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3M Co. v. Commissioner: IRS shipwrecks hard on the shoals of Loper Bright

by Edward L. Froelich | Oct 16, 2025 | Appellate Courts, Court Procedure Matters, Transfer Pricing Resource

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. [...]

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IRS roundup: September 19 – October 1, 2025

by Evan Walters, Samuel F. Hamer, Edward L. Froelich, Michael J. Scarduzio and Matthew J. Blaney | Oct 8, 2025 | Appellate Courts, Court Procedure Matters, IRS Guidance, Tax Reform, Transfer Pricing Resource

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for September 19, 2025 – October 1, 2025.

September 19, 2025: The US Department of the Treasury (Treasury) and the IRS issued proposed regulations, providing guidance on the “no tax on tips” provision of the One Big Beautiful Bill Act. The proposed regulations define “qualified tips” and identify which occupations customarily and regularly receive tips on or before December 31, 2024.

September 23, 2025: The IRS issued Notice 2025-54, providing guidance on the 2025 – 2026 special per diem rates for taxpayers when determining their ordinary and necessary business expenses incurred while traveling away from home, including meal and incidental expenses rates, rates for the incidental expenses only deduction, and rates for (and a list of) high-cost localities for purposes of the high-low substantiation method.

September 29, 2025: The IRS issued Revenue Procedure 2025-30, providing updated procedures for taxpayers requesting private letter rulings from the IRS after September 29, 2025, regarding transactions intended to qualify under Internal Revenue Code § 3551. This guidance specially provides details on the representations, information, and analysis taxpayers should submit when requesting these rulings.

September 30, 2025: The IRS issued Notice 2025-46 and Notice 2025-49, providing guidance on the application of the corporate alternative minimum tax (CAMT).

Notice 2025-46 provides interim guidance to domestic corporate transactions, financially troubled companies, and tax consolidated groups. This notice also announces the Treasury and the IRS’s intent to partially withdraw the CAMT Proposed Regulations (described in Section 2.03 of this notice) and instead issue revised proposed regulations with guidance similar to Sections 3 – 6 of this notice. The proposed regulations will reduce compliance burdens related to, and costs associated with, application of the CAMT.

Notice 2025-49 provides interim guidance regarding application of the CAMT as it relates to §§ 55, 56A, and 59. This notice also announced the Treasury and the IRS’s intent to partially withdraw the CAMT Proposed Regulations (described in Section 2.03 of this notice) and instead issue revised proposed regulations with guidance similar to Sections 3 – 10 of this notice.

October 1, 2025: The Treasury and the IRS issued final regulations, providing guidance on interest capitalization requirements on designated property. The final regulations specifically remove the associated property rule (including similar rules in existing regulations), modifies how “improvement” is defined when applying those similar rules, and primarily affects taxpayers making improvements to real or tangible personal property if those improvements are the production of designated property.

October 1, 2025: The US Court of Appeals for the Eighth Circuit released its opinion in 3M Company v. Commissioner. The Eighth Circuit reversed the US Tax Court’s decision that 3M must pay taxes on royalties – that it could not legally receive – from a Brazilian subsidiary and remanded the Tax Court’s decision with instructions to redetermine 3M’s tax liability. Relying [...]

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IRS roundup: August 28 – September 15, 2025

by Evan Walters, Samuel F. Hamer, Edward L. Froelich, Michael J. Scarduzio and Matthew J. Blaney | Sep 18, 2025 | Appellate Courts, Court Procedure Matters, IRS Guidance, Tax Reform, Transfer Pricing Resource

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for August 28, 2025 – September 15, 2025.

August 28, 2025: The IRS issued Revenue Procedure 2025-28, providing guidance on making certain elections for domestic research or experimental expenditures under § 70302(f) of the One Big Beautiful Bill Act (OBBBA). Revenue Procedure 2025-28 specifically modifies procedures under Internal Revenue Code (Code) § 446 and Treasury Regulation § 1.446-1(e) for obtaining automatic consent from the commissioner of the Internal Revenue to:

Change methods of accounting for research or experimental expenditures under § 174, as amended by the Tax Cuts and Jobs Act of 2017

Change methods of accounting to comply with §§ 174 and 174A, as amended by OBBBA.

