The Tax Times: August 2026

Wednesday, August 5, 2026

3M and the Blocked Income Debate Under Section 482

3M and the Blocked Income Issue

The long-running dispute in 3M Co. et al. v. Commissioner centered on whether the IRS could reallocate royalty income from 3M’s Brazilian subsidiary to its U.S. parent even though Brazilian law restricted the subsidiary from paying the full arm’s-length amount. The case involved 3M’s 2006 tax year and a section 482 adjustment of nearly $23.7 million in additional royalty income.

In February 2023, the U.S. Tax Court issued a sharply divided opinion that upheld the IRS’s position and validated the blocked-income regulation. The court’s reasoning focused on the idea that the regulation could be applied even where foreign law limited the actual payment of royalties.

Why the Case Matters

This case is important because it goes to the heart of transfer pricing and the reach of section 482 in cross-border intangible transactions. For multinational groups, it raises a practical question: can the IRS impute income to a U.S. parent when local law makes payment impossible or legally constrained?

The case also became more significant after the Supreme Court’s Loper Bright decision, which changed the judicial approach to agency deference. The Eighth Circuit relied on that shift when it reversed the Tax Court, emphasizing statutory text over regulatory deference.

Tax Planning Takeaways

For taxpayers with foreign subsidiaries, the case underscores the need to evaluate both transfer-pricing positions and foreign-law constraints early in the planning process. Documentation should show not only arm’s-length analysis, but also the legal and commercial reasons why a payment structure is or is not feasible.

It is also a strong reminder that litigation risk can change over time. A position that appears vulnerable at the Tax Court level may later improve on appeal, especially in cases involving closely divided opinions and major administrative-law developments.

Practical Lessons

· Review intercompany royalty arrangements for both section 482 exposure and local-law restrictions.

· Preserve foreign legal materials, including statutes, decrees, and licensing limitations.

· Consider protective claims and appellate posture in any case involving blocked income.

· Monitor whether the governing circuit has addressed the issue, since appellate law may differ from Tax Court reasoning.

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Sources:

1. https://academyoftaxlaw.com/document/3m-company-v-commissioner-of-internal-revenue-case-summary/

2. https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/tax-court-upholds-transfer-pricing-adjustments-against-3m/7fy84

3. https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-tp-3m-tax-court-upholds-validity-of-blocked-income-reg.pdf

4. https://www.ntu.org/library/doclib/2024/02/NTUF-Amicus-Brief-3M-v-CIR.pdf

5. https://tpguidelines.com/us-vs-3m-company-and-subsidiaries-february-2023-us-tax-court-160-t-c-no-3-docket-no-5816-13/

6. https://tpcases.com/us-vs-3m-company-and-subsidiaries-february-2023-us-tax-court-160-t-c-no-3-docket-no-5816-13/

7. https://www.millerchevalier.com/publication/3m-wins-blocked-income-transfer-pricing-dispute-eighth-circuit

8. https://www.dlapiper.com/en-us/insights/publications/2023/02/tax-court-sides-with-irs-in-long-running-dispute-over-blocked-income-regulation

9. https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-eighth-circuit-reverses-us-tax-court’s-ruling-in-3M-appeal.pdf

10. https://tpcases.com/us-vs-3m-company-and-subsidiaries-october-2025-u-s-court-of-appeal-opinion-no-23-3772/

11. https://news.bloombergtax.com/tax-management-international/eighth-circuit-challenges-irs-embraces-textual-statute-reading

12. https://legalblogs.wolterskluwer.com/international-tax-law-blog/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence/

13. https://www.currentfederaltaxdevelopments.com/blog/2025/10/1/eighth-circuit-reverses-tax-court-in-3m-restricting-482-allocations-of-blocked-foreign-income

14. https://vlex.com/vid/the-case-irs-overrule-supreme-court-464483414

15. https://www.taxcontroversy360.com/tag/3m-co-v-commissioner/

16. https://www.uschamber.com/cases/tax/3mco.v.irs

17. https://ecf.ca8.uscourts.gov/opndir/25/10/233772P.pdf

18. https://www.youtube.com/watch?v=Au-6rIsbynM

College Athletes and NIL Income: The Hidden Tax Trap Many Families Miss

The explosion of name, image, and likeness (NIL) opportunities has created a new class of young earners, college and even high school athletes generating significant income before ever filing a traditional tax return. While the headlines focus on six-figure endorsement deals, far less attention is given to the tax consequences that follow. For many athletes and their families, those consequences arrive as an unwelcome surprise.

