The Eighth Circuit Court of Appeals delivered 3M a victory in its long-running dispute with the Internal Revenue Service (IRS) over the allocation under section 482 of royalty income from a Brazilian affiliate to 3M, despite a foreign law restriction on the payment of that income. See 3M Co. & Subsidiaries v. Commissioner, No. 23-3772 (8th Cir. Oct. 1, 2025), rev'g 160 T.C. No. 3 (2023). In 2023, a divided Tax Court upheld the IRS's allocation on an extremely narrow margin (see here for our coverage of the Tax Court opinion). The IRS's allocation relied on the section 482 blocked-income regulation, which provides that the IRS can ignore foreign legal restrictions on payments for purposes of making allocations under section 482. Seven out of 17 Tax Court judges upheld the blocked-income regulation under Chevron as a reasonable interpretation of section 482, which the Tax Court plurality concluded was ambiguous on the question at hand. Two other judges concurred in the result based on an interpretation of section 482 itself, while the remaining eight dissented for a variety of reasons. One important development subsequent to the Tax Court's opinion was Loper Bright, where the Supreme Court ended Chevron deference to agency interpretation of statutes. Applying Loper Bright's mandate of determining the "best reading of the statute," the Eighth Circuit held that section 482 required the IRS to give effect to the foreign legal restriction and therefore did not provide authority for the IRS's allocation in this case.

The Eighth Circuit found persuasive judicial precedent (such as First Security Bank of Utah and Procter & Gamble) that pre-dated the promulgation of the blocked-income regulation. As reasoned in those cases, the court agreed that for income to be subject to a section 482 allocation, "'a taxpayer must have complete dominion over it.'" 3M, No. 23-3772, at *6 (citation omitted). Put another way, where the taxpayer lacks the power to shift income across related entities because the income cannot legally be paid, section 482 does not provide the IRS with authority to reallocate that income. As such, a section 482 allocation to 3M of income that Brazilian law blocked its subsidiary from paying would not achieve section 482's purpose of clearly reflecting 3M's income.

The Eighth Circuit further found that the "commensurate with income" standard in the second sentence of section 482, enacted after the years at issue in First Security Bank of Utah and Procter & Gamble, did not save the IRS's position. Notably, some of the Tax Court judges had found that the "commensurate with income" standard distinguished 3M from earlier case law and supported the IRS's allocation in this case. The Eighth Circuit, by contrast, deploying traditional tools of statutory construction, concluded that the second sentence of the statute had a narrower reading in this context. In the words of the Eighth Circuit, the "statute's true meaning" or its "best reading—if not the only one—is that the IRS can 'allocate' income, but only when the taxpayer has 'dominion or control' over it." 3M, No. 23-3772, at *9 (emphasis in original). The "commensurate with income" standard does not change that. It provides that, in the case of intangibles, whatever income is properly subject to allocation must be equal or proportionate to the income attributable to the intangible. But, as is the case in 3M, the "commensurate with income" standard "is of no help in reallocating" income that could not legally be paid. Id. at *10. The Eighth Circuit also noted that whatever authority was delegated to the IRS under section 482 is bound by the best reading of the statute, which did not authorize the IRS action in the present case.

The reasoning in the Eighth Circuit's 3M decision might impact consideration of the same legal issue in the ongoing Coca-Cola transfer pricing dispute (currently on appeal at the Eleventh Circuit). Beyond its direct relevance to Coca-Cola, the decision restores longstanding limits on the reach of section 482 and recognizes limits on the scope of the "commensurate with income" standard. More broadly, the Eighth Circuit's decision represents another case in which a tax regulation has been struck down following the Supreme Court's decision in Loper Bright. In the current tax controversy landscape, where statutory interpretation and regulation validity challenges continue to take center stage in many disputes, 3M is an important reference point for how courts are deciding these issues and a significant win on the taxpayer side. 

For more information, please contact:

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Kevin L. Kenworthy, kkenworthy@milchv.com, 202-626-5848

Lisandra Ortiz, lortiz@milchev.com, 202-626-5841

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