USA Trends and Developments Contributed by: Kim Marie Boylan, Kevin Spencer, Nicholas Wilkins and Sean Lyons, White & Case LLP
subsidiaries to the US parent companies. Both appeals address the validity of the IRS’s Section 482 allocations and, by extension, the validity of Treasury Regulation Section 1.482-1(h)(2). i) 3M case The validity of Treasury Regulation Section 1.482-1(h)(2) was squarely before the US Tax Court in 3M (see generally 3M Co v Commis - sioner, 160 TC 50 (2023)). The court engaged in a Chevron analysis, concluding that the regula - tion’s interpretation and application of Section 482 of the Code was entitled to deference (Id at 255–288). The court also considered and rejected the taxpayer’s arguments that Treasury Regulation Section 1.482-1(h)(2) was procedur - ally defective for failing to comply with the APA when promulgated (Id at 288–296). The US Tax Court’s rules allow for a judge’s opinion to be reviewed by the full court. This occurred with the US Tax Court’s 3M decision and the out - come was fractured: seven of 17 judges joined the opinion of the court, two of 17 judges con - curred in the result only, and the remaining eight judges dissented. The court’s opinion began with a comprehen - sive review of the history of Section 482 of the Code, other relevant statutes (such as the APA), prior regulatory provisions, the current regula - tions, and relevant case law (Id at 105–245). This informed the court’s Chevron step one analysis, where it concluded that the plain language of Section 482 of the Code was ambiguous as to the correct treatment of foreign legal restrictions on payments (Id at 275–276). The court likewise concluded that the legislative history of Section 482 of the Code did not explain how Congress intended foreign legal restrictions to be treated (Id at 276–278).
The court then turned to step two of the Chev - ron analysis. The court examined certain of the criteria contained in Treasury Regulation Section 1.482-1(h)(2) and concluded that they represent - ed permissible interpretations of Section 482 of the Code (Id at 279–288). The court declined to examine all of the criteria but, rather, focused on the criteria that the court concluded were not met under the facts of the case. Applying the regulation to the taxpayer’s facts, the court held that the Brazilian legal restrictions at issue should not be taken into account in computing the Section 482 allocations (Id at 298). On appeal, the parties’ initial briefing was very typical of a challenge to a regulation under Chev - ron. Both parties argued that Section 482 of the Code unambiguously supported their respective positions. The taxpayer argued that – should Section 482 of the Code be determined to be ambiguous – Treasury Regulation Section 1.482- 1(h)(2)’s interpretation of the statute should be rejected as impermissible, whereas the govern - ment naturally made the opposite argument. The parties also continued to dispute the regulation’s procedural validity under the APA. However, after briefing in the case had con - cluded, the US Supreme Court issued its Loper Bright opinion. The Eighth Circuit invited the parties to submit supplemental briefing, with the taxpayer arguing that “Loper Bright eviscerates the [US] Tax Court plurality’s sole rationale for upholding” Treasury Regulation Section 1.482- 1(h)(2) (Appellant’s Suppl Brief at 9, 3M Co v Commissioner, No 23-3772 (8th Cir 2 October 2024)). The taxpayer stated that “[t]he [US] Tax Court plurality never suggested that the IRS’s position represents the best reading of Sec- tion 482” of the Code (Id) and urged the Eighth Circuit to adopt the taxpayer’s reading of the statute (Id at 9–10). The thrust of the taxpayer’s
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