Tax Court Rejects Various Hail Mary Claim, Including APA Claims, to Get Out of Penalty Free (10/8/25)

In Computer Sciences Corp. v. Commissioner, 165 T.C. ___, No. 8 (2025), TC Case No. 4823-21, here, at entry 305 dated 10/6/25*, GS here**, and TN here, the Court (Judge Lauber) issued yet another § 6751(b), here, written supervisor approval opinion where, as in other cases, the taxpayer seeks to avoid an IRS penalty because of a supposed IRS footfault in the penalty assertion process. In addition to the usual § 6751(b) hail mary claims for a get out of penalty free escape, the taxpayer raises Administrative Procedure Act (“APA”) Claims which, I presume, are the reason the opinion was designated for T.C. reporting (as opposed to T.C. Memo or simply an Order).

For persons wanting a preliminary look at the underlying issues of what the case is all about, go to the docket entries linked above at entry 42 Order dated 7/24/23.

I report here on the APA claims, and will then cover its reference to the § 6751(b) regulations adopted in final in December 2024.

I start my discussion with a quote from Bryan Camp’s iconic post The APA Is Not A Hammer (Procedurally Taxing Blog 6/24/22), here, which opens:

Kristin Hickman loves the APA. To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love. It’s her Hammer, her righteous Mjölnir.

And when you have a hammer, everything looks like a nail. Including ALL Treasury regulations.

Although Computer Sciences is not directly attacking regulations, the same comment is appropriate here. With the modern claims about the APA, everything begins to look like a nail, so taxpayers unleash the APA to attack IRS action regardless of how far-fetched the attack is.

In Computer Sciences, I introduce the Court’s holdings from the opening relevant headnotes that, while not technically part of the opinion, for present purposes fairly summarize the opinion (after each holding, I provide brief comment for context):

Eighth Circuit Applies First Sec. Bank Limitation to § 482 Intangibles Allocation Despite the Commensurate with Income Standard Enacted in 1986 (10/2/25)

I recently wrote on the 3M case pending in the 8^th Circuit involving the issue of whether the commensurate with income standard in § 482 enacted in 1986 permits the IRS to use § 482 to allocate royalty income to 3M for intangibles it transferred to a Brazilian affiliate in excess of the amount of royalty income permitted by Brazilian law. The full text of the commensurate with income standard  enacted in 1986 is: “In the case of any transfer (or license) of intangible property (within the meaning of section 367(d)(4)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.” See Loper Bright’s Motivated Mistreatment of Statutory Ambiguity and Best Interpretations (Federal Tax Procedure Blog 8/28/25), here.

In 3M Company v. Commissioner, ___ F.4th ___ (8th Cir. 10/1/25), here, the Court held that the IRS could not use § 482's commensurate with income standard to tax a related party affiliate's (3M's)  income on the transfer of intangibles in excess of legal limits permitted by law applying to the party receiving and exploiting the intangibles transferred to it.

I think it might be helpful to illustrate the issue in a simple examples. I start with an example where no legal prohibition is involved: Suppose intangible property in an open market would have commanded a royalty of 10% in an unrelated party transaction (which I will call the fair market value (“FMV”) royalty). But, in a related party transaction, the U.S. party transferring intangibles to the foreign affiliate charged the foreign affiliate a royalty of 5%. The foreign affiliate earns extra income over what it would have earned if it paid the FMV 10% royalty. This example is a classic instance where the commensurate with income standard enacted in 1986 applies to permit the IRS to tax the U.S. affiliate on an additional 5% royalty.

The next example is the same, except the law where the foreign affiliate earns the extra income limits royalty payments to 5%. The foreign affiliate earns extra income by paying 5% rather than the 10% , FMV royalty. The 5% royalty rate is not commensurate with the income. The question in 3M is whether the IRS can apply the FMV commensurate with income royalty rate despite the local law prohibition?

In Commissioner v. First Sec. Bank of Utah, N.A., 405 U.S. 394 (1972), the Court held that pre-amendment § 482 did not permit an allocation where the recipient was not lawfully entitled to receive the income. In 3M, the taxpayer argued and the Eighth Circuit held that the commensurate with income standard did not apply because Brazilian law limited the royalty the 3M affiliate could pay 3M. The IRS argued that the 1986 commensurate with income amendment to § 482 permitted the allocation. I repeat the text of the commensurate with income standard: “ In the case of any transfer (or license) of intangible property (within the meaning of section 367(d)(4)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.” (Emphasis supplied.)