As discussed in an earlier post, 3M Co. v. Commissioner, T.C. Dkt. No. 5816-13, involves 3M Company’s (3M) challenge to the Internal Revenue Service’s (IRS) determination that Brazilian legal restrictions on the payment of royalties from a subsidiary in that country to its US parent should not be taken into account in determining the arm’s-length royalty between 3M and its subsidiary under Treas. Reg. § 1.482-1(h)(2). The case has been submitted fully stipulated under Tax Court Rule 122. We discussed the parties’ opening briefs, filed on March 21, 2016, here. Reply briefs were filed on June 29, with the IRS filing an amended reply brief on August 18.

3M returns to its argument that Treas. Reg. § 1.482-1(h)(2) is “procedurally invalid” because Treasury and the IRS failed to satisfy the requirements of section 553 of the Administrative Procedure Act (the APA) when they promulgated the regulations. 3M notes that the IRS completely ignored this argument in its opening brief. Citing the Supreme Court’s recent opinion in Encino Motorcars, discussed in more detail here, 3M points out that Treasury and the IRS made significant changes to the regulation, but offered no explanation for the changes. This, 3M argues, renders the regulation invalid. 3M observes that compliance with the two-step Chevron test would not save a regulation that is procedurally invalid, noting that such compliance is “a necessary but not a sufficient condition for a regulation to be upheld.”

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