Clark Armitage Comments on Recent Split 3M Decision in Law360

A recent U.S. Tax Court ruling against 3M that narrowly upheld transfer pricing regulations reflects divided views on key administrative law concepts, casting uncertainty over what standards the Internal Revenue Service may ultimately have to meet when defending rules.

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Clark Armitage, a member at Caplin & Drysdale, said the State Farm part of the analysis "was a bit glossy" and that the majority's decision doesn't seem in the spirit of more recent cases' requirements of agencies like the IRS.

"Treasury did not directly respond to on-point comments but was treated as having done so by publishing a rule that effectively ignored the comments," he said. "And the fact that we have this dispute in some ways shows that Treasury didn't really reflect their thinking very clearly."

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"Congress has not amended Section 482 in any way that would materially alter the Supreme Court's holding in First Security Bank," Judge Buch wrote.

According to Armitage, the majority's analysis "seems very thin" because it's not at the heart of the First Security ruling. The court's main message in that case, he said, was that taxpayers shouldn't be taxed on income they can't earn.

"It feels like the 3M court overturned that Supreme Court decision on a technicality," Armitage said.

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Armitage said another reason the 3M case could interest the Supreme Court is that it has implications for comity with foreign governments and "is important to broader concepts of what is income."

He also said the high court may be interested in the case "because of its own prior precedent being effectively overturned."

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