IRS Argues Whirlpool Had Foreign Base Company Sales Income

WHIRLPOOL FINANCIAL CORPORATION & CONSOLIDATED SUBSIDIARIES, ET AL.,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

RESPONDENT'S MEMORANDUM IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

SERVED Apr 24 2019

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Judge Albert Lauber

MEMORANDUM IN SUPPORT OF RESPONDENT'S MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO PETITIONERS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

OF COUNSEL:
ROBIN L. GREENHOUSE
Division Counsel
(Large Business & International)
WILLIAM G. MERKLE
Area Counsel
(Large Business & International)
JAMES M. CASCINO
Deputy Area Counsel
(Large Business & International)

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CONTENTS

PRELIMINARY STATEMENT

QUESTIONS PRESENTED

SUMMARY OF FACTS AND GOVERNMENT POSITION

RESPONDENT'S RESPONSES TO PETITIONERS' STATEMENTS OF FACTS

RESPONDENT'S STATEMENT OF UNCONTESTED MATERIAL FACTS

DISCUSSION

CONCLUSION

CITATIONS

Cases

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)

Ashland Oil, Inc, v. Commissioner, 95 T.C. 348 (1990)

Boulware v. United States, 552 U.S. 421 (2008)

Chevron U.S.A., Inc, v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)

Chickasaw Nation v. United States, 534 U.S. 84 (2001)

Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974)

Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554 (1991)

Elec. Arts, Inc, v. Commissioner, 118 T.C. 226 (2002)

FPL Grp., Inc. & Subs, v. Commissioner, 116 T.C. 73 (2001)

Fullenkamp v. Veneman, 383 F.3d 478 (6th Cir. 2004)

Gaughf Properties, L.P, v. Commissioner, 139 T.C. 219 (2012)

King v. Burwell, 135 S. Ct. 2480, 192 L. Ed. 2d 483 (2015)

Mayo Found, for Med. Educ. and Research, 562 U.S. 44 (2011)

Medchem (P.R.), Inc, v. Commissioner, 116 T.C. 308 (2001)

Mohamad v. Palestinian Authority, 566 U.S. 449 (2012)

Rauenhorst v. Commissioner, 119 T.C. 157 (2002)

Robinson v. Commissioner, 119 T.C. 44 (2002)

SIH Partners LLLP v. Commissioner, 150 T.C. No. 3 (2018)

Strick Corp, v. United States, 714 F.2d 1194 (3d Cir. 1983)

Sundstrand Corp, v. Commissioner, 98 T.C. 518 (1992)

Suzy's Zoo v. Commissioner, 114 T.C. 1 (2000)

Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012)

Vetco, Inc, v. Commissioner, 95 T.C. 579 (1990)

Vill. of Barrington v. Surface Transp. Bd., 636 F.3d 650 (D.C. Cir. 2011)

Webber v. Commissioner, 144 T.C. 324 (2015)

Yari v. Commissioner, 143 T.C. 157 (2014)

Statutes

I.R.C. § 936

I.R.C. § 951(a)

I.R.C. § 951(b)

I.R.C. § 952

I.R.C. § 952(a)

I.R.C. § 954(a)

I.R.C. § 954(b)(3)(B)

I.R.C. § 954(b)(4)

I.R.C. § 954(d)

I.R.C. § 954(d)(1)

I.R.C. § 954(d)(2)

I.R.C. § 954(d)(3)

I.R.C. § 954(d)(3)(A)

I.R.C. § 954(d)(3)(B)

I.R.C. § 956

I.R.C. § 957(a)

I.R.C. § 6110(j)(3)

I.R.C. § 7805(a)

Regulations

Treas. Reg. § 1.954-3(a)(4)(i)

Treas. Reg. § 1.954-3(c)

Treas. Reg. § 1.954-1(b)(1)(ii)

Treas. Reg. § 1.954-1(b)(2)

Treas. Reg. § 1.954-1(d)(6)

Treas. Reg. § 1.954-3(a)

Treas. Reg. § 1.954-3(a)(1)

Treas. Reg. § 1.954-3(a)(2)

Treas. Reg. § 1.954-3(a)(3)

Treas. Reg. § 1.954-3(a)(4)

Treas. Reg. § 1.954-3(a)(4)(iii)

Treas. Reg. § 1.954-3(b)

Treas. Reg. § 1.954-3(b)(1)

Treas. Reg. § 1.954-3(b)(1)(ii)

Treas. Reg. § 1.954-3(b)(1)(ii)(a)

Treas. Reg. § 1.954-3(b)(1)(ii)(b)

Treas. Reg. § 1.954-3(b)(2)(i)

Treas. Reg. § 1.954-3(b)(2)(i)(c)

Treas. Reg. § 1.954-3(b)(2)(ii)(a)

Treas. Reg. § 1.954-3(b)(2)(ii)(c)

Treas. Reg. § 1.954-3(c)

Treas. Reg. § 1.954-3(d)

Treas. Reg. § 301.7701-2(a)

Treas. Reg. § 301.7701-3

Treas. Reg. § 301.7701-3(a)

Rules

T.C. Rule 121

T.C. Rule 121(b)

T.C. Rule 121(d)

T.C. Rule 155

Legislation

Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312, § 13239(d)

Revenue Act of 1962, Pub. L. No. 87-834, 76 Stat. 960

Tax Reduction Act of 1975, Pub. L. 94-12, 89 Stat. 26, § 602(b)

Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, §§ 1221(e)(1) and (2)

Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3343, § 1012(i)(14)(A)

Legislative History

108 Cong. Rec. 17751 (1962) (Statement of Sen. Kerr)

108 Cong. Rec. 5320 (1962) (Statement of Rep. Ullman)

H.R. Rep. No. 87-1447, 87th Cong. 2d Sess. (1962)

Message from the President of the United States Relative to our Federal Tax System, H.R. Doc. No. 140, 87th Cong., 1st Sess. 6 (1961)

S. Rep. No. 1881, 87th Cong. 2d Sess. (1962)

Staff of S. Comm, on Finance, 87th Cong., Draft of Statutory Language, with Accompanying Explanation, of the Amendments Proposed by the Secretary of the Treasury on May 10, 1962, to Sections 13, 15, 16, and 20 of H.R. 10650, at 4 (Comm. Print 1962)

Staff of the Joint Committee on International Revenue Taxation, Tax Effects of Conducting Foreign Business Through Foreign Corporations, Appendix C (JCS-5-61) (1961)

Administrative Authorities and Treasury Decisions

73 Fed. Reg. 10716-01, 2008-16 I.R.B. 801 (Feb. 28, 2008)

General Counsel Memoranda 33357 (Oct. 24, 1966)

General Counsel Memoranda 35961 (Aug. 23, 1974)

Rev. Rul. 2004-77, 2004-2 C.B. 119

Rev. Rul. 75-7, 1975-1 C.B. 244

T.D. 6734, 1964-1 C.B. (Part 1) 237, 284; 27 Fed. Reg. 12,759 (12/27/62)

T.D. 9438, 2009-5 I.R.B. 387

Technical Advice Memorandum 8509004

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PRELIMINARY STATEMENT

On February 4, 2019, petitioners moved for partial summary judgment under section 954(d)(1) of the Internal Revenue Code ("Code").¹ On February 22, 2019, petitioners moved for partial summary judgment under section 954(d)(2). Respondent objects to both motions and has filed a motion for summary judgment ("Cross-Motion). Respondent's Cross-Motion seeks summary adjudication that: Whirlpool Overseas Manufacturing S.a.r.l. ("WOM"), a controlled foreign corporation ("CFC") owned by Whirlpool Corporation and organized under the laws of the Grand Duchy of Luxembourg ("Luxembourg"), has foreign base company sales income ("FBCSI") under section 954(d) in the amount of $49,964,080, includible in gross income under section 951(a) of the Whirlpool Corporation and Subsidiaries consolidated group ("Whirlpool") for the tax year ended December 31, 2009; and that respondent did not make the "various computational and related errors" alleged in paragraph 4(e) of each petition in the consolidated dockets. Pursuant to the Court's order dated March 4, 2019, respondent's Cross-Motion, together with a single memorandum in response to petitioners' motions and in support of his Cross-Motion, is due on or before April 23, 2019.

QUESTIONS PRESENTED

The instant motions present the ultimate question whether WOM has $49,964,080 of FBCSI, a category of subpart F income that Whirlpool failed to include in its gross income for the tax year ended December 31, 2009, under section 951(a).

