3M, IRS Clash on How High Court Rulings Affect Transfer Pricing

3M Co. and the IRS offered dueling arguments on Thursday over how a trio of recent US Supreme Court rulings affecting federal agencies’ rulemaking power should impact their ongoing $4.85 million transfer pricing dispute.

3M challenged the IRS’s decision to allocate additional income to the US-based parent company after the agency determined that its wholly-owned Brazil subsidiary undercompensated 3M in royalties paid to use its intellectual property. The IRS’s $23.6 million allocation resulted in a $4.85 million tax liability for 3M, which the conglomerate contests.

The high court’s decision in Moore v. United States supports the IRS’s income allocation for 3M because it undermines the parent company’s argument that it can’t recognize royalty income which Brazilian law barred its wholly-owned subsidiary from paying, the agency told the US Court of Appeals for the Eighth Circuit.

Moore saw two American shareholders unsuccessfully challenge a provision of the 2017 Republican tax law, called the mandatory repatriation tax, which required them to pay tax on undistributed income from their controlled foreign corporation. The Supreme Court held that the MRT was constitutional because Congress can attribute an entity’s realized and undistributed income to its shareholders for tax purposes.

That same principle backs up the IRS’s income allocation for 3M, its brief said.

“The IRS’s allocation here attributes otherwise untaxed income to a shareholder exactly as Congress allowed,” the agency said. “Moreover, unlike the 13-percent shareholders in Moore, 3M has full control over 3M Brazil’s ability to distribute income to 3M as the owner.”

Chevron‘s End

3M pushed back in its own brief, echoing its arguments in July that Moore wasn’t applicable because it concerned a different tax code section than is at issue here. The Supreme Court’s other decisions in Loper Bright Enterprises v. Raimondo and Ohio v. Environmental Protection Agency, however, do support 3M’s position, the company said.

Loper Bright, which ended the longstanding Chevron doctrine of judicial deference to administrative interpretation, “eviscerates the Tax Court plurality’s sole rationale” for upholding the IRS’s allocation, 3M said.

IRC Section 482 empowers the IRS to reallocate taxpayer income and deductions to prevent tax evasion. The Tax Court’s plurality “never suggested” that the IRS’s reading of Section 482 was the best one, and instead it simply deferred to the agency’s reading in accordance with Chevron, 3M said.

The lower court also undertook an “indulgent effort to reconstruct Treasury’s thinking” in order to justify the government’s alleged compliance with the Administrative Procedure Act’s explanatory requirements, 3M’s brief said. Its decision is therefore contrary to the Supreme Court’s recent decision in Ohio, it said.

The IRS said that its case can be resolved solely using Section 482, without reaching Loper Bright. Ohio also has no bearing on the case, the government said.

The US Chamber of Commerce moved to file an amicus brief on Wednesday, which echoed 3M’s position on Loper Bright and Ohio.

Oral arguments between 3M and the IRS are scheduled for Oct. 22.

Gibson, Dunn, & Crutcher LLP represents 3M.

The case is 3M Co. v. Commissioner, 8th Cir., No. 23-3772, supplemental briefs filed 10/3/24.