Tax Court In Brief | 3M Company V. Comm'r | Allocation Of Income For Subsidiary License Or Use Of Intellectual Property; Validity Of Treas. Reg. 1.482-1(h)(2))

Published date15 February 2023
Subject MatterTax, Income Tax, Tax Authorities
Law FirmFreeman Law
AuthorFreeman Law

The Tax Court in Brief - February 6th - February 10th, 2023

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

Tax Litigation: The Week of February 6th, 2022, through February 10th, 2023

  • Rawat v. Comm'r, T.C. Memo. 2023-14| February 7, 2023 | Gustafson, J. | Dkt. No 15340-16

3M Company and Subsidiaries v. Comm'r, 160 T.C. No. 3| February 9, 2023 |Morrison, J. | Dkt. No. 5816-13

Summary: In this 346-page opinion (including multiple concurring opinions and dissents) the Tax Court addresses federal income tax issues arising from 3M Company (3M) and its domestic and foreign subsidiaries' (Subs) consolidated ownership of trademarks in 3M. Other intellectual properties, such as patents and non-patented technology, was owned by a second-tier wholly owned U.S. subsidiary of 3M (Sub-IP).

Pursuant to three separate licenses'dating back to 1952 but amended over the many decades'a Brazilian subsidiary (Sub-Brazil) paid royalties to 3M for Sub-Brazil's sales of products involving 3M's trademarks. The operative license agreements were entered into in 1998. Under those agreements (generally), if a product sale involved trademarks covered by multiple of the three licenses, 3M and Sub-Brazil calculated the royalties owed by a "stacking principle." Based on legal counsel 3M received from its Brazilian lawyers that 3M would have to disclose non-patented technology and other intellectual property to the Brazilian Patent and Trademark Office (thus risking disclosure of such information to competitors), 3M did not require Sub-Brazil to pay 3M or Sub-IP for Sub-Brazil's use of other intellectual property. On its 2006 consolidated tax return (Form 1120, U.S. Corporation Income Tax Return), 3M reported the trademark royalty income.

The IRS determined that 3M's income should be increased by $23,651,332 to reflect an arm's length rate of compensation under section 482 to account for Sub-Brazil's use of 3M and Sub-IP's other intellectual property. The IRS's determination did not take into account the effect of Brazilian legal restrictions. See 26 C.F.R. ' 1.482-1(h)(2) (Effect of foreign legal restrictions; setting forth the requirements that must be met before the IRS "will take into account the effect of a foreign legal restriction" under I.R.C. ' 482).

3M challenged that...

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