1. Respondent assumes, for purposes of his Cross-Motion, and petitioners have admitted, that WOM manufactured through a branch in the United Mexican States ("Mexico") the products it sold to related parties. The Cross-Motion, and petitioners' motion for partial summary judgment under section 954(d)(2), present the question whether WOM has FBCSI under section 954(d) due to the application of the branch rules of section 954(d)(2) and Treas. Reg. § 1.954-3(b) (the "Branch Rules"). Whether WOM has FBCSI under the Branch Rules will turn on the following subissues :

2. Respondent also seeks summary judgment in his favor on the computational errors issue raised in each petition. Despite numerous requests for elaboration and clarification, respondent has not received information to substantiate petitioners' allegations concerning computational errors, except as concerns WOM's interest income. Thus, this question presents the following sub-issues:

3. The third question presented need only be addressed if the Court denies respondent's Cross-Motion. Petitioners have asserted that WOM is entitled to an exclusion from FBCSI provided only to manufacturers. This question will (if not mooted) also depend upon the resolution of the following subissues:

4. As noted above, petitioners have moved for partial summary judgment under section 954(d)(2). The question presented by that motion concerns the same sub-issues identified in question 1, above.

SUMMARY OF FACTS AND GOVERNMENT POSITION

In 2007, Whirlpool Corporation embarked on a restructuring of its Mexican manufacturing operations in order to obtain "significant tax savings."² The restructuring enabled Whirlpool to create stateless income in 2009 by funneling its sales income from the sale of certain refrigerators and like products and certain laundry washing machines and like products (collectively, the "Products") to a shell company organized in Luxembourg. The Luxembourg taxing authorities did not impose tax on the sales income because Whirlpool obtained a ruling from Luxembourg that WOM's sales income was attributable to a permanent establishment in Mexico, and was therefore not taxable in Luxembourg. The sales income was also exempted from taxation in Mexico because WOM was considered to not have a permanent establishment in Mexico so long as WOM met certain requirements under Maquiladora Program.³

This restructuring brought the transactions at issue directly within the ambit of the FBCSI rules of subpart F. As this Memorandum will demonstrate, WOM's income from the sale of personal property to related persons falls squarely within the definition of FBCSI set forth in section 954(d). A review of Whirlpool's Mexican operations before and after the 2007 restructuring demonstrates that the restructuring created exactly the type of tax haven operation that Congress intended to thwart when it enacted the FBCSI rules. Indeed, Congress' description of the foreign operations that it legislated against when it promulgated section 954(d) is identical to Whirlpool's foreign operations in every way:

The 'foreign base company sales income' referred to here means income from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation. . . .The sales income with which your committee is primarily concerned is income of a selling subsidiary (whether acting as principal or agent) which has been separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income.

S. Rep. No. 1881, 87th Cong. 2d Sess., at 84 (1962) (emphasis added). The formation of WOM and Whirlpool Internacional, S. de R.L. de C.V. ("WIN") resulted in the separation of sales income from manufacturing activities merely to obtain a lower rate of tax for the sales income, without WOM, the selling corporation, adding any appreciable value to the Products. Once the restructuring and separation was complete, Whirlpool had not only obtained a lower rate of tax on WOM's sales income in full violation of section 954(d), but Whirlpool also failed to report taxable income from the sale of the Products in any jurisdiction.⁴

I. Whirlpool's Structure Prior to 2007

Before the 2007 restructuring, Industrias Acros Whirlpool S.A. de C.V. ("IAW"), a company organized under the laws of Mexico and indirectly owned by Whirlpool Corporation, manufactured the Products and sold them to Whirlpool Mexico S.A. de C.V. ("Whirlpool Mexico"). Whirlpool Mexico, a company organized under the laws of Mexico and indirectly owned by Whirlpool Corporation, purchased IAW's production for sale to Maytag Sales, Inc. and to Whirlpool Corporation (collectively, "Whirlpool U.S."), as well as to unrelated parties in Mexico.

Whirlpool Mexico, IAW, and Comercial Acros Whirlpool S.A. de C.V. ("CAW"), a related Mexican company that provided administrative services to Whirlpool Mexico, filed a consolidated Mexican tax return. Accordingly, IAW reported the income from the sale of the Products to the Mexican tax authorities.

II. Whirlpool's Restructuring

On May 31, 2007, WOM was established under the laws of the Grand Duchy of Luxembourg as a CFC of Whirlpool U.S. On June 1, 2007, WIN was organized under the laws of Mexico and its shareholder subsequently elected for WIN to be treated as an entity disregarded as separate from WOM for U.S. federal income tax purposes, effective on WIN's date of formation.

WOM, WIN, IAW, CAW, Whirlpool Mexico, Maytag Sales, Inc., and Whirlpool Corporation entered into several intercompany agreements in furtherance of the restructuring. Under these agreements, IAW agreed to sell to WOM, and WOM agreed to retain exclusive ownership over, the raw materials, inventory, machinery, component parts, and tools required to manufacture the Products. WIN, which had secured the Mexican government's approval to operate under the Maquiladora Program, agreed to provide manufacturing, assembly, repair and related services to WOM with respect to the Products. In turn, WOM, which held title to the raw materials, work-in-process, and the finished goods inventory, agreed to sell the Products to Whirlpool U.S. and Whirlpool Mexico. Pursuant to these agreements, WOM sold 96.8 percent of the Products to Whirlpool U.S. and 3.2 percent of the Products to Whirlpool Mexico in 2009.

III. Whirlpool's Restructuring Results in FBCSI

After the restructuring, manufacturing activities remained in Mexico but the sales income was now effectively stateless. WOM derived $806,583,921 of gross receipts and $45,231,843 of sales income from its sale of the Products in 2009, but did not pay any income taxes on that sales income to the United States, Mexico, or Luxembourg.⁵ Accordingly, the structure at issue in this case and the resulting deferral of U.S. tax on the income parked in a tax haven subsidiary are the paradigm of the abuses Congress sought to address in enacting the FBCSI regime.

The separation of sales income from manufacturing activities by Whirlpool following the restructuring — and the resulting reporting position that the income from the sale of the Products to Whirlpool U.S. and Whirlpool Mexico is taxable nowhere — finds no basis in the Code, the Treasury Regulations, or the legislative history of subpart F. As fully explained in the discussion below, WOM's sales income is FBCSI pursuant to section 954(d).

IV. All of WOM's Income Is Subpart F Income

Petitioners have not identified any specific computational errors with respect to either docket. Their allegations of error remain unsupported, with the exception of vague assertions regarding interest income. For the reasons discussed herein, all of WOM's interest income is subpart F income pursuant to the full inclusion rule.

RESPONDENT'S RESPONSES TO PETITIONERS' STATEMENTS OF FACTS

Petitioners did not set forth the statements of fact in their briefs in numbered paragraphs. To the extent respondent disagrees with statements of fact set forth in petitioners' briefs, respondent generally addresses those statements in the relevant argument sections, below. The absence of a response is not intended to be, and should not be construed as, a concession of any factual issue.

RESPONDENT'S STATEMENT OF UNCONTESTED MATERIAL FACTS

I. Preliminary Matters

1. Whirlpool Financial Corporation is a corporation organized under the laws of the State of Delaware. See Petition, Docket No. 13986-17 at § 1.

2. Whirlpool Corporation is a publicly held entity and directly owns one hundred (100) percent of the stock of Whirlpool Financial Corporation. See Ownership Disclosure Statement to Docket No. 13986-17.

3. Whirlpool International Holdings, S.a.r.l. is a corporation organized under the laws of Luxembourg. See Petition to Docket No. 13987-17 at § 1.

4. Whirlpool Corporation indirectly owns one hundred (100) percent of the stock of Whirlpool International Holdings, S.a.r.l. See Ownership Disclosure Statement to Docket No. 13987-17.

5. Prior to December 31, 2010, Whirlpool International Holdings, S.a.r.l. was known as Maytag Corporation, which was a corporation organized under the laws of the State of Delaware. See Petition to Docket No. 13987-17 at § 1.

II. Prior Structure: Relevant Entities and Intercompany Transactions

6. The following chart depicts the form and organizational structure of petitioners' intercompany transactions in Mexico related to the sale of the Products prior to the occurrence of the intercompany transactions at issue:

7. As of April 2006, Whirlpool Corporation directly and indirectly owned one hundred (100) percent of the shares of Whirlpool Mexico. See Declaration of Michael S. Kramarz ("Kramarz Declaration") at § 6, Attachment 1, Response to Request 7.c., p. 4.

8. As of April 2006, Whirlpool Mexico and CAW owned 28.86 percent and 73.14 percent, respectively, of the shares of IAW. See Kramarz Declaration at § 7, Attachment 2 at WP021269.

