Tax Court Upholds Blocked Income Regulation in 3M Companies v. Commissioner. Case appealed by taxpayer to the Eighth Circuit Court of Appeals.

In 3M Companies & Subsidiaries, Inc. v. Commissioner, the Tax Court, in a 9-8 majority decision issued on February 9, 2023, sustained a proposed deficiency in income tax of $3.6 million attributable to the petitioner’s failure to include $23 million in blocked royalty income from a controlled Brazilian subsidiary based on Brazilian law on its consolidated return for 2006. The Tax Court rejected the petitioner’s argument that the regulation was invalid under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)(the “Chevron”) or was procedurally defective for violation of the notice and comment rule under the Administrative Procedures Act (“APA”) or from the failure of the Department of Treasury to articulate a satisfactory explanation for when to take into account foreign legal restrictions into account in allocating income between controlled parties. Dissenting opinions, reflected in an additional 72 pages, were issued by Judges Buch, Pugh and Toro and overall eight judges registered their dissent. The same outcome was recently reached by the Tax Court in Coca-Cola Company and Subsidiaries v. Commissioner with respect to the same prohibition under Brazilian law of cross-border royalty payments to controlled affiliates. 2 1T.C. Memo. 2023-135 (11/8/2023). Perhaps several if not more commentators, legal counsel and other tax practitioners may have difficulty in grasping why the Tax Court’s decision in 3M is correct, at least from a common sense standpoint.

Mr. August's article on the 3M case is being published by Corporate Taxation in its current issue and is also posted on WESTLAW and RIA Checkpoint. A galley proof copy of this article can be accessed on the Publications page.