Clark Armitage Weighs in on Recent 3M Ruling in Law360

U.S. Supreme Court ruling that gutted deference to agencies took center stage in the Eighth Circuit's recent decision that backed 3M's challenge to transfer pricing rules, signaling the strict statutory analysis that courts may now apply to tax regulations.

An Eighth Circuit panel held last month that the Internal Revenue Service lacked the statutory authority to allocate nearly $24 million in royalty payments that Minnesota-based multinational conglomerate 3M Co. said it was blocked from receiving under Brazilian law. In striking down transfer pricing regulations that underpinned the IRS' adjustment, the Eighth Circuit noted that "the legal landscape has changed" in light of the Supreme Court's June 2024 ruling in Loper Bright Enterprises v. Raimondo.

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According to Clark Armitage, a Member at Caplin & Drysdale, the court said that when it comes to blocked income, it's limited to that income item. The panel's view was that if a royalty is blocked, the focus is on that alone, and alternative methods for getting money back are irrelevant, he said.

"I think that the Eighth Circuit would have handled the Coke appeal in the same way it handled the 3M appeal," Armitage said.

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As Caplin & Drysdale's Armitage saw it, there's nothing in Section 482 that says the IRS can ignore the statute of limitations for making assessments. Yet the GLAM says the agency can make periodic adjustments regarding transactions that took place years ago.

"I think it's very vulnerable," Armitage said of the GLAM. "And I think Loper Bright makes it more vulnerable."

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