Eric Aberg

In 3M Co. v. Commissioner,1 the Tax Court upheld the validity of a regulation—Treas. Reg. § 1.482-1(h)(2) (the “Blocked Income Regulation”)—that effectively taxed income the taxpayer was barred from receiving under foreign law. The result is counterintuitive, and arguably flies in the face of Tax Court, circuit court, and Supreme Court precedents, which previously held that section 482 does not permit the Commissioner to allocate income “that [the taxpayer] did not receive and that he was prohibited from receiving.”2 The Tax Court upheld the Blocked Income Regulation by the slimmest of margins: seven judges joined a plurality opinion authored by Judge Richard T. Morrison, two judges concurred in result only, and eight judges dissented. The diversity of opinions reveals deep disagreement among the judges on the proper framework to apply in regulatory-challenge cases and leaves considerable room for a successful appellate challenge.

On 18 May 2023, the Supreme Court sided with the IRS in a dispute that centered on the agency’s power to issue summons for bank account records without notice to the interested account holders. The court’s decision, however, is far from an unmitigated victory for the agency. In fact, the majority and concurring opinions reflect the court has significant reservations about the IRS’s use of no-notice summons, particularly in cases involving innocent third parties.

In Coca-Cola Co. & Subs. v Commissioner, the Tax Court cited its nine-to-eight 3M decision1, which upheld the validity of the Treas. Reg. § 1.482-1(h)(2), before it addressed the regulation's application to dividend payments made by a Brazilian entity as a substitute for royalties. With 3M's appeal docketed in the Eighth Circuit and Coca Cola signaling an appeal to the Eleventh Circuit, the regulation's validity may undergo more searching administrative review. In fact, the question may find itself before a Supreme Court that has demonstrated a willingness to address administrative review procedures.