NIL Income Turns Athletes into Business Owners

Most NIL arrangements are structured so that athletes are treated as independent contractors rather than employees. That distinction carries significant tax implications. Instead of receiving a Form W-2 with taxes withheld, athletes typically receive a Form 1099 and are treated as self-employed individuals.

This means:

· Income is reported on Schedule C.

· Athletes are subject to self-employment tax under IRC §1401.

· No federal or state withholding is automatically applied.

26 U.S.C. § 1401 - U.S. Code Title 26. Internal Revenue ...

For first-time earners, many of whom have never filed a tax return, this shift can be jarring. A $100,000 NIL deal does not translate into $100,000 of spendable cash. After federal income tax and self-employment tax, the liability can easily approach 30% or more, depending on the athlete’s overall tax profile.

Non-Cash Compensation Is Still Taxable

A particularly overlooked issue is the taxation of non-cash benefits. NIL deals often include merchandise, equipment, travel, or other perks. These items are not tax-free simply because no cash changes hands.

Under general tax principles, athletes must include the fair market value of these items in gross income under IRC §61. An 18-year-old athlete receiving high-end gear or sponsored products may not realize that these benefits create immediate taxable income—without providing liquidity to pay the resulting tax.

Revenue Sharing May Shift Classification

Recent developments in collegiate athletics—particularly revenue-sharing arrangements between universities and athletes—introduce additional uncertainty. While many schools initially issued Forms 1099 for 2025 payments, there is growing expectation that these arrangements may ultimately be treated as wages.

If classified as W-2 income:

· Income tax and FICA withholding would apply.

· Compliance burdens may decrease for athletes.

· Universities would assume payroll reporting obligations.

However, endorsement deals with third-party brands will likely remain independent contractor income, preserving the complexity of dual income streams with different tax treatments.

Timing and Estimated Taxes Create Risk

One of the most common pitfalls is timing. NIL payments are often irregular—paid upfront, in installments, or tied to performance milestones—while estimated tax deadlines remain fixed.

Athletes who fail to plan may face:

· Underpayment penalties under IRC §6654.

· Cash flow issues when large tax bills come due.

· Difficulty applying safe harbor rules or annualizing income.

For example, a $200,000 NIL deal received early in the year could generate a $60,000 tax liability. Without proper planning, those funds are often spent before the first estimated payment is due.

Multi-State Tax Exposure Is Coming

State taxation is another emerging concern. While current enforcement is inconsistent, states are expected to apply “duty day” or similar allocation methods—long used for professional athletes—to NIL income.

This creates potential exposure to:

· Multi-state filing obligations.

· Allocation of income based on games, appearances, or promotional activities.

· Additional compliance costs and audit risk.

Athletes playing in no-income-tax states may have a temporary advantage, but that benefit can be diluted quickly when income is sourced to other jurisdictions.

Planning Must Start Before the First Deal

The most successful athletes in this new environment are not necessarily those earning the most—but those with the right advisory structure in place early.

Best practices include:

· Setting aside 30–40% of all NIL income for taxes.

· Engaging a tax advisor before signing agreements.

· Tracking expenses to maximize Schedule C deductions.

· Evaluating entity structuring where appropriate.

· Planning for quarterly estimated payments.

Importantly, this education must begin at the high school level. Families are now evaluating NIL opportunities alongside scholarship offers, and tax implications are increasingly part of that decision-making process.

The Role of Advisors and Institutions

Universities, collectives, and advisors all play a role in bridging the knowledge gap. Without guidance, young athletes are left navigating complex tax rules that many seasoned professionals find challenging.

Tax professionals, in particular, have an opportunity and arguably an obligatio to provide proactive education. Early intervention can prevent compliance failures, reduce penalties, and preserve wealth that might otherwise be lost to poor planning.

The NIL era has created unprecedented financial opportunities for student-athletes, but it has also introduced a level of tax complexity that demands careful attention. Without proper planning, today’s endorsement deal can become tomorrow’s tax problem.

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