A startling recent New York Times article revealed How Meta Uses A.I. Data Centers to Avoid Billions in Federal Taxes.

It’s written by Kashmir Hill, Jesse Drucker, Eli Tan and Mike Isaac. Some extracts:

• Mark Zuckerberg says Meta’s A.I. push is a tremendous success. “Our investments in A.I. are accelerating every major part of our core business,” he has told investors. “Every sign that we’re seeing in our own work and across the industry gives us confidence in this investment.”
• But when Meta files its taxes, it tells the Internal Revenue Service a different story. It claims that its A.I. data centers are a giant experiment that could fail, according to four people with knowledge of the company’s operations.
• It does this so it can tap into a tax credit intended for research and experimentation. It’s an aggressive interpretation of the tax break, which Meta embraced to claim billions of dollars in tax credits for data center expansion.
• Characterizing its A.I. data centers as experimental is “kind of wild and out there,” said Andre Shevchuck, a partner at the advisory firm BPM who specializes in the research and experimentation tax credit.
• Indeed, Meta’s own accountants recognize that the strategy is on shaky legal ground. In disclosures buried in securities filings, the tech giant warns that billions in tax savings are vulnerable to being overturned by the I.R.S., in large part because of “uncertainties with our research tax credits.”
• Here’s what Meta is doing: For tax purposes, the company classifies its enormous, multibillion-dollar data centers as “pilot models.” Under a tax credit created in the 1980s to spur innovation, companies can get a rebate for supplies, but only if they are being tested in an experimental effort, not standard business operations. Meta is claiming that the costly A.I. computer chips it buys from companies, including Nvidia, are entitled to a taxpayer-provided discount as part of the experiment.
• …The company started claiming the credit for the data centers two years ago. Since then, Meta’s savings from the credit have soared, trimming almost $4 billion off its tax bill last year, filings show. Meta is now the biggest beneficiary of the tax credit among publicly traded companies, a Times review of securities filings found.

The article provides some history:

• The tax break dates to the first year of the Reagan administration, when Japan was a global leader in technological innovation. Business lobbyists and legislators were worried that America’s fledgling tech sector would fall behind, so Congress created the Research & Experimentation Tax Credit as an incentive to take risks and invest in inventions that might not pan out commercially. A few years after the credit was created, a government report said it had been used to develop, among other things, electronic banking equipment and drugs to treat cancer.
• Tax rules already permitted tech companies to write off research expenses from their taxable income. The new credit was even more generous and could be taken on top of the deduction. But it was harder to qualify for. Companies have to meet a complex four-part test to prove they are running an experiment, not just rolling out a new product.

The issue somewhat reminds me of aggressive approaches taken under old Canadian GAAP to classifying development costs as an asset: it was never appropriate simply to capitalize early-stage operating losses, but I recall cases that came close to that (on the basis that the adverse initial experience would contribute to increased value-generation in the future). The article reports that James Shannon, a former U.S. representative from Massachusetts who sponsored the research tax credit in 1981, said it had been intended to support “people power, knowledge, information,” and not “making things.” Says Shannon: ““This has gone way, way beyond what anybody could have imagined.” Well, we’re used to that in the age of Trump. If the national “tone from the top” counts for anything, Meta should probably come in for praise (when during the 2016 campaign Hillary Clinton noted that he’d “paid nothing in federal taxes” in recent years, Trump bragged, “That makes me smart,” and his most prominent recent interaction with the IRS resulted in it being steamrollered into exempting him and his businesses from audit). The article records uncertainty about the tactic within Meta itself and among its advisors, and as noted, that uncertainty is specifically disclosed.

But at the risk of seeming naïve and idealistic, even if Meta thought the tactic was worth trying, the actions evidence how little it cares about what might once have been termed “good corporate citizenship.” A while ago, in the context of the KPMG Australia whistleblower scandal, we cited comments that “integrity and governance are not optional overheads—they are the foundation of enterprise value.” At some point, gaming the system, even (or perhaps especially) if the game is winnable, fails to be even grudgingly “smart,” and speaks mainly to the gamer’s ethical and moral rot. In Meta’s case, sadly, it’s not the only indicator…

The opinions expressed are solely those of the author.