The case, filed on December 28 in U.S. Tax Court in Washington, has implications for other technology companies with software assets that may prove difficult to value for tax purposes.

The IRS informed Amazon in November 2012 of what the agency said were unpaid taxes for 2005 and 2006. The agency also is contesting tax deductions Amazon claimed on its net operating losses, among other issues, according to the court filing.

Amazon first publicly disclosed in April 2011 that it faces $1.5 billion in additional federal taxes over a seven-year period, beginning in 2005, according to a Securities and Exchange Commission filing.

Amazon and the IRS declined to comment on Tuesday. A lawyer with Baker & McKenzie LLP, which is representing Amazon, could not be reached for comment.

The case involves a "transfer pricing" tax dispute.

Multinational corporations value goods and services moving across international borders from one corporate unit to another. These cash transfers are frequently managed to reduce corporations' global tax costs.

Amazon argues that the IRS is overestimating the value of Amazon's "intangible property," which includes computer software, trademarks and marketing assets, according to the court filing.

The IRS counters that Amazon's European subsidiaries made taxable payments to its U.S. parent company based on a low-dollar estimate.

IRS 2009 COURT LOSS

Seattle-based Amazon, which is expected to have $60 billion in annual revenue for 2012, contends the IRS used an inaccurate estimate for calculating its transfer pricing taxes.

The IRS relied on an estimation method that was overturned in a 2009 court decision involving Veritas Software Corp, now part of Symantec Corp, Amazon said.

The Veritas decision was a stinging loss for the IRS, prompting corporations to be more aggressive in fighting the IRS over transfer pricing.

"From Amazon's perspective, you'd be crazy not to litigate given what a sound defeat the IRS took in Veritas," said Neal Kochman, a tax lawyer with Caplin & Drysdale, who is not involved in the case.

The dispute "certainly will be watched broadly," he said.

The Veritas-based tax estimate derived in part from an outside report conducted for the IRS by Horst Frisch Inc, a transfer pricing consultancy.

Horst Frisch was contracted by the IRS to analyze Amazon's transfer pricing figures. The firm submitted a January 2011 report to the IRS that was used to levy additional taxes, Amazon said.

A Horst Frisch official could not be reached for comment on Tuesday.

Because the case was filed in U.S. Tax Court, Amazon is not required to pay the tax bill until the outcome of any court decision. The case could be settled out of court. The case was first reported in the trade publication Tax Analysts.

Amazon faces other tax troubles in the United States and abroad. Amazon received a $252 million demand from French tax authorities at the end of last year.

Amazon last year was forced to start collecting sales taxes in more states, including California, Texas and Pennsylvania.

(Additional reporting by Nanette Byrnes and Alistair Barr; Editing by Howard Goller and Dan Grebler)

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