On October 1, 2025, the U.S. Court of Appeals for the Eighth Circuit, in an internationally significant Transfer Pricing case, overturned a decision by the Tax Court that had upheld, by a narrow 9-to-8 margin, the IRS’s authority to reallocate to 3M Company royalty income that its Brazilian subsidiary was legally prohibited from paying it. The ruling—one of the first to apply the doctrine established by the Supreme Court in Loper Bright Enterprises v. Raimondo (2024), which eliminated judicial deference to federal agency regulations—directly limits the IRS’s ability to invoke Section 482 of the Internal Revenue Code when genuine foreign legal restrictions on the payment of intercompany royalties exist.
The Facts: A Royalty Cap Set by Brazilian Law
3M Company owns intellectual property that it licenses to its subsidiaries worldwide. For fiscal year 2006, its subsidiary 3M do Brasil Ltda. paid and deducted $5.1 million in royalties for the use of that intellectual property—the maximum amount permitted under Brazilian law, which set a cap on the royalties a local subsidiary could pay to a parent company not domiciled in Brazil. 3M reported that US$5.1 million as royalty income on its U.S. tax return. Following an audit, the IRS issued a deficiency notice, arguing that, under Section 482 and the “blocked income” regulation (Treas. Reg. § 1.482-1(h)(2)), approximately an additional US$ 23.7 million in royalty income should be reattributed to 3M—the amount that, according to the IRS, an arm’s-length licensor would have charged in a comparable transaction, regardless of whether Brazilian law effectively prevented the receipt of that amount.
The Standard That Decided the Case: Dominion and Control Over the Income
The Eighth Circuit based its decision on the Supreme Court’s precedent in Commissioner v. First Security Bank of Utah, N.A. (1972), which established that a taxpayer cannot be taxed on amounts that it did not receive and was legally unable to receive. The Court concluded that, for income to be attributable under Section 482, the taxpayer must have “dominion and control” over that amount—a standard that, the court reasoned, does not distinguish between domestic and foreign legal restrictions. Since Brazilian law prevented 3M do Brasil from paying more than it actually paid, 3M never had dominion or control over the excess amount that the IRS sought to reattribute to it.
The Court was also explicit regarding the effect of Loper Bright: without the deference previously accorded to Treasury regulations under the Chevron doctrine, the court was required to interpret the text of Section 482 independently, without assuming that the regulation on blocked income reflected the “best reading” of the statute. The ruling also forcefully rejected the IRS’s alternative argument to reclassify 3M do Brasil’s payments as dividends rather than royalties, characterizing that position as overly broad.
Scope of the Ruling and Its Relevance for Groups with Subsidiaries in Latin America
The decision declares the blocked income regulation inapplicable within the jurisdiction of the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota), but it is not binding on the IRS or the Tax Court outside that jurisdiction—the case was remanded to the Tax Court to redetermine 3M’s tax liability for fiscal year 2006. However, its reasoning has a direct impact on other pending cases involving the same issue, including the Coca-Cola Company litigation, where the Tax Court had reserved its decision on the blocked income issue pending the outcome of the 3M case.
For any multinational group with a U.S.-based parent company and subsidiaries in Latin American countries that impose foreign exchange restrictions, limits on the repatriation of royalties, or transfer pricing controls—all of which are not uncommon in the region—the 3M case establishes an important precedent: the existence of a genuine and verifiable foreign legal restriction can serve as a solid defense against an IRS adjustment under Section 482, provided that such restriction is properly documented and does not result from a structure artificially designed to limit the payment.
At TPC Group, we work with our clients who have intellectual property licensing structures between subsidiaries in the United States and Latin America to assess how local legal restrictions on intercompany payments should be documented to adequately support the taxpayer’s position in the event of an audit.
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