Monthly Archives: October 2025

In a major win for multinational businesses, the Eighth Circuit Court of Appeals has overturned the IRS’s $24 million transfer pricing adjustment against 3M, ruling that the IRS cannot force U.S. companies to recognize and pay tax on royalty income they were legally prevented from receiving under foreign law.

What Happened in the 3M Case?

The dispute centered on income from 3M’s Brazilian subsidiary, which was subject to strict local limits on royalty payments to foreign parent companies. The IRS tried to use Section 482 to increase 3M’s U.S. taxable income by the amount it felt 3M should have received, despite the fact that Brazilian law prevented the subsidiary from making those payments.

8th Circuit’s Take: Reality Over Theory

The Appeals Court rejected both the IRS’s regulatory approach and the earlier U.S. Tax Court’s decision, emphasizing that U.S. tax law is grounded in economic reality. The court found that attributing income to 3M that it could not legally receive runs counter to Section 482’s requirement that income allocations “clearly reflect income.” The fact that Brazilian restrictions, not 3M’s own actions, stopped those payments was a decisive factor.

Key Legal Reasoning

·         The Court referenced the Supreme Court’s First Security Bank precedent, confirming that income blocked by law, whether foreign or domestic, cannot be forced into a taxpayer’s gross income if the taxpayer never had actual or practical control over it.

·         The “commensurate with income” standard for intangibles (the second sentence of § 482) did not convert uncollectible or legally blocked royalty payments into taxable U.S. income.

·         Attempts by the IRS to claim that dividends or other creative workarounds could substitute for true royalties were also dismissed by the Eighth Circuit, which refused to reward hypothetical transactions over actual, legal ones.

Why This Matters for Multinationals and Practitioners

This ruling dramatically curtails IRS authority to make transfer pricing adjustments based on so-called “blocked income.” Multinational companies with foreign subsidiaries in countries that restrict payment of royalties or service fees are directly affected. U.S. tax professionals should view this as strong new precedent limiting the government’s reach over cross-border income shifting when payments are genuinely prevented by foreign law.

The Bottom Line

The Eighth Circuit’s decision is poised to change the landscape for transfer pricing litigation and royalty payment disputes. With the IRS’s “blocked income” rule now struck down, for now, multinationals can breathe easier where foreign law truly stands in the way of payments, while the IRS may be forced to rethink its approach to enforcing transfer pricing in the global economy.

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Sources:

1.       https://kpmg.com/us/en/taxnewsflash/news/2025/10/eighth-circuit-reallocation-blocked-royalty-income-not-allowed.html    

2.      https://www.currentfederaltaxdevelopments.com/blog/2025/10/1/eighth-circuit-reverses-tax-court-in-3m-restricting-482-allocations-of-blocked-foreign-income      

3.      https://news.bloombergtax.com/daily-tax-report/faulting-irs-appeals-court-remands-3m-transfer-pricing-dispute  

4.      https://www.uschamber.com/cases/tax/3mco.v.irs

5.       https://www.grantthornton.com/insights/alerts/tax/2023/flash/tax-court-transfer-pricing-case-has-big-implications

6.      https://ecf.ca8.uscourts.gov/opndir/25/10/233772P.pdf

7.       https://www.taxriskmanagement.com/3m-transfer-pricing-case-us-tax-court/

8.      https://mcguiresponsel.com/blog/3m-transfer-pricing-court-case/

9.      https://www.law360.com/articles/2394830/8th-circ-reverses-irs-win-in-3m-transfer-pricing-case

10.   https://www.caplindrysdale.com/news-bloomberg-quotes-leila-carney-on-3ms-appeal-to-the-eighth-circuit

11.    https://www.ntu.org/foundation/detail/eighth-circuit-hears-oral-arguments-for-high-stakes-3m-case

12.   https://www.law360.com/tax-authority/cases/658eed5bcf607a0068f31dd2

13.   https://www.law360.com/articles/2394830/breaking-8th-circ-reverses-irs-win-in-3m-transfer-pricing-case

14.   https://law.justia.com/cases/federal/appellate-courts/ca8/23-3772/23-3772-2025-10-01.html

15. https://kaufmanrossin.com/news/three-international-tax-cases-practitioners-must-watch-in-2025/

    16. https://law.justia.com/cases/federal/appellate-courts/ca8/2025/

Read more at: Tax Times blog

The Changing Landscape for IRS Civil Fraud Penalties

The IRS’ longstanding authority to administratively assess civil fraud penalties faces major new questions in the wake of the Supreme Court’s 2024 decision in SEC v. Jarkesy. The Court held that imposing certain types of civil penalties without a jury might violate the Seventh Amendment. This reasoning has emboldened taxpayers to challenge the IRS’ use of its in-house penalty regime, especially for the severe 75% civil fraud penalty.