Revenue Procedure 2025-28 also prescribes the procedure for electing to amortize domestic research or experimental expenditures paid or incurred in the taxable years beginning after December 31, 2024, under Code § 174A(c).

September 2, 2025: The IRS issued Tax Tip 2025-59, reminding employers that they can use educational assistance programs to help employees pay for various educational expenses for undergraduate- or graduate-level studies. These programs can help pay for books, equipment, supplies, tuition, and other fees, as well as for qualified education loans. This tax-free benefit is allowed only up to $5,250 per employee per year and does not include meals, lodging, or transportation.

September 3, 2025: In Medtronic, Inc. v. Commissioner, the US Court of Appeals for the Eighth Circuit vacated the US Tax Court’s order, rejecting the Tax Court’s three-step unspecified method to value the arm’s length royalty rate for intercompany licensing agreements. The Eight Circuit also held that the Tax Court incorrectly rejected the application of the comparable profits method, explaining that, on remand, the Tax Court should consider whether the proposed comparable companies were “sufficiently similar” to Medtronic Puerto Rico.

September 15, 2025: The IRS released Internal Revenue Bulletin 2025–38, which includes Notice 2025-38. This notice republishes the inflation adjustment factor and the clean electricity production credit allowable under Code § 45Y for the 2025 calendar year. The inflation adjustment factor – and applicable amounts allowable for the 2025 calendar year – are used to determine the amount of Code § 45Y credits that may apply to calendar year 2025 sales, consumption, or storage of electricity produced at a qualified facility in the United States.

The IRS also released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums, and Chief Counsel Advice).

Taxpayer Loses Claim for Research Credit

by Edward L. Froelich | Nov 30, 2023 | Appellate Courts, Court Procedure Matters, Trial Courts

In United States v. Grigsby, Docket No. 22-30764, the US Court of Appeals for the Fifth Circuit held that a refund claim based on claimed Internal Revenue Code (IRC) Section 41 credits was erroneous. Cajun Industries LLC, a subchapter S corporation, filed a refund claim that identified four highly specialized construction projects (two refineries and two flood control systems) as “business components,” which, in turn, gave rise to qualified research expenses (QRE). Cajun fabricated the systems under four separate contracts. The Internal Revenue Service (IRS) granted the claim and issued the refund (ultimately to Cajun’s shareholders who are the taxpayers in this case) but later regretted the decision and filed a suit for recovery of an erroneous refund under IRC Section 7405. The decision turned on two main factors:

A failure to plead
The funded contract exception under IRC Section 41(d)(4)(H)

PLEADING FAILURE

After discovery, the parties prepared for trial and moved for summary judgment. In its motion for summary judgment (and about a month before trial), for the first time in the litigation, the taxpayers identified certain construction processes as additional “business components,” giving rise to the claimed QRE. The Fifth Circuit held that the district court did not abuse its discretion by declining to consider these new processes as “components” in support of the claimed QRE. In short, the taxpayer was too late and paid the price for its delay. One taxpayer faced a similar problem in 2000 when it sought to put into evidence additional QRE beyond the amount described in its detailed refund claim. There, the Federal Circuit cited the doctrine of variance (i.e., a taxpayer must provide adequate notice of the grounds of the refund claim and any substantial variance from those grounds is not permitted in litigation) and declined to put the additional QRE into evidence. Variance may not have been applicable in the Grigsby case because the refund claim was reviewed and issued, but the taxpayers could have improved their position in court by including the construction processes at the beginning of the litigation or at the latest during discovery.

