of what it sought to
9 request from Facebook. Further, throughout June the IRS never reduced to writing any suggestions
1 0 for document search terms.
11 26. On July 6, 2016, the IRS filed its Petition to Enforce the six summonses. On July
12 25, 2016, the IRS amended its Petition to include the seventh summons.
13 27. Based on my experience, information provided to me by Facebook's e-discovery
14 team, and the ongoing document review by our external counsel Baker & McKenzie, I estimate
15 that it will take through approximately January 2017 to complete the search and review of the
16 potentially responsive documents. Further, based on information provided to me by external
17 consultants that assist Facebook with such searches, I estimate the total third-party data processing
18 costs for compliance with the seven summonses will exceed $1.0 million. These figures do not
19 include attorney review costs, which will also be substantial.
20 I declare under penalty of perjury under the laws of the United States that the foregoing is
21 true and correct. Executed on the 11th day of October 2016 at Menlo Park, California.
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