Two Recent Cases, Two Opposite Outcomes

The past month alone saw two federal courts go in opposite directions on this issue:

·         In Silver Moss Properties LLC v. Commissioner (August 2025), the U.S. Tax Court rejected a post-Jarkesy constitutional challenge, upholding the IRS’ ability to assert civil fraud penalties within Tax Court refund litigation.

·         Just weeks later, in U.S. v. Sagoo (September 2025), the U.S. District Court for the Northern District of Texas ruled that the IRS’ assessment violated the taxpayer’s constitutional right to a jury trial under the Seventh Amendment—dealing a blow to the agency’s current enforcement toolbox.

Why These Cases Matter for Taxpayers

These cases significantly impact anyone facing potential IRS civil fraud penalties, which are among the harshest in the tax law arsenal, reaching 75% of the underpayment amount. The Tax Court’s position currently leaves the IRS’ administrative process intact, but the Texas District Court’s opinion could pave the way for broader constitutional challenges and, possibly, a new Supreme Court showdown.

What Taxpayers Should Do Now

Tax practitioners and high-net-worth individuals under audit should watch this evolving legal landscape closely. When facing civil fraud allegations, it may become increasingly viable, depending on jurisdiction, to assert a constitutional jury trial defense, possibly changing how these penalties are assessed and resolved going forward.

Staying informed of future appellate decisions will be crucial, as the administration of IRS civil fraud penalties could change dramatically in the coming months. If you have questions or are under IRS audit threat, seeking experienced legal counsel who monitors these developments is more important than ever.

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for a FREE Tax Consultation at: 

www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid (888) 882-9243

Sources:

1.       https://www.law360.com/agencies/u-s-supreme-court  

2.      https://www.law360.com/agencies/internal-revenue-service   

3.      https://www.law360.com/agencies/u-s-supreme-court  

4.      https://www.law360.com/agencies/internal-revenue-service     

5.       https://bosstaxlaw.com/understanding-the-irs-civil-fraud-penalty-what-every-taxpayer-needs-to-know/

6.      https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/12/ARC24_MSP_09_Civ-Pen-Admin.pdf

7.       https://www.irs.gov/irm/part25/irm_25-001-006

8.      https://klasing-associates.com/tax-evasion-penalties-guide-tax-fraud-jail-time-sentences/

9.      https://taxreliefcounsel.com/blog/tax-fraud-penalties/

10.   https://www.irsstreamlinedprocedures.com/whats-the-difference-between-civil-and-criminal-tax-fraud/

11.    https://www.goldinglawyers.com/tax-fraud-penalties-irs-penalty-summary-of-tax-fraud-violations/

12.   https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/Fault-Based-Civil-Tax-Penalties_ABA_SPR2019.pdf

13.   https://www.jdsupra.com/legalnews/civil-tax-fraud-should-75-percent-8377311/

14.   https://bosstaxlaw.com/understanding-the-irs-civil-fraud-penalty-what-every-taxpayer-needs-to-know/

15.    https://freemanlaw.com/irs-penalties-brief-primer/

16.   https://www.law360.com/agencies/internal-revenue-service

17.    https://www.law360.com/agencies/u-s-supreme-court

18.   https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/12/ARC24_MSP_09_Civ-Pen-Admin.pdf

19.   https://klasing-associates.com/can-taxpayer-face-civil-fraud-penalties/

20.  https://www.communitytax.com/tax-blog/irs-tax-penalties/

21.   https://taxreliefcounsel.com/blog/tax-fraud-penalties/

22.   https://wiggamlaw.com/blog/tax-fraud-punishments/

23.   https://www.myirsteam.com/blog/understanding-tax-fraud-key-types-penalties-differences-from-tax-evasion/

24.  https://www.irs.gov/irm/part25/irm_25-001-006

25.   https://irssolution.com/blog/criminal-tax-evasion-vs-civil-tax-fraud/

Read more at: Tax Times blog