9. As of April 2006, Whirlpool Mexico and IAW owned 99.9999995 percent and 0.0000005 percent, respectively, of the shares of CAW. See Kramarz Declaration at § 7, Attachment 2 at WP021269.

10. From August 2005 through February 2008, IAW owned the land, buildings, and equipment and employed the individuals used to manufacture horizontal-axis washing machines and similar products at the manufacturing facility located in Apodaca, State of Nuevo Leon, Mexico (the "Horizon Facility"). See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.C., p. 4; see also Petition to Docket No. 13896-17 at § 5.a.15.

11. From August 2005 through February 2008, IAW sold to Whirlpool Mexico the horizontal-axis washing machines and similar products that were manufactured at the Horizon Facility, which Whirlpool Mexico then sold to Whirlpool U.S. and unrelated third parties in Mexico. See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.c., p. 4.

12. From April 2006 through July 2007, IAW owned the land, buildings, and equipment and employed the individuals used to manufacture side-by-side refrigerators and similar products at the manufacturing facility located in Ramos Arizpe, State of Coahuila, Mexico (the "Ramos Facility"). See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.C., p. 4.

13. From April 2006 through July 2007, IAW sold to Whirlpool Mexico the side-by-side refrigerators and similar products that were manufactured at the Ramos Facility, which Whirlpool Mexico then sold to Whirlpool U.S. and unrelated third parties in Mexico. See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.C., p. 5.

14. From August 2005 through February 2008, CAW provided administrative services to Whirlpool Mexico. See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.C., p. 5.

III. The 2007 Reorganization

15. The following chart depicts the form and organizational structure of Whirlpool's Mexican operations in 2009 with respect to the transactions at issue:

A. WOM

16. On May 31, 2007, WOM was established under the laws of Luxembourg. See Kramarz Declaration at § 6, Attachment 1, Response to Request 7.f.l.a., p. 10.

17. At the time of its establishment, and during 2009, WOM's registered office was located at 50 Val Fleuri, L-1526 Luxembourg. See Kramarz Declaration at § 8, Attachment 3 at JIT850 000046.

18. Upon its establishment on May 31, 2007, WOM was wholly owned by Whirlpool America Holdings Corporation. See Kramarz Declaration at § 8, Attachment 3 at JIT850 000046.

19. On July 13, 2007, Whirlpool Corporation sold Whirlpool NAR Holdings, LLC ("NAR") to WOM in consideration of $2,000. See Kramarz Declaration at § 10, Attachment 5 at JIT850F 00002.

20. On August 1, 2007, Whirlpool America Holdings Corporation sold its entire interest in WOM to Whirlpool Luxembourg S.a.r.l. ("Whirlpool Luxembourg") in consideration of $20,000. See Kramarz Declaration § 10, Attachment 5 at JIT850F 00002.

B. WIN

21. On June 1, 2007, WIN was organized under the laws of Mexico. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

22. Upon its organization on June 1, 2007, WIN's stated minimum shareholder equity was 3,000 Mexican Pesos represented by two (2) company shares, which were held by Whirlpool America Holdings Corporation (value of 2,999 Mexican Pesos) and NAR (value of 1 Mexican Peso). See Kramarz Declaration at ¶ 12, Attachment 7 at WP010374.

23. Effective June 1, 2007, WIN's shareholder elected for WIN to be treated as a disregarded entity of Whirlpool America Holdings Corporation pursuant to Treas. Reg. §§ 301.7701-2(a) and 3(a). See Kramarz Declaration at ¶ 13, Attachment 8.

24. On August 13, 2007, Whirlpool America Holdings Corporation sold its participation in WIN to WOM, in consideration of 2,999 Mexican Pesos (equivalent to $275). See Kramarz Declaration at ¶ 12, Attachment 7 at WP010388.

C. Purposes for Forming WOM and WIN

25. WOM and WIN were formed as part of Whirlpool Corporation's plan to participate in Mexico's "Maquiladora Program" through an authorization from the Mexican government under the Decree to Promote the Manufacturing, Maquila and Services Export Industry (the "IMMEX Decree") with respect to the manufacture of refrigerators and washing machines at the Ramos (refrigerators) and Horizon (washing machines) Facilities. See Kramarz Declaration at 5 14, Attachment 9 at WP033436 - WP033437; Kramarz Declaration at ¶ 15, Attachment 10 at WP033453 - WP033458; Kramarz Declaration ¶ 18, Attachment 13 at WP022718 - WP022719; and Kramarz Declaration at 5 19, Attachment 14 at WP022815.

26. In 2007, as part of its implementation of the Maquiladora Program at the Ramos and Horizon Facilities, Whirlpool Corporation created a step-by-step tax and legal plan for each facility. See Kramarz Declaration at ¶¶ 14 and 15, Attachments 9 and 10.

27. Whirlpool Corporation implemented the Maquiladora Program at the Ramos and Horizon Facilities "for tax purposes" in order to obtain "significant tax savings." See Kramarz Declaration at ¶ 16, Attachment 11 at WP022282; Kramarz Declaration at ¶ 17, Attachment 12 at WP022296; and Kramarz Declaration at ¶ 18, Attachment 13 at WP022718.

28. The expected tax benefits from the formation of WOM and WIN included: (1) reducing global tax on production as a result of the maquiladora regime and Luxembourg tax rules; (2) reduction of Mexican tax as a result of favorable transfer pricing rules and Presidential Decree tax credit; (3) deferral of U.S. taxation on profits earned by WOM; and (4) a lower transfer pricing risk through the utilization of maquiladora guidelines. See Kramarz Declaration at ¶ 18, Attachment 13 at WP022720.

29. Whirlpool Corporation sought to obtain "significant tax savings" by shifting the income from the sale of the Products to a low- or no-tax jurisdiction, in order to create stateless income on the sale of the Products. See Kramarz Declaration at ¶ 15, Attachment 10 at WP033543 (Step 1.5); Kramarz Declaration at ¶ 16, Attachment 11 at WP022282; Kramarz Declaration at ¶ 17, Attachment 12 at WP022296; Kramarz Declaration at ¶ 18, Attachment 13 at WP022718 and WP022720 - WP022721; Kramarz Declaration at ¶ 19, Attachment 14 at WP022821; and Kramarz Declaration at ¶ 20, Attachment 15 at WP022858.

30. On December 19, 2007, WOM obtained a ruling from the Luxembourg Administration des Contributions Directes (the "Luxembourg Direct Tax Administration") regarding the taxation of WOM by Luxembourg (the "Luxembourg Tax Ruling"). See Kramarz Declaration at ¶¶ 9 and 10, Attachments 4 and 5.

31. The Luxembourg Tax Ruling concludes, in part, that WOM's income from the sale of the Products is exempt from Luxembourg's corporate income tax, municipal commercial tax, and the wealth tax. See Kramarz Declaration at ¶¶ 9 and 10, Attachments 4 and 5 at JIT850F 00008 - JIT850F 00009.

IV. Structure and Intercompany Transactions During 2009

A. Ownership of Relevant Entities During 2009

32. In 2009, Whirlpool Corporation and Whirlpool America Holdings Corporation owned 91.36028 percent and 8.63972 percent, respectively, of the shares of Whirlpool Mexico, a company organized under the laws of Mexico. See Kramarz Declaration at ¶ 21, Attachment 16, p. 3.

33. In 2009, Whirlpool Mexico was a controlled foreign corporation ("CFC") for U.S. federal income tax purposes. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7. d., p. 5.

34. In 2009, Whirlpool Mexico and CAW owned 28.86 percent and 73.14 percent, respectively, of the shares of IAW. See Kramarz Declaration at ¶ 21, Attachment 16, p. 3.

35. IAW is a company organized under the laws of Mexico, and in 2009, was a CFC for U.S. federal income tax purposes. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

36. In 2009, Whirlpool Mexico and IAW owned 99.9999995 percent and 0.0000005 percent, respectively, of the shares of CAW. See Kramarz Declaration at ¶ 21, Attachment 16, p. 3.

37. CAW is a company organized under the laws of Mexico, and in 2009, was a CFC for U.S. federal income tax purposes. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

38. In 2009, Whirlpool Corporation owned 100 percent of the shares of 1900 Holdings Corporation, a company organized under the laws of the State of Delaware. See Kramarz Declaration at ¶ 21, Attachment 16, p. 2.

39. In 2009, 1900 Holdings Corporation owned 100 percent of the shares of Whirlpool Holdings Corporation, a company organized under the laws of the State of Delaware. See Kramarz Declaration at ¶ 21, Attachment 16, p. 2.