FUNDED EXCEPTION

The Fifth Circuit then analyzed the four contracts and focused particularly on terms pertinent to the ownership of research results and whether payment to Cajun was contingent upon success of its research. (Regulations promulgated under IRC Section 41(d)(4)(h) provide that research is funded and thus not eligible for the credit if the researcher does not retain substantial rights in its research.) The Court held that three of the contracts awarded sole rights in the research to the customer and removed any substantial rights from Cajun. The fourth contract (firm fixed price) was simply considered “funded” because payment was not contingent upon the success of any research performed by the taxpayer. The Court also rejected a Fairchild risk argument negating the funded nature of this fourth contract.

In general, regarding the three contracts, it’s not clear that Cajun retained zero substantial rights in its research. For [...]

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Can the Government Sue for Tax Debts Outside Internal Revenue Code Procedures?

by Kevin Spencer, Edward L. Froelich and Evan Walters | Jul 21, 2023 | Appellate Courts, Court Procedure Matters, Trial Courts

On June 1, 2023, in United States v. Liberty Global, Inc., the US District Court for the District of Colorado held that the US Department of Justice (DOJ) can assert and seek judgment for federal income tax deficiencies using a common law right of action, bypassing the usual statutory tax deficiency procedures outlined in the Internal Revenue Code (IRC). This decision might encourage the DOJ to seek tax collections through court judgments moving forward without following the IRC’s deficiency procedures.

With the IRS, Mail Delivery Counts!

by Kevin Spencer and Evan Walters | Jun 29, 2023 | Appellate Courts, Court Procedure Matters, Tax Refunds, Trial Courts

Over the years, case law has developed around when a mail delivery method is acceptable to prove that a tax filing was made.

The US Court of Appeals for the Fourth Circuit’s recent decision in Pond v. United States[1] addresses how a taxpayer can prove delivery of a filing where the Internal Revenue Service (IRS) disputes physical delivery.

Stephen Pond, the taxpayer, filed two claims for refund in the same envelope. One claim pertained to his 2012 tax year and the other pertained to his 2013 tax year. The government acknowledged receipt of Pond’s 2012 claim. An IRS agent contacted Pond for more information in September 2017, after which Pond faxed a duplicate copy of his 2012 claim for refund but not his 2013 claim. In March 2018, the government issued a refund to Pond for his 2012 claim. However, after receiving no response about his 2013 claim, Pond again contacted the IRS. The IRS could not locate his claim for refund, so he faxed a duplicate copy of the 2013 claim.[2] Pond later received a “Notice of Denial” from the IRS informing him that it denied his 2013 claim for refund because the statute of limitations on claiming a refund or credit had expired.

Pond filed a refund suit in US federal district court, where the court dismissed his claim pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to allege facts upon which the court’s subject matter jurisdiction could be based. Stated differently, assuming all reasonable inferences in favor of the taxpayer, the district court ruled that the taxpayer’s pleadings did not sufficiently establish that he timely filed his 2013 claim for refund, a statutory requirement for the district court to have jurisdiction.

IRC Section 7502(a) creates a presumption of timeliness if a mailing sent by US Mail is postmarked before the deadline.[3] IRC Section 7502(c) creates a presumption of delivery, but only if the mailing is sent by US Postal Service (USPS) registered or certified mail.[4] Unfortunately, Pond sent his refund claims via USPS first-class mail, rather than registered or certified mail. Thus, he was not entitled to the presumption of delivery under IRC Section 7502. Further, according to the Fourth Circuit (and consistent with case law in the Second and Sixth Circuits), Pond could not rely upon federal common law principles because IRC Section 7502 supplanted the common law rule.[5] Thus, Pond needed more than the postmark alone to establish that he actually filed his 2013 claim for refund. He had to show that the claim for refund was physically delivered.

Nonetheless, Pond was entitled to present evidence to establish physical delivery. The Fourth Circuit cited three factual allegations that could establish a triable issue of fact. First, the envelope he claimed included the claim for a refund was postmarked. Although this fact is not sufficient in the case of mail sent by means other than USPS registered or certified, it was still evidence of [...]

