USA Trends and Developments Contributed by: Sean Lyons, Nicholas Wilkins, Kevin Spencer and Kim Marie Boylan, White & Case LLP
The government primarily relied on its argument that the allocation was mandatory under the plain lan - guage of Section 482, such that the court need not reach the question of the validity of the regulation (Suppl Brief for the Appellee at 2–3, 3M Co v Comm’r , No 23-3772 (8th Cir 2 October 2024). The government argued that, should the court reach that question, Loper Bright supports the validity of the regulation (Id at 13). The government stated that “courts have long recognized” that Section 482 of the Code delegates discretionary authority to the IRS and the Treasury (Id at 15). Given the discretionary grant of authority, the government argued that the court must only “ensure that [the] Treasury acted within ‘the boundaries of the delegated authority’ and ‘engaged in reasoned deci - sionmaking within those boundaries’ in promulgating [Treasury Regulation Section] 1.482-1 (h)(2)” (Id at 17) (quoting Loper Bright at 395). The government then explained how the regulation was consistent with the government’s reading of Section 482 of the Code (Id at 17–31). The appellate decision The Eighth Circuit issued its opinion in October 2025, finding in favour of the taxpayer (see generally 3M Co v Comm’r , 154 F4th 574 (8th Cir 2025)). The very first sentence was a preview into how the appellate court viewed the dispute: “Statutes trump regulations” (Id at 576). The Eighth Circuit parsed Section 482 of the Code sentence-by-sentence and, relying on Loper Bright , concluded that Treasury Regulation Section 1.482-1 (h)(2) did not offer the best reading of the stat - ute ( 3M Co , 154 F4th at 578–81). The court described the first sentence of the statute as both granting the IRS authority to “distribute, appor - tion, or allocate gross income, deductions, credits, or allowances” between commonly controlled busi - nesses and providing safeguards to prevent arbitrary allocations (Id at 578). The Eighth Circuit read the stat - ute as permitting allocations only when “necessary” to accomplish one of two goals: • the prevention of evasion of taxes; or • the clear reflection of controlled entities’ income (Id).
The granting of authority and the safeguards both relate to the fundamental purpose of Section 482, which the court described as a tool for combating “tax gamesmanship” (Id). However, the court also read First Security (which, again, was heavily relied upon by the taxpayer in its post- Loper Bright briefing) to require a taxpayer to have “‘complete dominion’” over income before an allocation is permissible (Id at 579 (quoting First Security at 403)). The court reasoned that, where legal restrictions prevent taxpayers from receiving income from related parties, they lack the power to engage in the very tax gamesmanship that Section 482 was intended to prevent (see id). Ultimately, because the Brazilian legal restrictions at issue prohibited the tax - payer from receiving income, the Eighth Circuit con - cluded that allocating income to the taxpayer under Treasury Regulation Section 1.482-1 (h)(2) would not clearly reflect the taxpayer’s income (Id). The Eighth Circuit also interpreted the second sen - tence of Section 482, which includes a “commensu - rate with income” standard for transactions between related parties involving intangible property, and rejected the IRS’s argument that the reallocation was mandatory under this sentence. The court reasoned that the second sentence of Section 482 must be read in light of the first, and so the same safeguards must apply, regardless of whether intangible property is relevant to the underlying transaction. “The power of reallocation always depends on a taxpayer’s ‘com - plete dominion’ over the funds, regardless of the type of property involved” (Id at 581 (quoting First Security at 403)). The Eighth Circuit noted that “[t]he shifting sands of administrative law brought a change in the IRS’s position”, leading the agency to de-emphasise the importance of Treasury Regulation Section 1.482-1 (h) (2) itself (Id at 581–582). The court quickly dismissed the idea that Section 482 gave the IRS discretionary authority to allocate income in the manner permitted by the regulation, and further declined to afford the regulation deference under pre- Chevron standards, because “the statute has another ‘be[tter] reading’” (Id at 582 (alteration in original) (quoting Loper Bright at 400)).
305 CHAMBERS.COM
Powered by FlippingBook