3M Company v. Commissioner

154 F.4th 574 (2025)

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3M Company v. Commissioner

United States Court of Appeals for the Eighth Circuit
154 F.4th 574 (2025)

  • Written by Nathan Benedict, JD

Facts

3M Company (plaintiff) was a United States company with international subsidiaries that paid to license its intellectual property. 3M charged its Brazilian subsidiary $5.1 million to license its intellectual property. Under Brazilian law, this was the maximum that a foreign corporation could receive in licensing fees from its Brazilian subsidiary. The Internal Revenue Service (IRS) (defendant) sent 3M a notice of deficiency. Pursuant to 26 U.S.C. § 482, the IRS reallocated $23.7 million in extra royalty income, reflecting what an unrelated entity would pay as a license fee. 3M challenged the deficiency, arguing that the IRS lacked the authority to tax income it had not received, and that the IRS had not followed the Administrative Procedure Act in enacting its regulation interpreting the law. A divided tax court ruled for the IRS by a vote of nine to eight, with seven of the majority judges deferring to the IRS’s interpretation of the statute as reasonable. 3M appealed. After the tax court ruling, the United States Supreme Court held in Loper Bright Enterprises v. Raimondo that courts should no longer defer to an agency’s interpretation of an ambiguous statute.

Rule of Law

Issue

Holding and Reasoning (Stras, J.)

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Casebooks

International Taxation

Key Terms

  • SubsidiaryA corporate entity owned or controlled by some separate, higher corporate entity.
  • Parent CorporationA corporation that owns at least 50 percent of another corporation.
  • Intangible PropertyProperty with no physical existence, such as an account number.
  • LicensePermission to do something that would otherwise be prohibited.
  • RoyaltyOwnership of a portion of the proceeds from the sale of intellectual property rights or from the sale of tangible materials or products, such as oil and gas.
  • Statutory ConstructionRules or principles that may be used to determine a statute's meaning or applicability in specific circumstances.
  • Power to Reallocate Income (Internal Revenue Code)Codified at § 482, gives United States tax authorities power to reallocate gross income across organizations controlled by the same interests to prevent tax evasion or better reflect the organizations’ incomes.

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