Blocking the Blocked Income Rules? Loper Bright’s influence over the Eighth Circuit’s 3M decision.

On October 1, 2025, the Eighth Circuit decided 3M Co. v. Commissioner in the taxpayer’s favor, based on its application of Loper Bright. The question presented in the case was whether the IRS had the authority to reallocate royalty income to a U.S. parent company that its foreign subsidiary was prohibited from paying under foreign law. The court held that the best interpretation of the governing statute did not permit the IRS’s reallocation.

3M is the U.S. parent company of a multinational group and licenses intellectual property to its global subsidiaries. At issue in this case was the application of the Blocked Income Rules under Treas. Reg. § 1.482-1(h)(2) (“Blocked Income Rules”) to the license and royalties between 3M and its Brazilian subsidiary, because a Brazilian law capped the amount of royalties that a Brazilian subsidiary may pay to a non-Brazilian parent company. In this case, 3M’s Brazilian subsidiary paid $5.1 million for the use of 3M’s intellectual property—the maximum amount permitted under the Brazilian law—but the IRS audited and issued a notice of deficiency to 3M, asserting that 3M owed an additional $23.7 million in royalty income based on the true value of the intellectual property. The IRS relied on its Blocked Income Rules to argue that it could reallocate the income to 3M’s U.S. parent company despite the cap under Brazilian law.

3M challenged the IRS’s determination in Tax Court. The Tax Court held in favor of the IRS, holding that Congress had not intended to prevent the IRS from reallocating blocked income and that, under Chevron, Treasury’s regulation reflected a reasonable interpretation of the statute by ensuring tax parity between controlled and uncontrolled taxpayers and requiring arm’s-length transactions between related parties. The Tax Court also did not agree with the taxpayer that Treasury disregarded significant comments in promulgating the Blocked Income Rules.

Between Tax Court and the Eighth Circuit, the U.S. Supreme Court issued its decision in Loper Bright, overruling Chevron. Considering the “shifting sands” of administrative law, the Eighth Circuit reversed.

Applying Loper Bright, the Eighth Circuit did not place special weight on the IRS’s interpretation of its own enabling statute. Instead, the Court began with the text of the statute as its guide. The Court held that Congress only meant to provide the IRS with the ability to reallocate income that a taxpayer could have received. Thus, the Blocked Income Rules exceeded the IRS’s statutory grant of authority because the IRS allowed itself to reallocate income that the taxpayer—3M’s U.S. parent company—could never have received from the Brazilian subsidiary under Brazilian law. The Eighth Circuit rejected the IRS’s argument that 3M could either break Brazilian law or restructure its affairs to maximize its tax burden, as neither are required by the tax code.

Key Takeaways

1. In the wake of Loper Bright, taxpayers should consider challenging regulations and the IRS’s interpretations of the same where they believe the IRS exceeded the authority Congress provided to the IRS through statute or that the interpretation of the statute is not reasonable. Taxpayers may find that courts increasingly will place more weight on Congress’s authorizing statutes and less weight into Treasury and the IRS’s regulations.
2. Taxpayers should consider consulting tax controversy attorneys in the early stages of taking a return position, filing a refund claim, or during the audit process to evaluate both the taxpayer’s position and the application of the underlying regulations. As the 3M case demonstrates, taxpayers can prevail by challenging the IRS’s regulations.
3. While this case is not binding on the IRS or the Tax Court outside of the Eighth Circuit, the CocaCola case pending in the Eleventh Circuit involves the same issue. We will be watching to see how the IRS and courts deal with the Blocked Income Rules in other circuits.

Our team is ready to assist your organization navigate the present and ever-changing tax regulatory and enforcement landscape. Let’s continue the discussion.