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March 02, 2023 The Tax Lawyer

Whirlpool Financial Corp. v. Commissioner Was Properly Decided

Vol. 76, No. 2 - Winter 2023

by Philip G. Cohen


This Article focuses on the decisions of the Tax Court and the United States Court of Appeals for the Sixth Circuit in Whirlpool Financial Corp. v. Commissioner, that address the scope of subpart F foreign base company sales income and the branch provision thereunder, and why this writer believes the courts reached the correct outcomes. These are important and controversial opinions which have been subject to criticism (as discussed infra). Both the Tax Court and a divided Sixth Circuit found in favor of the Service, and the Sixth Circuit denied the taxpayer’s ensuing request for a rehearing or rehearing en banc. The Supreme Court subsequently denied a petition for certiorari. Before discussing the courts’ opinions and reasoning, as well as this writer’s thoughts about the decisions, the Sixth Circuit dissent, and certain assertions raised by the parties and amici curiae, it is beneficial to provide the reader with a brief background of the foreign base company sales income regime of section 954(d), as well as the special branch rule contained in section 954(d)(2). It also requires an understanding of the rather complex statutory and regulatory provisions, as well as the convoluted structure, involved here.

Whirlpool undertook a reorganization of its Mexican appliance manufacturing operation with virtually nothing changing on the ground. But through paper shuffling, related party sales income was shifted to a Luxembourg controlled foreign corporation, in this case, the non-branch “remainder.” (A corporation will often conduct a function such as selling, purchasing, or manufacturing as an unincorporated branch. The part of the corporation not operating as a branch is often referred to as “the remainder.”) It was not, however, the questionable substance of Whirlpool’s restructuring that resulted in Whirlpool’s loss in the courts. Instead, Whirlpool properly lost the case because it undertook a practice of separating related party sales income from the manufacturing entity or, to be precise in this case, the manufacturing branch. This was the type of activity Congress meant to be denied deferral. The statute and the Regulations accomplished that intention, and the decisions of the Tax Court and Sixth Circuit reached the correct outcome.

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