What is the 8th Circuit’s 3M decision about?

The 3M decision limits the IRS’s authority to tax “blocked income” that a U.S. parent company cannot legally receive from a foreign subsidiary, reinforcing that clear statutory language governs over regulations under Section 482.

How does the Loper Bright ruling influence the 3M case?

The 8th Circuit relied on the Supreme Court’s Loper Bright decision, which ended judicial deference to agency interpretations. This means courts now determine the “best reading” of tax law rather than deferring to IRS regulations.

What is “blocked income” in international tax?

Blocked income refers to funds a foreign subsidiary cannot legally remit to its U.S. parent due to foreign law restrictions, such as currency controls or local regulations. The 3M decision confirms such income cannot be reallocated for U.S. tax purposes.

How does Section 482 apply to transfer pricing and blocked income?

Section 482 allows the IRS to allocate income among related entities to prevent tax evasion, but only when the U.S. parent has dominion and control over the income. The 3M decision confirms that income outside a taxpayer’s legal control cannot be taxed under this provision.

What does “dominion and control” mean in this context?

Dominion and control refer to a taxpayer’s legal ability to access and use income. The 3M decision reaffirmed that the IRS cannot impute income to a U.S. company when foreign law prevents that control.

Why is this case considered a win for taxpayers?

The decision strengthens taxpayer protections in cross-border transactions by curbing the IRS’s ability to rely on regulations that go beyond the plain language of tax statutes.

How might this decision affect future IRS enforcement?

Post-Loper Bright, courts may be less likely to uphold IRS positions based solely on regulatory authority. The 3M case may influence transfer pricing, GILTI, BEAT, and other international tax enforcement areas.

How can organizations prepare in light of this decision?

Multinational companies should review transfer pricing documentation, blocked income issues, and Section 482 positions to ensure alignment with statutory language rather than regulatory interpretation. Consulting with experienced international tax advisors can help mitigate risk.

A “Grammar Lesson” in Tax Law: The 8th Circuit’s Reversal of the Tax Court in 3M

October 10, 2025October 10, 2025

PYA Insights

Executive Contacts

Joe Engel

Mike Shamblin

On October 1, 2025, in a key international tax and transfer pricing decision guided by the 2024 Supreme Court decision in Loper Bright Enterprises v. Raimondo, the 8^th Circuit determined that the best reading of Internal Revenue Code (IRC) section 482 prevents the IRS from taxing a U.S. parent company on royalty income that it could not legally receive from a foreign subsidiary under foreign law (i.e., blocked income). See 3M Company, and Subsidiaries v. Comm’r of Internal Revenue, No. 23-3772.

This decision not only is a big win for taxpayers, but it also represents a clear example of how courts will interpret tax law in the post-Loper Bright era.

The Court’s Decision

In reversing the Tax Court’s February 2023 decision that the IRS is permitted under IRC section 482 to reallocate to a U.S. parent company royalties that its subsidiary was prohibited from paying under Brazilian law, the opening paragraph of the 8^th Circuit’s opinion concisely summarizes its conclusion:

Statutes trump regulations. Over three decades ago, another court decided that the IRS could not tax a domestic parent company on royalties it could not legally receive from a foreign subsidiary. See Procter & Gamble Co. v. Comm’r, 961 F.2d 1255, 1259 (6th Cir. 1992). The IRS then authorized by regulation what a statute had not. That strategy might have worked before, see Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982–83 (2005), but not now, see Loper Bright Enters. v. Raimondo, 603 U.S. 369, 400 (2024), so we reverse.

Impact of Loper Bright

During the more than two years since the decision of the Tax Court in 3M, the U.S. Supreme Court decided Loper Bright, which, as the 8^th Circuit notes, “frees courts to adopt the ‘best reading of the statute’: the one ‘the court would have reached if no agency were involved’.”

The Court’s Rationale

In adopting the best reading of section 482 in this matter, the 8^th Circuit was guided by the statutory text and a common grammatical “feature of the English language” stating that the first sentence of the provision answers “the what-gets-allocated question” and requires that the taxpayer has “complete dominion” over the income, whereas “[t]he second sentence answers the how-much question” when intangible property is involved.

Contrary to the IRS position, the 8^th Circuit concluded that the second sentence of section 482 does not separately allow the IRS to reallocate income from intangible property regardless of whether the taxpayer has dominion or control over the income. In so doing, the court rejected the IRS attempts to distinguish the 3M matter from Comm’r v. First Sec. Bank of Utah, N.A., 405 U.S. 394 (1972), the U.S. Supreme Court decision providing the basis of the dominion or control requirement.

Key Takeaway

This 8^th Circuit reversal of the Tax Court represents a significant loss for the IRS in the international tax/transfer pricing area and an excellent illustration of how a court will interpret tax statutes post-Loper Bright. For taxpayers and the IRS, alike, this “grammar lesson” demonstrates that when the words of a statute are clear, no regulation can rewrite them.

PYA Can Help

PYA’s International Tax team helps organizations conduct operations across the globe by planning, designing, and executing effective tax strategies in compliance with complex international laws.