3M Company v Commissioner of Internal Revenue: Case Summary

This case involved the 3M Company and its subsidiaries (collectively referred to as the “3M consolidated group”) disputing a section 482 adjustment made by the Commissioner of Internal Revenue. The dispute focused on the income tax treatment of intellectual property (IP) transactions between 3M's U.S. subsidiaries and its Brazilian subsidiary, 3M do Brasil Ltda (3M Brazil), for the tax year 2006.

3M Brazil used intellectual property, including trademarks, patents, and non-patented technology, owned by its U.S. affiliates. During 2006, 3M Brazil paid 3M Company royalties under three trademark licenses executed in 1998, which amounted to 1% of sales for each set of trademarks. However, the Commissioner of Internal Revenue issued a notice of deficiency, increasing the income of 3M Company’s U.S. group by $23.65 million, arguing that the royalties under section 482 were insufficient to reflect an arm’s-length transaction.

3M argued that Brazilian legal restrictions capped the royalties and payments for the IP use, particularly under Brazil’s Law No. 8383/1991, which placed limits on remittances to foreign parent companies. 3M asserted that the adjustment should account for the maximum allowable payments under Brazilian law, claiming that U.S. tax rules must consider foreign legal restrictions when applying section 482.

The Commissioner, however, applied the U.S. Treasury Regulations (26 C.F.R. sec. 1.482-1(h)(2) (2006)), which limit the recognition of foreign legal restrictions only when such restrictions meet specific requirements, such as being publicly promulgated. The court ruled that the Brazilian restrictions did not meet these requirements and rejected 3M’s arguments. The court upheld the Commissioner’s position, confirming that the income of the 3M consolidated group should be increased to reflect arm’s-length compensation for the IP use.