On March 3, 2013, the 3M Company (3M) filed a petition in the U.S. Tax Court challenging the Internal Revenue Service (IRS) on its ability to reallocate income between related parties in the presence of foreign legal restrictions that prohibit payment or receipt. (See 3M Co. v. Comr., T.C., Docket No. 5816-13 for full information regarding the 3M petition).
The IRS alleges that 3M do Brasil LDTA (3M Brazil), a 3M subsidiary, underpaid royalties to 3M for the use of certain patents and trademarks in 2006. However, 3M claims that 3M Brazil was prevented by Brazilian law from paying higher royalties and contends that the IRS does not have the authority to reallocate income under such conditions. In essence, 3M is questioning the validity of a 1994 U.S. Treasury Regulation (Treas. Reg.) § 1.482-1(h)(2)(i) and (ii) that establishes the conditions under which companies facing foreign legal restrictions may demonstrate that they should be exempt from certain tax payment considerations.