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IRS Proposes New Regulations to Settle Supervisory Approval of Penalties Requirements

by Kevin Spencer and Sarah M. Raben | Apr 14, 2023 | Appellate Courts, Court Procedure Matters, IRS Audits, IRS Guidance, Trial Courts

The Internal Revenue Service (IRS) has proposed regulations to clarify the rules regarding supervisory approval of federal civil tax penalties under IRC Section 6751(b). Since Chai v. Commissioner, there has been a substantial number of cases litigating issues involving supervisory approval of federal civil tax penalties. Back in September, we posted about the US Court of Appeals for the Ninth and Eleventh Circuits split in which both Courts departed from long-standing US Tax Court precedence on the timing requirement of supervisor approval. Those two decisions, along with others, prompted this new guidance “to have clear and uniform regulatory standards.”

The proposed regulations address three timing rules: (1) penalties subject to pre-assessment review in the Tax Court; (2) penalties raised in the Tax Court after a petition and (3) penalties assessed without prior opportunity for Tax Court review.

Specifically, the proposed regulations allow supervisors to approve the initial determination of a penalty up until the time the IRS issues a pre-assessment notice, such as a Statutory Notice of Deficiency, which is the notice that provides taxpayers with a ticket to the Tax Court. The proposed regulations explain that “earlier deadlines created by the Tax Court do not ensure that penalties are only imposed where appropriate” and the “bright-line rule relieves supervisors from having to predict whether approval at a certain point will be too early or too late.” Additionally, penalties raised in the Tax Court after a petition is filed, such as an answer or an amended answer, would need supervisory approval any time prior to the penalty being raised. Supervisory approval for penalties not subject to pre-assessment review in the Tax Court may be obtained at any time prior to the assessment.

The proposed regulations require the approval of “the immediate supervisor,” which is defined as “any individual with responsibility to approve another individual’s proposal of penalties without the proposal being subject to an intermediary’s approval.” The term is also not limited to any particular individual.

Comments and requests for a public hearing must be received by July 10, 2023.

Practice Point: Penalties continue to be a hot topic in the tax controversy arena. The updated guidance promises to clarify and standardize the requirements of supervisory approval of IRS penalties, with the hope and expectation of reducing litigation on the issue. From the taxpayer’s perspective, ideally, the new regulations will enable examiners and managers the opportunity to thoroughly review the facts and circumstances of cases before deciding if penalties are warranted. We will continue to follow and report on any new developments.

Please see the links to our prior commentary on Code Section 6751 below:

Supreme Court Punts on Attorney-Client Privilege Question

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Feb 2, 2023 | Appellate Courts, Court Procedure Matters, IRS Audits, Privilege and Non-Disclosure, Trial Courts

In a surprising move, the Supreme Court of the United States (SCOTUS) dismissed a dispute involving the proper test to apply when determining whether an unnamed law firm’s mixed bag of communications involving both legal advice and discussions of tax preparation was privilege. The dismissal came less than two weeks after oral arguments, with SCOTUS stating that “[t]he writ of certiorari is dismissed as improvidently granted” (commonly known as a “DIG,” which infrequently happens when SCOTUS determines there is no conflict warranting review, one or both parties have changed their position, or no consensus can be reached by the Justices and dismissal is preferable to fractured opinions with no controlling rationale).

BACKGROUND

The law firm and an unnamed company were each served with subpoenas for documents and communication related to a criminal investigation. Both produced some documents but withheld others on the grounds of attorney-client privilege and the work-product doctrine. The government moved to compel production, which the district court granted in part, explaining that the documents were not protected by any privilege, and they were discoverable under the crime-fraud exception. The company and law firm continued to withhold the documents, and the government filed motions to hold them in contempt. The district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice. On appeal to the US Court of Appeals for the Ninth Circuit, the law firm and the company argued that the court should have relied on a broader, “because of” test, not the “primary purpose” test. The Ninth Circuit disagreed and concluded that the “primary purpose” test governs, and the primary purpose of the communications was tax advice. SCOTUS granted certiorari in October 2022.

