The IRS' Blocked Income Regulations are Themselves Blocked

In my Kluwer article of February 11, 2023, The 3M Decision: Did Treasury or Congress Overturn Past Jurisprudence? I predicted that the Eighth Circuit Court of Appeals would likely overturn the Tax Court. Then, I followed up with more certainty in my Kluwer 2024 article How May the Supreme Court Overturning of Chevron Deference Impact International Tax Regulations and Pending Cases? because of the Supreme Court’s overturning in Loper Bright of the Chevron doctrine.1 

3M in the Tax Court (2013 – 2023)

To refresh our memory, the 3M case, which required ten years of trial and judicial deliberation at the Tax Court level,2 at its heart, addressed whether the 1986 ‘commensurate with income’ sentence added to I.R.C. Section 482:

(“… In the case of any transfer (or license) of intangible property … the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.”)

stood distinct from the original term “income” in the Code Section before the addition:

(“…the Secretary may distribute, apportion, or allocate gross income, … clearly to reflect the income …”).

If the 1986 commensurate-with-income addition was distinct, then, argued the IRS, it may issue a regulation to sidestep pre-1986 cases: First Security Bank of the Supreme Court, Procter & Gamble of the Sixth Circuit, and Texaco Inc. v. Commissioner of the Fifth Circuit.3

The Tax Court4 issued three opinions totaling 284 pages in favor of the IRS’ issuance of the blocked income regulation, signed on by a total of nine judges, but none of which obtained a majority of the 17 Tax Court judges. The lead opinion received seven total votes, including its author. Eight judges issued three dissenting views over 64 pages, with two opinions receiving five votes each and the third issued by a single author. This is as 'split' and indecisive a Tax Court decision as I've seen.

Eighth Circuit Court of Appeals 3M Decision

On October 1, 2025, a unanimous three-judge Eighth Circuit panel overturned the Tax Court.5 The opening sentence of the opinion succinctly foretells its outcome and the reasoning: “Statutes trump regulations.”6 The Eighth Circuit opinion continued, referring to Proctor & Gamble:7

“Over three decades ago, another court decided that the IRS could not tax a domestic parent company on royalties it could not legally receive from a foreign subsidiary.”

Then, referencing Loper Bright, the Eighth Circuit stated that courts are free to adopt the "best reading of the statute": the one "the court would have reached if no agency were involved."8 And the Eighth Circuit’s reading of I.R.C. Section 482 (hereafter ‘Section 482’) led it to conclude that the IRS had attempted to authorize by regulation what the statute had not.9

The Eighth Circuit opined that Section 482 contains two limits on the IRS’ broad authority of reallocation of income. The first limitation is that, as regards 3M, the IRS may employ Section 482 only when necessary to clearly reflect income among the controlled parties (i.e., 3M USA and 3M Brazil).10 The second limitation is that the income of the previous sentence qualifies only when a taxpayer has complete dominion over it, “meaning it is money that could have [been] received."11 A Brazilian government law severely limited the royalty that 3M Brazil was allowed to pay 3M USA.12 The Eighth Circuit reasoned that the 3M facts substantially resembled those in First Security and thus required the same outcome:13

A person cannot "have taxable income that he did not receive and that he was prohibited from receiving".

The IRS argued that the addition of the second sentence of Section 482 included a distinct use of the term income that attached specifically to intangible income and did not include reading that term considering the first sentence.14 The Eighth Circuit retorted that a statutory provision read in isolation may appear to have a distinct meaning, yet another when viewed in the context of "the design and structure of the statute as a whole."15 The Eighth Circuit noted that the IRS's argument requires divorcing the twice-used term ‘income’ of the second sentence from the first sentence’s context of income as "gross income".16 But relying on the precepts of statutory construction, the IRS's argument fails. The Court affords a strong presumption that a term means the same within a statute when an article like "the" precedes a previously used general noun, such as ‘the income’ in the added second sentence of Section 482 and general ‘gross income’ in the first.17

The IRS had argued in the alternative that 3M Brazil could have increased its dividend repatriation to 3M USA to capture the amount of the forgone royalty.18 But the Eighth Circuit held that the IRS cannot impose a duty on 3M to evade Brazilian law. Moreover, the IRS cannot require a taxpayer to treat income, such as royalties and dividends, interchangeably.19

3M Impact on Coca-Cola Appeal in the Eleventh Circuit

The Eighth Circuit’s 3M decision does not control the outcome of the Eleventh Circuit’s eventual Coca-Cola decision regarding the blocked income aspects of the Tax Court ruling.20 But, for the same reasons, that portion of the Tax Court’s Coca-Cola decision will likely be remanded for redetermination as if the blocked income regulations do not apply.

• 1See my Kluwer July 1, 2024, article How May the Supreme Court Overturning of Chevron Deference Impact International Tax Regulations and Pending Cases?which addressed the impact on 3M of Loper Bright Enters. v. Raimondo, 603 U.S. 369, 400, 144 S. Ct. 2244 (2024).
• 2Initial Tax Court filing in 2013, briefs and oral arguments occurred in 2016, the Tax Court decision issued in 2023.
• 3Under the pre-1986 decisions regarding the “blocked income” rule, if a legal restriction prohibits the taxpayer’s receipt of income, then I.R.C. Section 482 and the arm’s-length standard do not require the taxpayer to take the prohibited income into account. Commissioner v. First Sec. Bank, 405 U.S. 394, 92 S. Ct. 1085, 1972 U.S. LEXIS 126; Procter & Gamble Co. v. Commissioner, 961 F.2d 1255 (6th Cir. 1992); and Texaco Inc. v. Commissioner, 98 F.3d 825 (5th Cir. 1996).
• 43M Co. v. Comm'r, 160 T.C. 50, 2023 U.S. Tax Ct. LEXIS 704.
• 53M Co. v. Comm'r, 154 F.4th 574, 2025 U.S. App. LEXIS 25418, (Oct. 1, 2025). The three-judge panel consisted of, as follows: Judge Jane Kelly (Pres. Obama), Judge Bobby Shephard (Pres. ‘W’ Bush), and the opinion’s author Judge Kelly Stras (Pres. Trump).
• 63M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *2.
• 73M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *2.
• 83M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *5.
• 93M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *2.
• 103M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *7-8.
• 113M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *8.
• 12The IRS and 3M stipulated that the Brazil government’s blocked amount represented an arm’s length transaction.
• 133M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *9; Comm’r v. First Sec. Bank, 405 U.S. 394, 92 S. Ct. 1085, 1972 U.S. LEXIS 126.
• 143M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *11.
• 153M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *11.
• 163M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *12.
• 173M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *12.
• 183M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *20.
• 193M Co. v. Comm'r, 154 F.4th 574; 2025 U.S. App. LEXIS 25418, *21-22.
• 20Coca-Cola Co. v. Comm’r, No. 24-13470 (11th Cir.), appealing Coca-Cola Co. v. Comm’r, 2023 Tax Ct. Memo LEXIS 138 (T.C. Nov. 8, 2023).