The Department of Justice and The Coca-Cola Company have filed letters with the U.S. Court of Appeals for the 11th Circuit taking opposing positions on how the 8th Circuit’s recent precedent-setting ruling on blocked income should affect the IRS’ transfer pricing allocations to Coca-Cola.
Blocked Income
Generally, IRC § 482 allows the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances among commonly controlled entities when needed to prevent tax evasion or clearly reflect income, including by requiring that returns from intangibles be commensurate with the income attributable to the intangible. The regulations describe the goal as determining the taxpayer’s true taxable income under an arm’s-length standard.
Treasury’s blocked-income regulation under § 482 requires that a foreign restriction be publicly promulgated and generally applicable to similarly situated controlled and uncontrolled parties and that it expressly prevents payment or receipt, in any form, of the arm’s-length amount. The guidance also distinguishes legal prohibitions on payment from rules that merely limit local deductibility.
Coca-Cola’s case involves a network of foreign supply points that manufactured concentrate and paid the U.S. parent for use of its intangibles. The Tax Court rejected the company’s long-used “10-50-50” profit split and largely upheld the IRS’ use of the comparable profits method, reallocating more than $9 billion of income to the U.S. parent. One element concerns Brazilian rules that cap royalties to foreign related parties and whether those rules block additional arm’s-length royalties.
The 3M Ruling
In 3M Co. v. Commissioner (160 T.C. 50), the Tax Court held that the IRS could allocate royalty income to the U.S. parent even if Brazilian law restricted related-party royalties, crediting the IRS’ blocked-income regulation and the 1986 “commensurate with income” amendment to § 482.
The 8th Circuit reversed, concluding that the Commissioner could not allocate income the U.S. parent was legally barred from receiving under Brazilian law (136 AFTR 2d 2025-6164). The appellate court reaffirmed the “dominion and control” standard established in Commissioner v. First Security Bank of Utah, (405 U.S. 394 (1972)), and found that the best reading of § 482 — particularly following Loper Bright Enterprises v. Raimondo, (603 U.S. 369 (2024)), which curtailed judicial deference to agency regulations — does not permit the IRS to create taxable income where none could legally be received.
The 8th Circuit also rejected the government’s “dividend substitution” theory, declining to allow substitute dividends to serve as the basis for a royalty allocation. The IRS’ petition for rehearing en banc was denied.
Government Says No ‘Perpetual Deferral’
In a March 4 letter, DOJ attorney Jennifer Rubin urged the 11th Circuit not to read 3M as limiting the IRS’ § 482 adjustments in Coca-Cola. The letter states that the court “should not rely on the 3M decision to grant Coca-Cola a perpetual deferral of income taxes that it owes” under § 482.
DOJ characterizes Coca-Cola’s historical reporting position by saying the company “misallocated massive amounts of income to foreign subsidiaries on its U.S. tax returns, including to its Brazilian subsidiary.” The government argues that Brazilian law limits the deductibility of royalties in Brazil but does not bar the movement of cash or the recognition of income for U.S. tax purposes. DOJ writes that the Brazilian rules limit “the amount of money transferred to a related party as ‘royalties’ for purposes of Brazilian taxes,” but that “this law does not bar paying dividends, or treating those dividends as ‘royalties’ for purposes of U.S. taxes.”
The government adds that “it is undisputed that Coca-Cola could have accessed the income allocated to it by the Commissioner—just not in the form of ‘royalties’ deductible under Brazilian law,” and on that basis asserts that “the income here is not ‘blocked’ under the law or under these facts.”
DOJ also directly addresses the 8th Circuit’s analysis, stating that “3M improperly adopted a narrower definition of ‘income’ for § 482 than elsewhere in the Internal Revenue Code.” The letter argues that § 482 reaches income even if foreign law constrains the specific form of payment and relies on Coca-Cola’s use of dividends from its Brazilian affiliate to support additional U.S. royalty income. DOJ concludes that “Brazilian law neither blocks the relevant income—legally or practically—nor bars the Commissioner’s income allocation.”
Coca-Cola’s Response
In a March 13 response authored by attorney Gregory Garre, Coca-Cola describes its appeal as presenting “the same Brazilian ‘blocked income’ issue as in 3M” and argues the government is reasserting positions the 8th Circuit already rejected.
The company cites the government’s own prior filings, noting that in its petition for rehearing en banc in 3M, “the IRS acknowledged that this case involves the same Brazilian ‘blocked income’ issue as in 3M and, indeed, specifically relied on the Tax Court’s (erroneous) decision in this case to challenge the panel decision in 3M.” Coca-Cola adds that DOJ warned the 8th Circuit that a ruling for 3M would be “on all fours” with Coca-Cola’s case and would directly affect it.
On the merits, Coca-Cola emphasizes that the 8th Circuit rejected the dividend substitution theory. The company notes that the panel characterized the IRS’ approach as an attempt to “‘purposely evade’ Brazilian law’s restrictions on royalties by requiring a Brazilian subsidiary to pay dividends, in lieu of royalties” and that the court did not accept that approach.
Coca-Cola argues that DOJ’s letter restates that same theory and urges the 11th Circuit to follow the 8th Circuit’s reasoning, noting that rehearing was denied in 3M and that there is no need for a conflicting interpretation on the same Brazilian blocked-income question.
For more on § 482’s interplay with adjustments under other Code sections, see Checkpoint’s Federal Tax Coordinator 2d ¶ G-4169.
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