The Tax Times: Eighth Circuit Overturns IRS in 3M Transfer Pricing Battle: A Post

The U.S. Court of Appeals for the Eighth Circuit issued a pivotal decision on October 1, 2025, in 3M Company and Subsidiaries v. Commissioner, 136 AFTR 2d 2025-5252 (CA8), reversing the U.S. Tax Court’s 2023 ruling in favor of the IRS. The court held that the IRS could not impose U.S. tax on “blocked” royalty income that 3M was legally prohibited from receiving under Brazilian law.

Background

The dispute stemmed from 3M’s intercompany licensing arrangement with its Brazilian subsidiary, which paid royalties capped by Brazilian regulations at 1% of sales. The IRS determined that the arm’s-length rate should have been 6%, asserting that the company underreported its income by approximately $23.7 million. Relying on its “blocked income” regulation under Treasury Regulation §1.482-1(h)(2), the IRS reallocated income to 3M’s U.S. parent despite the Brazilian payment restrictions.

In 2023, the Tax Court narrowly (9–8) upheld the IRS’s adjustment, concluding that the regulation properly implemented IRC §482. 3M appealed, arguing that it could not be taxed on income that foreign law prohibited it from receiving and that the regulation conflicted with the statute’s text.

The Eighth Circuit’s Ruling

The Eighth Circuit reversed the Tax Court, rejecting the IRS’s interpretation of §482 and invalidating the blocked income regulation within its jurisdiction. Citing the Supreme Court’s landmark Loper Bright Enterprises v. Raimondo (2024) decision, which ended Chevron deference, the panel held that courts, not agencies, must determine the “best reading” of tax statutes.

The Judges Concluded That §482 Does Not Authorize The IRS To Impute Income That Taxpayers Cannot Legally Earn Abroad.

The court further dismissed the IRS’s alternative argument that it could recharacterize the blocked royalties as dividends, calling that stance “breathtaking in its potential reach.” It emphasized that taxpayers are not required to violate foreign law to satisfy U.S. transfer pricing principles.

Broader Implications

This ruling is one of the first appellate applications of Loper Bright in the tax context and significantly limits the IRS’s regulatory reach in cross-border transfer pricing. Within the Eighth Circuit, the court’s reasoning effectively invalidates the blocked income regulation, requiring the IRS to respect foreign legal constraints when applying §482 adjustments.

For multinational taxpayers, the case signals a new landscape: judicial interpretation will likely override agency-driven transfer pricing positions when statutory authority is ambiguous. Companies with subsidiaries in jurisdictions imposing currency controls or profit remittance restrictions may find stronger grounds to challenge IRS allocations that disregard foreign law.

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