40. In 2009, Whirlpool Corporation, 1900 Holdings Corporation, and Whirlpool Holdings Corporation owned 21.75 percent, 51.65 percent, and 26.60 percent, respectively, of the shares of KitchenAid Delaware, Inc. See Kramarz Declaration at ¶ 21, Attachment 16, p. 2.

41. In 2009, KitchenAid Delaware, Inc. owned 100 percent of the shares of Whirlpool Luxembourg S.a.r.l. ("Whirlpool Luxembourg"), a company organized under the laws of Luxembourg. See Kramarz Declaration at ¶ 21, Attachment 16, p. 2.

42. In 2009, Whirlpool Luxembourg was a CFC for U.S. federal income tax purposes. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

43. In 2009, Whirlpool Luxembourg owned 100 percent of the shares of WOM. See Kramarz Declaration at ¶ 21, Attachment 16, p. 2.

44. In 2009, WOM was a CFC for U.S. federal income tax purposes. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

45. In 2009, WOM owned 100 percent of the shares of NAR, a company organized under the laws of the State of Delaware, and in 2009, was disregarded as an entity separate from WOM for U.S. federal income tax purposes pursuant to Treas. Reg. §§ 301.7701-2(a) and 3(a). See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

46. In, 2009, WOM and NAR owned 99.97 percent and 0.03 percent, respectively, of the shares of WIN. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

47. In 2009, WIN was disregarded as an entity separate from WOM for U.S. federal income tax purposes pursuant to Treas. Reg. §§ 301.7701-2(a) and 3(a). See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p. 6.

B. Relevant Intercompany Agreements and Transactions in Effect During 2009

48. On August 27, 2007, Whirlpool U.S. and WOM, and Whirlpool Mexico and WOM, entered into two separate Manufacturing Supply Agreements whereby WOM agreed to perform services related to the manufacture and assembly of certain refrigerators in accordance with the contract specifications and other instructions provided by Whirlpool U.S. and Whirlpool Mexico, respectively, and agreed to sell the resulting products to Whirlpool U.S. and Whirlpool Mexico, respectively. See Kramarz Declaration at ¶¶ 22 and 24, Attachments 17 and 19.

49. The Manufacturing Supply Agreements dated August 27, 2007, between Whirlpool U.S. and WOM, and Whirlpool Mexico and WOM, were executed on behalf of WOM by Steven B. Rush in his capacity as a Class A Manager of WOM in the United States or another location outside of Luxembourg, and by Nordine E. Nijar in his capacity as a Class B Manager of WOM in Luxembourg. See Kramarz Declaration at ¶ 26, Attachment 21, Response to Requests 27. g., p. 3, and 29.g., p. 6.

50. On March 1, 2008, Whirlpool U.S. and WOM, and Whirlpool Mexico and WOM, entered into two separate Manufacturing Supply Agreements whereby WOM agreed to perform services related to the manufacture and assembly of certain laundry washing machines and like products in accordance with the contract specifications and other instructions provided by Whirlpool U.S. and Whirlpool Mexico, respectively, and agreed to sell the resulting products to Whirlpool U.S. and Whirlpool Mexico, respectively. See Kramarz Declaration at ¶¶ 23 and 25, Attachments 18 and 20.

51. The Manufacturing Supply Agreements dated March 1, 2008, between Whirlpool U.S. and WOM, and Whirlpool Mexico and WOM, were executed on behalf of WOM by Robert Althoff in his capacity as a Class A Manager of WOM in the United States or another location outside of Luxembourg, and by Nordine E. Nijar in his capacity as a Class B Manager of WOM in Luxembourg. See Kramarz Declaration at I 26, Attachment 21, Response to Requests 28. g., p. 4, and 30.g., pp. 7-8. The Manufacturing Supply Agreements relating to the manufacture and assembly of the refrigerators and the laundry machines and like products are referred to collectively herein as the "Manufacturing Supply Agreements."

52. In July and August 2007, WIN and WOM executed a Manufacturing Assembly Services (IMMEX) Agreement ("Manufacturing Assembly Services Agreement"), which states that "[WIN] covenants and agrees to contract, exclusively with [WOM] for the assembly, manufacture, repair, finishing, packaging, warehousing, distribution, rework and/or refurbishing (hereinafter referred to as 'IMMEX Services') of refrigerators or like products under the terms and conditions hereinafter mentioned, as [WOM] may wish to produce in a manufacturing facility located in Ramos Arizpe, State of Coahuila, Mexico (the 'Ramos Facility')." See Kramarz Declaration at 5 29, Attachment 24.

53. On March 1, 2008, WIN and WOM entered into an Manufacturing Assembly Services (IMMEX) Agreement, which states that "WIN covenants and agrees to contract with WOM, for the assembly, manufacture, repair, finishing, packaging, warehousing, distribution, rework and/or refurbishing hereinafter referred to as the 'IMMEX Services') of [laundry washing machines or like products] under the terms and conditions hereinafter mentioned, as WOM may wish to produce in a manufacturing facility located at Apodaca, State of Nuevo Leon, Mexico (the 'Apodaca Facility')."⁶ See Kramarz Declaration at ¶ 30, Attachment 25. The Manufacturing Assembly Services (IMMEX) Agreement referenced in this and the prior paragraph are collectively referred to as the "Manufacturing Assembly Services Agreements."

54. On August 22, 2007, WOM and IAW entered into an Asset Purchase Agreement, under which IAW agreed to sell assets from the Ramos Facility to WOM, including equipment, machinery, tools, inventories of raw materials, office furniture, and infrastructure supporting the production of refrigerators and like products. See Kramarz Declaration at ¶ 31, Attachment 26.

55. On August 22, 2007, WIN and IAW entered into an Asset Purchase Agreement, under which IAW agreed to sell to WIN certain goods and materials located at the Ramos Facility referred to as "indirect products" (e.g., hand tools and spare parts) supporting the production of refrigerators and like products. See Kramarz Declaration at ¶ 32, Attachment 27.

56. On December 27, 2007, WOM and IAW entered into an Asset Purchase Agreement, under which IAW agreed to sell assets from the Horizon Facility to WOM, including equipment, machinery, tools, inventories of raw materials, office furniture, and infrastructure supporting the production of laundry washing machines and like products. See Kramarz Declaration at ¶ 33, Attachment 28.

57. On March 1, 2008, WOM and IAW entered into Amendment 1 to the December 27, 2007 Asset Purchase Agreement, under which IAW agreed to sell the "Additional Assets" located at the Horizon Facility identified in Exhibit A to WOM on the same terms and conditions as the December 27, 2007 Asset Purchase Agreement between WOM and IAW. See Kramarz Declaration at ¶ 34, Attachment 29.

58. On March 1, 2008, WIN and IAW entered into an Asset Purchase Agreement, under which IAW agreed to sell to WIN certain goods and materials located at the Horizon Facility referred to as "indirect products" supporting the production of laundry washing machines and like products. See Kramarz Declaration at ¶ 35, Attachment 30. The Asset Purchase Agreements referenced in this paragraph and the prior four paragraphs are referred to collectively herein as the "Asset Purchase Agreements."

59. On June 20, 2007, WIN and IAW entered into a Lease Agreement in which IAW as "LANDLORD" agreed to lease to WIN as "TENANT" the temporary use and enjoyment of the Ramos Facility. See Kramarz Declaration at ¶ 38, Attachment 33.

60. On March 1, 2008, WIN and IAW entered into a Building Lease Agreement in which IAW as "Landlord," agreed to lease to WIN as "Tenant," the temporary use and enjoyment of the Horizon Facility. See Kramarz Declaration at ¶ 39, Attachment 34. The Building Lease Agreement referenced in this paragraph, and the Lease Agreement referenced, in the prior paragraph, are referred to collectively herein as the "Lease Agreements."

61. On October 1, 2008, WIN entered into "Secondment Agreements" with IAW and with CAW. Under the Secondment Agreements, IAW and CAW each "agree[d] to make available personnel to WIN under secondment." See Kramarz Declaration at ¶¶ 40 and 42, Attachments 35 and 37.

62. The Secondment Agreements include the following provisions:

See Kramarz Declaration at 55 40 and 42, Attachments 35 and 37.

63. On June 29, 2007 and March 1, 2008, respectively, WIN and IAW entered into Employee Services Agreements pursuant to which IAW agreed to render services to WIN with its own personnel for the manufacture of refrigerators and like products at the Ramos Facility, and for the manufacture of laundry washing machines and like products at the Horizon Facility. See Kramarz Declaration at 15 43 and 44, Attachments 38 and 39.

