3M’s Transfer Pricing Victory Puts Brakes on IRS Overreach

The US Court of Appeals for the Eighth Circuit’s decision last week in 3M Co. v. Commissioner marks a turning point in transfer pricing disputes. The case centered on whether the IRS could invoke its regulatory authority to disregard foreign legal restrictions. This dispute specifically involved 3M’s Brazilian subsidiary, which could only remit limited royalties to its US parent under Brazilian law.

The IRS sought to impute nearly $24 million in “phantom” royalties, meaning an amount that the IRS seeks to tax although it was never—or legally barred from being—received by the taxpayer.

The IRS argued its regulations under Section 482 of the federal tax code and the Treasury Department’s “blocked income” rule permitted it to treat those Brazilian restrictions as if they didn’t exist. Blocked income refers to amounts that, while theoretically payable under an arm’s‑length standard, can’t legally be remitted to the taxpayer due to restrictions imposed by foreign law or other regulatory prohibitions. The Eighth Circuit disagreed with the IRS, holding that the agency had overstepped and remanded the case for reconsideration.

The federal tax code allows the IRS to reallocate income within multinational groups, but only when the parent has “dominion or control”—a taxpayer’s legal right and practical ability to receive, use, or dispose of income—over that income. If foreign law blocks payment, then nothing can be reallocated. The court affirmed a long-standing doctrine that the IRS can’t tax amounts that a taxpayer is legally barred from receiving.

Judicial Oversight of IRS

This case indicates that courts are willing to limit the boundaries of IRS authority. For multinationals, this creates opportunity to challenge IRS overreach but can create risk if documentation isn’t sufficiently robust to withstand scrutiny.

The IRS in 3M leaned heavily on its regulatory authority to override treaty obligations and arm’s-length principles. The Eighth Circuit’s unwillingness to endorse that approach suggests taxpayers should scrutinize in the early stages of an audit whether the IRS is exceeding its authority.

Importance of Robust Documentation

The 3M ruling reinforces the importance of contemporaneous transfer pricing documentation to reflect the economic realities of cross‑border operations.

Taxpayers should document when foreign law restricts payments, with clear evidence showing they lacked “dominion or control” over the income. This aligns with the court’s view that Section 482 doesn’t authorize taxing income that a taxpayer couldn’t control.

Multinationals should ensure their local files present a consistent narrative globally, particularly where local restrictions—such as royalty caps, exchange controls, or licensing rules—limit intercompany payments. Documenting this in global transfer pricing policies will be critical to defending positions and avoiding contradictions that could undermine credibility.

Intensifying Controversy Landscape

Boards and audit committees should be briefed on how the ruling highlights the potential for significant IRS adjustments and reputational risk.

The IRS may respond by doubling down on aggressive theories at the audit stage and seeking early settlements rather than risking litigation. Taxpayers should weigh the costs of early resolution against the benefits of standing firm, particularly where precedent is favorable.

Post-3M, multinationals should take several practical actions.

Identify jurisdictions with legal limits on royalties, service fees, or other payments to quantify potential exposure and optimize intercompany supply chains.

Several jurisdictions impose statutory caps or regulatory hurdles on intercompany royalties and service fees—including Brazil, India, China, Indonesia, Thailand, Mexico, Argentina, South Korea, and Turkey—creating the kind of ”blocked income” situations that multinationals must carefully navigate.

Ensure contemporaneous transfer pricing documentation explicitly addresses local law restrictions, such as limits on deductible royalties, restrictions on cross‑border payments, licensing caps, or other laws that prevent certain payments from being made. Explain why arrangements remain arm’s-length even with such restrictions.

Anticipate the IRS will test legal boundaries and preemptively compile economic analyses, legal arguments, and robust documentation to defend positions.

Align intercompany policies across all jurisdictions to present a consistent narrative among all local files. Implement clear procedures for setting, recording, and monitoring intercompany prices annually.

Discuss transfer pricing risk with senior management to highlight transfer pricing as a compliance and risk‑management issue.

This ruling can be seen as a rebuke to decades of IRS efforts to stretch its regulatory power beyond the statute, especially now that the US Supreme Court’s Loper Bright decision has curbed judicial deference to government agencies, holding that courts must exercise independent judgment in interpreting statutes rather than deferring to agency interpretations simply because a statute is ambiguous.

Taken together, 3M and Loper Bright reflect a broader judicial trend of courts being less willing to let government agencies expand their regulatory authority beyond statutes themselves.

For taxpayers, the message is clear. Invest in documentation, anticipate disputes, and be prepared to defend positions that reflect both economic reality and legal constraints.

The case is 3M Co. v. Commissioner, 8th Cir., No. 23-3772, decided 10/1/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Rezan Ökten is a partner and head of transfer pricing at Dentons’ Amsterdam office.

Linda Pfatteicher is a partner in Dentons’ venture technology group focused on international corporate tax and operational structuring.

Cali Krajnik is an associate at Dentons’ transfer pricing practice in Amsterdam.

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