3M Co. v. Commissioner, 136 AFTR 2d 2025-, (8th Cir.) (Oct.1, 2025), is perhaps the most significant tax case to date that implements Loper Bright’s instruction regarding evaluation of an agency’s exercise of delegated authority.[1] The unanimous panel held that:
- The Internal Revenue Services’ (IRS) adjustment imputing additional royalty income to 3M from its Brazilian affiliate was invalid because it was outside the authority delegated by Internal Revenue Code Section 482.
- The underlying regulation, Reg. § 1.482-1(h)(2) (the blocked income regulation), was invalid for the same reason.
The IRS’s change of tack
Those following the US Court of Appeals for the Eighth Circuit’s consideration of the case were aware that the Court had asked the parties to file supplemental briefing on the impact of the Loper Bright decision, which was handed down after the US Tax Court’s decision. The focus of the Tax Court dispute was whether the blocked income regulation was a valid implementation of the statute under Chevron and the Administrative Procedure Act. A plurality of that court agreed it was.
In its briefing before the Eighth Circuit, the IRS pivoted[2] and argued that even if the Court determined that the blocked income regulation was invalid, Code Section 482 provided direct authority to the IRS to make adjustments to income. The IRS maintained that it did not need a regulation to support the adjustment in the case. Moreover, the IRS argued, where adjustments relate to the transfer of intangible property (such as here), its authority was only constrained by the requirement that the adjustment conform to the income commensurate with that attributable to the intangible.[3] Because the parties agreed that the higher royalty would have been paid to an unrelated party, slip op. at 2, the IRS maintained it was authorized to make the adjustment to 3M’s income.
No one can be taxed on income they can’t have
The IRS’s maneuver did not deter the Eighth Circuit from carefully following the mandate it had received via Loper Bright to evaluate whether the agency’s exercise of authority was within its statutory mandate. In other words, even if the IRS could act without a regulation to make adjustments under Code Section 482, the exercise of its authority under that section must remain within the confines of the statute: “[I]t is still our job to ‘fix[] the boundaries of [that] delegated authority’ based on the statute’s text, as we have done today.” Slip. op. at 11 (quoting Loper Bright). Viewed through this lens, the Eighth Circuit found that the adjustments asserted by the IRS were well outside the authority granted by Code Section 482. Because the blocked income regulation purported to exercise the same extra-statute authority, it too was found deficient.
According to the Eighth Circuit, Code Section 482’s broad delegation to the IRS by its terms is limited to making adjustments where necessary to avoid evasion or distortion of income. However, in Comm’r v. First Sec. Bank of Utah, N.A., 405 U.S. 394 (1972), the Supreme Court of the United States determined that income for Code Section 482 purposes does not include what a taxpayer did not receive and was prohibited from receiving. In 3M’s case, Brazilian law prohibited 3M from receiving royalties from its Brazilian affiliate. Consequently, 3M was not evading income, and neither was its income being distorted because there was no income to distort for Code Section 482 purposes. Accordingly, the IRS’s adjustment under Code Section 482 was not a valid exercise of authority whether viewed as proceeding directly under the statute or through the blocked income regulation.
Additionally, the IRS’s appeal to section 482’s commensurate with income rule did not save its position either. The Eighth Circuit acknowledged that this rule was introduced into the statute after the Supreme Court decided in First Sec. Bank. However, the Eighth Circuit observed that when enacted, the rule became part of an existing framework of delegation which by its own terms allowed an adjustment only where income was being evaded or distorted. “The point is that, from a plain-and-ordinary-meaning standpoint shifting income to 3M here would not ‘clearly . . . reflect [its] income.’” Slip op. at 7.
Skidmore is fading
Loper Bright largely – if not completely – discarded deference as a judicial tool in statutory construction. The clear instruction from the Supreme Court was that the judiciary should independently determine what is the best reading of any law apart from what an agency’s rule might say. However, Loper Bright referred to Skidmore v. Swift & Co., 323 U.S. 134 (1944), as a possible guide for deciding that best reading. Loper Bright, 603 U.S. at 388.
Skidmore’s guidance to consider various factors relating to agency interpretations, such as the expertise of the agency, has been described as a type of deference generally asking whether the agency’s position is persuasive and, if so, a court should consider deferring to that position. In 3M, the Eighth Circuit declined the IRS’s appeal to its expertise and to Skidmore deference because the IRS’s position was recently invented and, more importantly, “the statute has another better reading.” Slip op. at 11. While Skidmore will still be relied upon by the IRS and other agencies, the 3M decision suggests its continuing vitality as a practical matter is fading, especially where a court decides it has a clear understanding of the meaning of a statute using ordinary statutory construction tools.
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[1] Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024).
[2] The Eighth Circuit observed that “[w]hen the case started, it was all about the blocked-income regulation that it claimed was a reasonable interpretation of a silent statute.” Slip op. at 10. The Court then noted that the government moved with the “shifting sands” of administrative law by relegating the regulation it fought so hard to vindicate to the background in favor of its new Code Section 482 argument. Id.
[3] “In the case of any transfer (or license) of intangible property (within the meaning of Section 367(d)(4)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.” Code Section 482.