64. The Employee Services Agreements include the following provisions (in the June 29, 2007 Employee Services Agreement, WIN is referred to as "Company" and IAW is referred to as "Provider"):

65. On June 21, 2007, and March 1, 2008, WIN and CAW entered into agreements ("Contratos de Prestación de Servicios" or "Administrative Services Agreements"), pursuant to which CAW agreed to provide administrative services to WIN with respect to the Ramos and Horizon Facilities. See Kramarz Declaration at ¶¶ 45-48, Attachments 40-43.

66. The Administrative Services Agreements state that "CAW hereby states that the employees, advisers, consultants, and third-party professionals that it subcontracts will be dependent exclusively upon CAW, which is the employer of these persons." See Kramarz Declaration at ¶¶ 45-48, Attachments 40-43, Third Clause.

67. The Administrative Services Agreements do not state that CAW's employees would be leased to WIN. See Kramarz Declaration at ¶¶ 45-48, Attachments 40-43.

68. On July 13, 2007, the WOM Board of Managers, meeting in Luxembourg, resolved and authorized the following: (1) ratification of the August 27, 2007 Manufacturing Supply Agreements between WOM and Whirlpool U.S. and Whirlpool Mexico for the sale of refrigerators by WOM to Whirlpool U.S. and Whirlpool Mexico; (2) ratification of the July and August 2007 Manufacturing Assembly Services Agreement between WOM and WIN for the provision of manufacturing services at the Ramos Facility; and (3) ratification of the August 22, 2007 Asset Purchase Agreement between WOM and IAW for the purchase of certain assets at the Ramos Facility. See Kramarz Declaration at ¶ 49, Attachment 44.

69. On June 12, 2008, the WOM Board of Managers, meeting in Luxembourg, resolved and authorized the following: (1) ratification of the December 27, 2007 Asset Purchase Agreement between WOM and IAW for the purchase of certain assets at the Horizon Facility; (2) ratification of the March 1, 2008 Manufacturing Supply Agreements between WOM and Whirlpool U.S. and Whirlpool Mexico for the sale of washing machines by WOM to Whirlpool U.S. and Whirlpool Mexico; and (3) ratification of the March 1, 2008 Manufacturing Assembly Services Agreement between WOM and WIN for the provision of manufacturing services at the Horizon Facility. See Kramarz Declaration at Î 50, Attachment 45.

70. In 2007, 2008, and 2009, WOM's Board of Managers was comprised of Robert Althoff, Steven Rush and John Sweeney as Class A Managers, and Romain Thillens and Nour-Eddin Nijar as Class B Managers. See Kramarz Declaration at M 49 and 50, Attachments 44 and 45; Kramarz Declaration at ¶ 51, Attachment 46, Response to Request 54.b.i., p. 30.

71. The Manufacturing Supply Agreements, Manufacturing Assembly Services Agreements, Asset Purchase Agreements, Lease Agreements, Secondment Agreements, Employee Services Agreements, and Administrative Services Agreements were in effect during 2009.

C. Mexico's Maquiladora Program

72. As used, in this Memorandum, the "Maquiladora Program" refers to the combination of customs and other tax benefits granted by Mexico under the Decree to Promote the Manufacturing, Maquila and Services Export Industry (the "IMMEX Decree") and the Mexican income tax law. See Bendiksen Affidavit at 14 through 18.

73. Generally, Mexico's Maquiladora Program includes, but is not limited to, a combination of customs and tax incentives and other policies designed to attract manufacturing activities to Mexico and to increase the competitiveness of the Mexican export sector. See Petitioners' Motion for Partial Summary Judgment Under Section 954(d)(1), Exhibit A, Request 29, pp. 22-23; see also Bendiksen Affidavit at ¶ 14.

74. Originally, the sole purpose of Mexico's Maquiladora Program was to create job opportunities along the border between Mexico and the United States. Historically, the Maquiladora Program benefited from the physical proximity of U.S. companies to produce or assemble products with temporarily imported materials to re-export to the United States. Currently, and in 2009, maquiladoras were established throughout Mexico (not only close to the U.S. border), performing maquila services transactions with their related parties abroad, which are located in countries with which Mexico has signed a double taxation treaty. See Kramarz Declaration at ¶¶ 58 through 60, Attachments 53 through 55.

75. On November 1, 2006, the Mexican Ministry of Economy published the IMMEX Decree in the Federal Official Gazette of Mexico. The IMMEX Decree was in effect during 2009 and embodies the customs and other benefits of the Maquiladora Program. See Bendiksen Affidavit at ¶ 17.

76. In addition to the benefits granted maquiladoras under the IMMEX Decree, in 2009, maquiladoras were subject to a reduced rate of taxation pursuant to Article Eleventh of the Presidential Decree published in the Federal Official Gazette of Mexico on October 30, 2003, and Article Fifth of the Presidential Decree published in the Federal Official Gazette of Mexico on November 5, 2007. See Bendiksen Affidavit at ¶ 18.

77. Under the Maquiladora Program as in effect in 2009, a maquiladora manufactured products from raw materials and components owned and furnished by its foreign principal; at all times, the foreign principal retained title to the raw materials, work-in-process inventory, and the finished goods inventory. See Kramarz Declaration at ¶¶ 58 through 60, Attachments 53 through 55; see also Bendiksen Affidavit at 5 15.

78. In order for the foreign principal to obtain the income tax benefits under the Maquiladora Program as in effect in 2009, after the maquiladora manufactured the products, the foreign principal, and not the maquiladora (or any other Mexican entity or branch), was the entity required to sell the finished products. See Kramarz Declaration at ¶¶ 58 through 60, Attachments 53 through 55.

79. On July 20, 2007, the Mexican government granted WIN an authorization under the "Maquiladora Program" with respect to the manufacture of refrigerators and like products at the Ramos Facility. See Kramarz Declaration at ¶¶ 52 and 53, Attachments 47 and 48.

80. On November 14, 2007, WIN submitted an application to the Mexican Secretary of the Economy, Undersecretary of Development, requesting the expansion of the Maquiladora Program to the Horizon Facility for the manufacture of washing machines, which was ultimately granted by Mexico. See Kramarz Declaration at ¶¶ 54 and 55, Attachments 49 and 50.

D. Operations in 2009

i. Purchasing, Manufacturing, and Sales

81. In 2009, WOM purchased the raw materials, supplies, and components used in the manufacture of the Products at the Ramos (refrigerators) and Horizon (washing machines) Facilities using blanket purchase orders that set out the terms of purchase with each supplier. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 1, p. 1; Kramarz Declaration at ¶ 61, Attachment 56.

82. In 2009, the raw materials, supplies, and components purchased by WOM were delivered by suppliers directly to the Ramos and Horizon Facilities. The blanket purchase orders and invoices for raw materials, supplies, and components state that WOM is the purchaser, using its registered address and tax identification number in Luxembourg, with invoices to be sent to WOM's Luxembourg address. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 1, p. 1; Kramarz Declaration at ¶¶ 61 and 62, Attachments 56 and 57.

83. In 2009, WOM retained legal title to the raw materials, supplies, and components required to manufacture the Products at the Ramos and Horizon Facilities throughout the manufacturing process. See Petition to Docket No. 13986-17 at ¶ 5. a. 2 9.

84. In 2009, WOM owned all work-in-process inventory related to the Products throughout the manufacturing process at the Ramos and Horizon Facilities. See Petition to Docket No. 13986-17 at ¶ 5.a.30.

85. In 2009, the Products that WOM sold to Whirlpool U.S. and Whirlpool Mexico were manufactured in Mexico at the Ramos and Horizon Facilities. See Petition to Docket No. 13986-17 at ¶¶ 5.a.34 and 5.a.35.

86. In 2009, IAW owned the land and buildings used in the manufacturing process at the Horizon and Ramos Facilities. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.d., p.7.

87. In 2009, pursuant to the Manufacturing Supply Agreements:

88. In 2009, Customs Forms 7501, commercial invoices, and other supporting documents (collectively, "customs documents") were prepared with respect to the Products sold by WOM to Whirlpool U.S. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 1, p. 2; Kramarz Declaration at ¶ 63, Attachment 58.

89. In 2009, the customs documents:

90. According to petitioners, in 2009, with respect to the Products WOM sold to Whirlpool U.S. and Whirlpool Mexico, WOM undertook no sales activities in either Luxembourg or Mexico. See Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 187, p. 14.

