The case concerned 3M’s 2006 tax return and whether additional royalty income should be attributed to 3M from its Brazilian subsidiary, despite Brazilian legislation capping the amount of royalties that could be paid to a foreign controlling company. The IRS issued an assessment reallocating approximately 23.7 million dollars in unpaid royalties, on the basis that an unrelated licensee would have paid that amount for 3M’s intellectual property. 3M challenged the adjustment in the Tax Court and lost. An appeal was then filed by 3M with the Court of Appeal. Judgment The Court of Appeal reversed the decision of the tax court and rejected the reallocation of unpaid royalties that Brazilian law prevented 3M Brasil from paying. The court held that section 482 [US’ Transfer Pricing regulations] does not permit the attribution of income that the taxpayer could not legally receive. The court rejected the idea that it matters whether the legal bar arises from United States law or foreign law, explaining that Brazilian restrictions deprived 3M of control over the unpaid royalties in the same way. The court also rejected the tax authorities’ reliance on the ‘commensurate with income’ clause in the statute. This clause determines how much to attribute once income is properly allocable. It does not alter what income can be allocated in the first place. Finally, the court concluded that the blocked income regulation (Treasury Regulation section 1.482-1(h)(2)) could not extend the scope of section 482 to authorise reallocations that the statute itself does not permit. Given Loper Bright’s rejection of Chevron deference, the regulation could not provide what Congress had withheld, resulting in the judgment being reversed. Click here for other translation ...