Case: IRS Cannot Reallocate Amount of Royalty Income Foreign Subsidiary Not Legally Permitted to Pay (8th Cir.) (IRC §482)

The IRS could not reallocate royalty income to Taxpayer that its foreign subsidiary was legally prohibited from paying under foreign law, the U.S. Court of Appeals for the 8th Circuit held, reversing the U.S. Tax Court’s decision. In 2006, Taxpayer, a U.S. company, received $5.1 million in royalty payments for use of its intellectual property from a Brazilian subsidiary. The amount of royalties paid was the maximum amount the subsidiary could pay under Brazilian law to a non-Brazilian controlling company. The IRS attempted to reallocate an additional $23.7 million in royalty income to Taxpayer to reflect what, the parties agreed, ...