91. According to a Management Report of the Managers of WOM for the years 2008 and 2009, WOM outsourced its sales function to an (unidentified) affiliated company. See Kramarz Declaration at ¶ 84, Attachment 79 at WP022037.

92. According to a 2009 Transfer Pricing Study prepared for WIN to evaluate intercompany transactions under the Mexican Income Tax Law, in 2009, WIN did not perform any sales activities with respect to the Products because WOM was WIN's only client. All functions of distribution, marketing, sale, logistics, and after-sale services with respect to the Products were the responsibility of WOM. See Kramarz Declaration ¶ 64, Attachment 59 at WP023886 and WP023887.

93. In 2009, Whirlpool Corporation and Maytag Sales, Inc. each were a "related person" with respect to WOM as defined by section 954 (d) (3). See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 4, p. 5.

94. In 2009, Whirlpool Mexico was a "related person" with respect to WOM as defined by section 954(d)(3). See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 5, pp. 5-6.

95. In 2009, Whirlpool Corporation was a "United States shareholder" of WOM as defined by section 951(b). See Kramarz Declaration at ¶ 21, Attachment 16; Kramarz Declaration at ¶ 28, Attachment 23 (Whirlpool Corporation identified itself as a Category 4 and a Category 5 Filer on the 2009 Form 5471 it filed on behalf of WOM).

96. In 2009, the Products WOM sold to Whirlpool U.S. and Whirlpool Mexico were sold for use outside of Luxembourg. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 6, p. 6.

97. In 2009, the Products WOM sold to Whirlpool U.S. and Whirlpool Mexico were manufactured outside of Luxembourg. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 7, p. 6.

98. In 2009, WOM's Form 5471 reported $806,583,921 of "gross receipts or sales" from its sale of the Products to Whirlpool U.S. and Whirlpool Mexico. See Kramarz Declaration at ¶ 28, Attachment 23.

ii. Personnel

99. In 2009, the Products were manufactured at the Ramos and Horizon Facilities using personnel supplied by IAW pursuant to a Secondment Agreement and the Employee Services Agreements. See Kramarz Declaration at ¶¶ 40, 43 and 44, Attachments 35, 38 and 39.

100. In 2009, pursuant to a Secondment Agreement and the Administrative Services Agreements, CAW supplied personnel to perform administrative services with respect to the Products manufactured at the Ramos and Horizon Facilities. See Kramarz Declaration at ¶¶ 42, and 45 through 48, Attachments 37, and 40 through 43.

101. For the period January 1, 2009 through December 31, 2009, pursuant to the Secondment Agreement between IAW and WIN, the following individuals were "seconded" by IAW to WIN:

Name	Position Description
Juan Enrique Sanchez Mares	Plant Manager, Horizon
Israel Urbano Salazar and Arturo Martinez Anderson	Materials Managers, Horizon
Victor Israel Raudry Guevara	Quality Controls Manager, Horizon
Enrique Lozano Martinez	Plant Manager, Ramos
Carlos Julio Aleman Lopez and Marco Gonzalez	Materials Managers, Ramos
Enoc Bareno Ramos	Quality Controls Manager, Ramos

See Kramarz Declaration at ¶ 41, Attachment 36, Response to Request 9, p. 12.

102. For the period January 1, 2009 through December 31, 2009, pursuant to the Secondment Agreement between CAW and WIN, the following individuals were "seconded" by CAW to WIN:

Name	Position Description
Fernán Gonzalez Garza	Plant Controller, Horizon
Julio Cesar Naranjo	Plant Controller, Ramos

See Kramarz Declaration at ¶ 41, Attachment 36, Response to Request 9, p. 12.

103. In 2009, the personnel supplied by IAW pursuant to the Employee Services Agreements to manufacture the Products at the Ramos and Horizon Facilities, and the personnel supplied by CAW pursuant to the Administrative Services Agreements, ultimately reported to the Operations Manager, Quality Control Manager, Materials Manager, Human Resources Manager, Manufacturing Engineering Manager, WP Operations Manager, and Controller at the Ramos and Horizon Facilities. See Kramarz Declaration at ¶ 26, Attachment 21, Response to Requests 56 through 59, pp. 11-15; Kramarz Declaration at ¶¶ 67 through 70, Attachments 62 through 65.

104. In 2009, the Operations Manager, Quality Control Manager, Materials Manager, Human Resources Manager, Manufacturing Engineering Manager, WP Operations Manager, and Controller reported to the respective Plant Manager of each Facility. See Kramarz Declaration at ¶ 26, Attachment 21, Response to Requests 56 through 59, pp. 11-15; Kramarz Declaration at ¶ 67, Attachment 62.

105. In 2009, the Plant Managers at the Ramos and Horizon Facilities reported to IAW's Vice President of Manufacturing, Technology and Procurement. See Kramarz Declaration at ¶ 71, Attachment 66; Kramarz Declaration at ¶ 26, Attachment 21, Response to Request 56, pp. 11-12.

106. In 2009, WIN did not have any employees. See Kramarz Declaration ¶ 73, Attachment 68 at WP033492.

107. In 2008 and 2009, WOM had a single, part-time employee (Nour Eddine "Nordine" Nijar) located in Luxembourg who performed nominal activities (limited general accounting and administrative functions) in his capacity as an employee of WOM. See Petitioners' Motion for Partial Summary Judgment Under Section 954(d)(2), Exhibit A, Response to Request 102.

108. In 2009, tasks performed by Nordine Nijar in his capacity as an employee of WOM included: (i) the payment of rent and other invoices related to telephone and utilities for the Luxembourg office; (ii) the payment of tax expenses for social security and payroll for WOM's single, part-time employee; and (iii) other back-office functions relating to the Luxembourg office. See Petitioners' Motion for Partial Summary Judgment Under Section 954(d)(2), Exhibit A, Response to Request 103.

109. In 2009, in addition to serving as a part-time employee for WOM, Nordine Nijar was a Class B Manager of WOM and served on its Board of Directors. See Kramarz Declaration at ¶ 51, Attachment 46, Response to Request 54.b.i., p. 30.

110. In his Fourth Request for Production of Documents, respondent requested petitioner to produce copies of all written directions, performance reviews, and/or communications made during 2009 from WOM to any person seconded by IAW to WIN, and CAW to WIN, pursuant to the Secondment Agreements. See Requests 104 and 105. With respect to the "written communications" and "directions," petitioners produced none of the requested documents, and in Petitioners' Response to Respondent's Motion to Compel Responses to Respondent's Fourth Request for Production of Documents, petitioners objected to the production of the "communications" and "directions" on the grounds that the request for these documents is overly broad and unduly burdensome. See Petitioners' Response to Respondent's Motion to Compel Responses to Respondent's Fourth Request for Production of Documents at ¶¶ 17 and 18, pp. 37-40.

V. Applicable Tax Considerations in Luxembourg and Mexico

A. Luxembourg Tax Filings

111. On January 29, 2013, the Luxembourg Administration des Contributions Directes (the "Luxembourg Direct Tax Administration") received WOM's Corporate Income Tax Return, Municipal Business Tax Return, Net Worth Tax Return as of January 1, 2010, Determination of the Unitary Value as of January 1, 2010, and appendices, for its 2009 taxable year. WOM's 2009 Luxembourg Corporate Income Tax Return and Municipal Business Tax Return were due by May 31, 2010. See Kramarz Declaration at ¶¶ 74 and 75, Attachments 69 and 70.

112. On or about November 30, 2016, WOM presented to the Luxembourg Direct Tax Administration WOM's amended Corporate Income Tax Return, amended Municipal Business Tax Return, and amended Net Worth Tax Return as of January 1, 2009 (collectively, the "2009 Luxembourg Amended Returns"), for its 2009 taxable year. See Kramarz Declaration at ¶¶ 76 and 77, Attachments 71 and 72; see also Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 143, pp. 3-4.

113. WOM's 2009 Luxembourg Amended Returns reported additional income of $5,286,265, and included the following explanation: "Interest income on receivables allocated to the head office (Initially incorrectly allocated to the Mexican permanent establishment)." See Kramarz Declaration at ¶ 76, Attachment 71 at JIT850F 000028.

114. On or about March 30, 2017, WOM submitted to the Luxembourg Direct Tax Administration WOM's Corporate Income Tax Return, Municipal Business Tax Return, Net Worth Tax Return as of January 1, 2016, Determination of the Unitary Value as of January 1, 2016, and appendices (collectively, the "2015 Luxembourg Returns"), for its 2015 taxable year. See Kramarz Declaration at ¶ 78, Attachment 73; Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 143, pp. 3-4.

