The IRS sought to reallocate an additional USD 23.7 million in royalties to 3M under the arm’s-length standard, despite the company’s Brazilian subsidiary being legally limited to paying only USD 5.1 million.
The US Court of Appeals for the Eighth Circuit overturned a US Tax Court ruling in a transfer pricing dispute involving 3M Company and the IRS on 1 October 2025.
The case revolved around royalty payments from 3M’s Brazilian subsidiary in 2006. Due to Brazilian laws capping royalty payments to foreign parent companies, the subsidiary paid only USD 5.1 million in royalties to 3M. However, the IRS argued that the arm’s-length standard under Section 482 of the tax code required an additional USD 23.7 million in royalty income to be reallocated to 3M, which the company contested, claiming it couldn’t be taxed on income it was legally barred from receiving.
Initially, the Tax Court sided with the Internal Revenue Service (IRS), relying on a regulation that assumes income could still be taxed even if foreign laws block its payment. But the Eighth Circuit reversed this decision, drawing on the Supreme Court’s 2024 ruling in Loper Bright Enterprises v. Raimondo, which limited courts’ deference to agency interpretations.
The Appeals Court concluded that Section 482 does not permit taxing income that a company cannot legally access. It reaffirmed the “dominion-and-control” principle from a 1972 case, which states that income is only taxable if the taxpayer has actual control over it—meaning they can use or benefit from it.
Since 3M lacked such control over the additional royalties, the Appeals Court ruled in its favor and sent the case back to the Tax Court for further review.
