On October 1, the U.S. Court of Appeals reversed a prior U.S. Tax Court decision in the case of 3M Company & Subsidiaries v. Commissioner. This prior case pertained to a tax issue surrounding 3M’s blocked royalty income, which the IRS attempted to reallocate as U.S. income. However, the Eighth Circuit’s decision reverses that of the U.S. Tax Court, altering the multinational income tax landscape. This article summarizes the tax dispute between 3M and the IRS and outlines three key ways this win affects corporate multinational taxation.
The Case Of 3M Company & Subsidiaries v. Commissioner
This case of 3M Company & Subsidiaries v. Commissioner and the corresponding decision stems from a tax dispute nearly 20 years ago. According to the U.S. Tax Court decision, in 2006, 3M Brazil used intellectual property owned by its U.S. parent company. During this time, 3M Brazil paid royalties (1% of sales) for each trademark used. Several trademarks were issued, leading to significant intercompany royalty income being earned by the 3M parent company.
However, it was later determined by the IRS that 3M’s taxable income was understated by $23.65 million – meaning that 3M should have paid more in taxes and it will now be expected to pay those taxes. The reason for the understatement was that Brazilian law does not allow payments to foreign parent companies, such as 3M in the U.S., to be made. The IRS determined that under Internal Revenue Code Section 482, this transaction was not conducted at an “arms-length”, which means that since the transaction was an intercompany payable, 3M must recognize it as taxable income, even though the Brazilian government does not allow the payment to be made. Instead, the Brazilian subsidiary must utilize those funds.
In 2013, 3M petitioned the U.S. Tax Court to challenge this deficiency, claiming that since the Brazilian government does not allow the payment to be made, it is not actually taxable income. It was not until February of 2023 that the U.S. Tax Court sided with the IRS by a narrow 9-8 decision. 3M appealed the decision, and, on October 1, 2025, the U.S. Court of Appeals sided with 3M, overturning the prior decision.
3 Key Implications of 3M’s Victory In Court
Even though this ruling was made over a matter of $23.65 million, which is immaterial for a conglomerate like 3M, the fact of the ruling has significant impacts on U.S. multinationals across the key dimensions.
(1) Continued Fallout From Chevron Deference Being Overturned Weakening The IRS’s Ability To Police Large Multinational Companies Like 3M
Since 1984, the court ruling in Chevron U.S.A. v. NRDC has guided many government-related interpretations of the laws. According to Forbes, the ruling from the Chevron court case meant courts should refer to governmental agencies when the laws were not clear. While many of these situations are related to environmental agencies or healthcare agencies, issues that may not have been as clear in the Internal Revenue Code should be deferred to the top-ranked governmental agency dealing with tax-related issues, the IRS and Treasury.
Given that the Chevron deference was overturned in 2024, this case illustrates the continued fallout of the U.S. federal court system following new approaches to applying the applicable laws. For instance, without the Chevron deference, the courts may have been more open to deferring to the IRS or the Treasury on their expertise in how to apply Internal Revenue Code Section 482.
Moving forward, large multinational companies may seek to take on riskier and more aggressive tax positions. Put differently, if the courts are less likely to side with the IRS and the Treasury on regulatory matters, then companies may see the 3M decision and adjust their risk tolerance for these aggressive tax positions.
(2) Transfer Pricing With Blocked Income Becomes More Lucrative After The 3M Decision
The “blocked income” rule under Internal Revenue Code Section 1.482-1(h)(2) effectively limited some of the benefits some companies had when shifting income out of the U.S. to certain jurisdictions. In simple terms, when companies engaged in transfer pricing arrangements under these conditions, they were not able to receive as much of the financial benefits because the income could not be directed back to the U.S. However, the companies were also forced to pay tax on that income. The mismatch of the taxable income and use of the funds limited the benefits of transfer pricing in regions where this blocked income was present, namely Brazil, China, and India.
With the 3M court case decision, many of these lower tax casts have declined substantially. In particular, the income earned through royalties will no longer be considered taxable income in the U.S., which should act to increase the benefits of engaging in these aggressive transfer pricing arrangements.
(3) The 3M Decision Will Have A Ripple Effect On Financial Accounting Reserves
Under ASC 740-10, companies must record a liability in their financials for aggressive tax positions that are more likely than not (more than 50% possibility) to be overturned if audited by the IRS. The overturning of the U.S. Tax Court decision changes the calculus for these reserves. Most notably, all companies with tax benefits from blocked income arrangements will need to assess the likelihood that the positions will be overturned upon IRS audit. This means that some positions were reserved for before the court decision and will no longer need to be reserved for after the court decision. The downstream effect is that many companies will release reserves, leading to a potentially significant increase in income.
The change in how these positions are treated before vs. after the 3M ruling undoubtedly becomes more important given that the upcoming changes to the presentation of taxes on the financial statements, which, as reported by Forbes, will significantly increase the disclosure of income across jurisdictions.
Despite the 3M Company & Subsidiaries v. Commissioner court case being over a rather trivial amount of money by most U.S. multinational company standards, the impacts this decision will have are massive when it comes down to the oversight of the IRS and Treasury, transfer pricing, and financial statement reserves.