115. WOM's 2015 Luxembourg Returns reported an "[a]djustment for interest income to be allocated to the Luxembourg head office for the period 2007-2011," in the amount of $9,861,792, which includes the $5,286,265 reported on WOM's 2009 Luxembourg Amended Returns. The Luxembourg Direct Tax Administration requested that WOM report the additional interest income on its 2015 Luxembourg Returns as opposed to filing the 2009 Luxembourg Amended Returns previously presented to the Luxembourg Direct Tax Administration. See Kramarz Declaration at ¶ 78, Attachment 73 at WP022911; Kramarz Declaration ¶ 66, Attachment 61, Response to Request 143, pp. 3-4.

116. A 2016 memorandum to the International Tax File of the Whirlpool Corporation's Tax Department states that "[s]tarting from 2007, WOM has intercompany loan receivables," and that "WOM has not included the intercompany receivables or the interest associated with them in its Luxembourg tax returns based on the position that these receivables and the interest income thereon are economically attributable to the Mexico Maquiladora activities and thus not subject to Luxembourg tax." The 2016 memorandum also states that "[a]t the end of 2014, the Company identified certain interest income associated with a number of WOM's intercompany receivables that could potentially be taxable in Luxembourg," and concludes that "WOM's intercompany loan receivables may not be considered as economically attributable to the Mex PE due to the Mexican rules under which Maquiladoras generally are not allowed to grant loans or similar financing instruments, and should therefore not benefit from the aforementioned Luxembourg tax exemption of assets and income that are attributable to the Mex PE per the [income tax treaty between Luxembourg and Mexico]." See Kramarz Declaration at ¶ 79, Attachment 74 at WP022955 - WP022956.

117. With respect to its 2009 taxable year, WOM did not pay any tax to Luxembourg on the income from its sales of the Products to Whirlpool U.S. and Whirlpool Mexico. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 11.

118. WIN did not file a Luxembourg income tax return in 2009, and did not pay any income tax to Luxembourg for 2009. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Requests 13 and 14.

B. Applicable Luxembourg Law

119. In 2009, the aggregate income tax rate applicable in Luxembourg to a company with Luxembourg corporate taxable income exceeding €15,000 was 28.59 percent, which is comprised of a 21 percent corporate income tax, 6.75 percent municipal business tax, and a 0.84 percent net wealth tax. See Kramarz Declaration at ¶ 80, Attachment 75.

C. Mexican Tax Filings

120. In 2009, WOM did not file an income tax return with Mexico, or pay any income tax to Mexico on its sale of the Products. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.f.5.A., p. 15; Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 15.

121. On August 16, 2010, WIN filed its 2009 Mexican income tax return with Mexico's Servicio de Administración Tributaria ("SAT"). See Kramarz Declaration at ¶¶ 81 and 82, Attachments 76 and 77.

122. For its 2009 tax year, WIN's 2009 Mexican income tax liability was 3,307,578 pesos. See Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 173; Kramarz Declaration at ¶ 82, Attachment 77 at JIT101S 000028.

123. On the 2009 Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities, filed by Whirlpool Corporation on behalf of WIN, Schedule C reports "other adjustments" in the amount of $1,796,232. See Kramarz Declaration at ¶ 83, Attachment 78.

124. On the 2009 Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, filed by Whirlpool Corporation on behalf of WOM, Schedule E reports $1,796,232 of income, war profits, and excess profit taxes paid or accrued to Mexico. See Kramarz Declaration at ¶ 28, Attachment 23.

125. In 2009, the $1,796,232 of income, war profits, and excess profit taxes paid or accrued to Mexico with respect to WIN's income is not attributable to the sales income from the sale of the Products. See supra ¶¶ 123 and 124.

D. Applicable Mexican Law

126. In 2018, respondent received information from Mexico's SAT regarding the applicable Mexican law. Specifically, with respect to 2009, Mexico's SAT confirmed that:

a. The Ley del Impuesto Sobre la Renta ("ISR") provided that if a foreign corporation that owned a maquiladora ("Foreign Principal") met all applicable requirements, and the maquila was operated within the Maquiladora Program's guidelines, including the Foreign Principal owning the inventory (raw materials, work-in-process and finished products manufactured by the maquiladora), the Foreign Principal did not have a permanent establishment in Mexico. See ISR, Article 2, eighth paragraph; Article 216-bis, first paragraph; see also Bendiksen Affidavit at ¶¶ 20.

b. Generally, under the Maquiladora Program, the Foreign Principal, and not the maquiladora (nor any other Mexican entity or branch), was the entity that sold the finished products and the finished products were sold with ownership passing outside of Mexico from the Foreign Principal to the buyer. See Bendiksen Affidavit at ¶ 15.

c. Under the Maquiladora Program, the Foreign Principal did not recognize taxable income in Mexico because the Foreign Principal did not have a permanent establishment in Mexico. See ISR Article 1; Article 2, eighth paragraph; see also Bendiksen Affidavit at 111 20 and 21.

d. If a Foreign Principal did not have a permanent establishment in Mexico because it complied with all applicable requirements, and because the maquila was operated within the Maquiladora Program's guidelines, the fact that the Foreign Principal did not have a permanent establishment applied only to specified maquiladora (manufacturing-related) activities, and did not apply to any income from sales of manufactured products if ownership of the products passed in Mexico. See ISR Article 1; Article 2, eighth paragraph; Article 216-bis, last paragraph; see also Bendiksen Affidavit at ¶ 22.

e. Prior to 2014, maquiladoras were permitted to sell inventory, but the maquiladoras' sales of inventory were not entitled to the benefits of the Maquiladora Program and were subject to Mexico's general tax regime. See ISR Article 1; Article 2, eighth paragraph; Article 216-bis, last paragraph; see also Bendiksen Affidavit at ¶ 23.

See Kramarz Declaration at ¶¶ 58 through 60, Attachments 53 through 55, Response to Inquiry 1.

127. Mexico's SAT also confirmed that with respect to 2009:

a. Under Mexican law, the treaties Mexico had with Luxembourg and the United States did not override the statements, rules, and conclusions contained in the preceding paragraph. See id., Response to Inquiry 2.

b. If a Mexican corporation (whether or not a maquiladora) owned by a foreign corporation was located in Mexico, and regularly performed sales functions in Mexico, the income related to these sales would have been taxable in Mexico at a rate of 28 percent under Articles 1 and 2 of the Mexican Income Tax Law ("MITL") or 17 percent under a flat tax similar to the Alternative Minimum Tax, the Ley del Impuesto Empresarial a Tasa Unica ("MIEUTUL"). See id., Response to Inquiry 4.a.; see also Bendiksen Affidavit at ¶ 24.

c. If a branch of a foreign corporation was located in Mexico and regularly performed sales functions in Mexico,the income related, to those sales would have been taxable in Mexico at a rate of 28 percent under Articles 1 and 2 of the MITL. See id., Response to Inquiry 4.b.; see also Bendiksen Affidavit at ¶ 25.

d. A 28 percent income tax rate would apply to Mexico-source sales income earned by a foreign corporation through a Mexican permanent establishment. See id. Response to Inquiry 5; see also Bendiksen Affidavit at ¶ 26.

e. A 28 percent income tax rate and 17 percent flat tax would apply to the sales income of Company X under the following scenarios: Company X was formed under Mexican law as a sociedad anonima (S.A.), sociedad anonima de capital variable (S.A. de C.V.), sociedad de responsibilidad limitada (S. de R.L.) or sociedad de responsibilidad limitada de capital variable (S. de R.L. de C.V.); Company X was owned by a foreign company; Company X was managed and controlled in Mexico; Company X conducted business in Mexico of manufacturing and selling products through a permanent establishment in Mexico to which all of Company X's income was allocable; Company X purchased the raw materials for the products from unrelated persons; Company X owned during the manufacturing process the raw materials, work-in-process and finished goods Company X manufactured; and Company X sold the products manufactured in Mexico to a related company in the United States and/or Mexico, with ownership of the products passing in Mexico. See id., Response to Inquiry 6; see also Bendiksen Affidavit at ¶ 27.

VI. Stateless Income

128. For 2009, after the 2007 reorganization, Whirlpool took the position that WOM's sales income was not taxable in any relevant jurisdiction. Specifically, with respect to WOM's sales of the Products, Whirlpool took the reporting positions detailed in the following paragraphs.

129. In 2009, WOM did not file an income tax return in Mexico or pay any income tax in Mexico on its sales of the Products to Whirlpool U.S. and Whirlpool Mexico. See Kramarz Declaration at ¶ 6, Attachment 1, Response to Request 7.f.5.A., p. 15; Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 15.