SUPREME COURT

In its brief, the law firm asked SCOTUS to adopt a more expansive “significant purpose” test, which was applied by the US Court of Appeals for the District of Columbia Circuit in In re Kellogg Brown & Root, Inc. The law firm argued that the test applied in Kellogg “appropriately protects attorney-client dual purpose communications” and that the test “asks a single question that arises directly from the long-established test for attorney-client privilege: whether a client is seeking or obtaining confidential legal advice from his or her lawyer.”

The government argued that courts consistently emphasize the need to construe the attorney-client privilege narrowly and that the primary or predominant purpose test “thus molds the scope of the privilege to its purpose of encouraging effective legal advice, while avoiding sweeping in communications predominantly about a nonlegal matter.”

During oral argument, the Justices seemed skeptical of a need to change the test and expressed some confusion as to how any privilege analysis would change from a practice perspective. Justice Kagan invoked the saying “if it ain’t broke, don’t fix it.” Shortly thereafter, SCOTUS issued the DIG.

Practice Point: More [...]

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Tax Court Holds That Deficiency Petition 90-Day Time Limit Is Jurisdictional

by Kevin Spencer, Sarah M. Raben and McDermott Will & Emery | Dec 1, 2022 | Appellate Courts, Court Procedure Matters, Trial Courts

Last summer, the Supreme Court of the United States held that the 30-day time limit to file a Collection Due Process (CDP) petition is a non-jurisdictional deadline subject to equitable tolling (Boechler, P.C. v. Commissioner). (Our prior discussion of Boechler can be found here.) The natural follow-up issue was whether this holding extended to the 90-day limit for deficiency petitions.

On November 29, 2022, in a unanimous 17-0 opinion in Hallmark Research Collective v. Commissioner, the US Tax Court held that the 90-day time limit is jurisdictional not subject to equitable tolling. The taxpayer in that case filed its deficiency petition one day late but argued that the 90-day limit is non-jurisdictional under Boechler and that it should be allowed to show cause for equitable tolling of the limitations period.

The Tax Court analyzed the relevant statute (Internal Revenue Code (IRC) Section 6213(a)) and found that the statutory text, context and relevant historical treatment all confirmed that the 90-day time limit clearly provided that the deadline was jurisdictional. Its analysis started with the US Constitution and tracked the deficiency procedures from the days of its predecessor (the Board of Tax Appeals) through various statutory changes and the overall framework of the procedures. Based on its analysis of almost 100 years of statutory and judicial precedent, the Tax Court concluded that it and the US Courts of Appeals have expressly and uniformly treated the 90-day time limit as jurisdictional, and the US Congress was presumptively aware of this treatment and had acquiesced in it.

The Tax Court rejected the taxpayer’s arguments to the contrary. It noted that the Supreme Court in Boechler rejected the analogy of the statutory 30-day limit for a CDP petition to the statutory 90-day limit for a deficiency petition. The Court also provided separate reasons why the statutory 30-day time limit was different, both in its text and in prior judicial constructions from the 90-day time limit.

Practice Point: The Tax Court’s opinion in Hallmark will not be the last word on the issue, and we expect further developments in this area. Additionally, there are other types of petitions that can be filed in the Tax Court (e.g., so-called “innocent spouse” petitions filed in non-deficiency cases) that contain language different from the statutes addressed in Boechler and Hallmark. We will continue to follow this area and provide relevant updates as they develop.

Supreme Court Denies Certiorari in Whirlpool

by Kevin Spencer and McDermott Will & Emery | Nov 21, 2022 | Appellate Courts, Court Procedure Matters, IRS Guidance, Trial Courts

On November 21, 2022, the Supreme Court of the United States denied certiorari in Whirlpool Financial Corp., et al., Petitioners v. Commissioner of Internal Revenue, No. 22-9. This means that the US Court of Appeals for the Sixth Circuit’s decision remains in effect and is binding on the taxpayers who reside in that circuit. However, for taxpayers in other circuits, the Sixth Circuit’s decision is only persuasive authority and not binding precedent. Thus, it remains to be seen whether taxpayers in other jurisdictions will challenge the result reached in Whirlpool, and if they do, how appellate courts outside the Sixth Circuit will rule.

Prior coverage of this case can be found below:

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