130. For 2009, WOM did not pay any income tax in Luxembourg on its sales of the Products to Whirlpool U.S. and Whirlpool Mexico. See Kramarz Declaration at St 27, Attachment 22, Response to Request 11.

131. WOM's Form 5471 for 2009 reported income from the sale of the Products but not any FBCSI with respect to the Products sold by WOM during 2009. See Kramarz Declaration at ¶ 28, Attachment 23.

132. WOM's Form 5471 for 2009 also reported $806,583,921 of gross receipts or sales related to WOM's sale of the Products. WOM did not pay any income taxes on its $45,231,843 of sales income of the Products in 2009 to the United States, Mexico, Luxembourg, or any other jurisdiction. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Requests 11 and 15; Kramarz Declaration at ¶ 28, Attachment 23; Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 187.

VII. The Branch Rules and Tax Rate Disparity

133. For purposes of respondent's Cross-Motion, and as admitted by petitioners, during and throughout 2009, WOM had a manufacturing branch in Mexico that produced the Products that Whirlpool reported as sold on WOM's 2009 Form 5471. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 16.

134. In 2009, in determining whether the use of WOM's manufacturing branch had substantially the same tax effect as if the branch was a wholly owned subsidiary of WOM, the income allocated to the remainder of WOM is $78,891,850, which is the income derived by the remainder of WOM, which, when the special rules of Treas. Reg. Treas. Reg. § 1.954-3(b)(2)(i) are applied, is described in Treas. Reg. § 1.954-3(a) (determined without applying subparagraphs (2), (3), and (4)). See Bendiksen Affidavit at ¶ 34, Attachment 17.

135. In 2009, the actual effective rate of tax with respect to WOM's sales income is zero percent (the "Actual Effective Rate of Tax"). See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 11.

136. In 2009, the effective rate of tax which would apply to WOM's sales income under the laws of Mexico, if, under Mexican law, the entire income of WOM were considered derived by WOM from sources within Mexico from doing business through a permanent establishment therein, received in such country, and allocable to such permanent establishment, and the corporation were created or organized under the laws of, and managed and controlled in, such country ("Hypothetical Effective Rate of Tax"), would have been 28 percent. See Bendiksen Affidavit at ¶ 36, Attachment 18.

137. In 2009, the Actual Effective Rate of Tax with respect to WOM's sales income was less than 90 percent of, and at least 5 percentage points below, the Hypothetical Effective Rate of Tax calculated under the assumptions of the TRD test set forth in the section 954(d)(2) regulations. See supra ¶¶ 135 and 136.

VIII. Applicable Regulations

138. On June 29, 2011, the Internal Revenue Service issued Information Document Request ("IDR") #64 to Whirlpool Corporation, with a due date of July 29, 2011, regarding WOM. See Kramarz Declaration at ¶ 85, Attachment 80, p. 6.

139. On October 26, 2011, the Internal Revenue Service received Whirlpool Corporation's response to IDR #64. See Kramarz Declaration at ¶ 85, Attachment 80, p. 6.

140. In its response to Information Document Request #64, Whirlpool Corporation stated that "before July 1, 2009, the final regulations under Reg. § 1.954-3(a)(4)(i) do not apply. However, according to Reg. § 1.954-3(c) & (d), a taxpayer may choose to apply the final regulations in their entirety for all open years. Therefore, we have applied the manufacturing exception to 2008 as well as 2009 as shown on the attached work paper under Reg. § 1.954-3(a)(4)(i) See Kramarz Declaration at ¶ 86, Attachment 81, Response to Request 5 and the 2009 Subpart F Worksheet for the 2009 tax year at p. 14.

IX. Alleged Computational Errors

141. In their petitions, petitioners allege the '"Commissioner made various computational errors in the calculations reflected in the Notice[s] of Deficiency, and therefore determined an erroneous deficiency for 2009," and also state that the "computational errors should be addressed pursuant to Tax Court Rule 155 after the substantive issues . . . are resolved." See Petition to Docket Nos. 13986-17 and 13987-17 at ¶¶ 5.e.2. and 3.

142. In their January 6, 2018 response to Request 13 of Respondent's First Branerton Request, in which respondent requested a detailed explanation of the computational errors alleged in each petition, petitioners stated that the "referenced errors are computational and depend solely on the outcome of the primary issue in this case. The parties will address any necessary computations during discussions pursuant to Tax Court Rule 155 at an appropriate time." See Kramarz Declaration at ¶ 41, Attachment 36, Response to Request 13, p. 14.

143. In their May 4, 2018 response to Request 128 of Respondent's Fourth Branerton Request, in which respondent requested all documents supporting the claimed computational errors referenced in each petition at paragraph 5.e., and a corrected computation, petitioners objected to the request for "all documents," and referenced their response to Request 13 of Respondent's First Branerton Request. See Kramarz Declaration at ¶ 87, Attachment 82, Response to Request 128, p. 4.

144. In their December 19, 2018, response to Request 12 of Respondent's First Request for Admissions, in which respondent requested petitioners to admit respondent did not make any computational errors in computing the deficiencies in tax for each docket in these consolidated cases, petitioners denied the request without explanation. See Kramarz Declaration at ¶ 27, Attachment 22, Response to Request 12, p. 9.

145. In their December 19, 2018, response to Request 81 of Respondent's Fourth Request for Production of Documents, in which respondent requested all documents substantiating petitioners" allegations regarding computational errors in each docket at petition paragraph 5.e., petitioners stated:

The errors referenced are in the nature of correlative computational errors flowing from Respondent's misinterpretation and erroneous application of the facts and law to the issues in this case. As stated in Whirlpool's response to Request 13 of the IRS First Branerton on January 6, 2019, correction of these correlative computational errors necessarily is dependent upon resolution of the issues in this case. In addition, as reflected in Respondent's Request for Admission 4 and Request 188 of the IRS Sixth Branerton, Respondent erroneously appears to contend that WOM earned approximately $50 million in 2009 from WOM's sale of refrigerators and washers to Whirlpool US, when in fact WOM earned approximately $43.8 million on such sales. See Whirlpool's response to Request for Admission 4 and Request 188 of the IRS Sixth Branerton on December 14, 2018.

See Kramarz Declaration at ¶ 88, Attachment 83, Response to Request 81, pp. 18-19.

146. Petitioners' Response to the Fourth Request of Respondent's First Request for Admissions, in which respondent requested petitioners to admit that in 2009 WOM sold the Products to Whirlpool U.S., a related person, and earned approximately $50 million in connection with the sale of these Products, states, in part:

Deny that WOM earned approximately $50 million in connection with the sale of personal property to Whirlpool US. Admit that WOM earned approximately $43,791,843 from the sale of personal property to Whirlpool US. This number is calculated by subtracting $5,286,265 in related party interest income from $50,518,108 in total profits reported on WOM's 2009 Form 5471, less approximately $1.44 million earned on sales of personal property to Whirlpool Mexico.

See Kramarz Declaration ¶ 27, Attachment 22, Response to Request 4, p. 5.

147. Petitioners' Response to Request 188 of Respondent's Sixth Branerton Request, in which respondent asked petitioners whether they admit that WOM earned $50 million in connection with the sale of personal property, states:

Deny. As reported on WOM's Form 5471, WOM earned $50,518,108 in 2009. Part of this income in the amount of $5,286,265 constituted related party interest income unrelated to WOM's sale of personal property. WOM's profits from sale of personal property to both Whirlpool US and Whirlpool MX in 2009 were $45,231,843. Approximately 3.2% of WOM's sales in 2009 were to Whirlpool MX. Profits attributable to WOM's sales to Whirlpool MX in 2009 were thus approximately $1.44 million, calculated as 3.2% of $45,231,843.

See Kramarz Declaration at ¶ 66, Attachment 61, Response to Request 188, p. 15.

148. Because petitioners failed to produce documents pursuant to Request 81 of Respondent's Fourth Request for Production of Documents, respondent moved to compel a response, and in Petitioners' Response to Respondent's Motion to Compel Responses to Respondent's Fourth Request for Production of Documents, petitioners state:

a) The errors referenced are in the nature of correlative computational errors flowing from Respondent's misinterpretation and erroneous application of the facts and law to the issues in this case. For example, Respondent has claimed that WOM earned approximately $50 million from its sales of refrigerators and washers, an amount that Respondent believes constitutes FBCSI. As Whirlpool has informed Respondent, WOM earned less than $44 million from its sale of refrigerators and washers. See Whirlpool's Response to Request for Admission 4; and Whirlpool's Response to Branerton Request 188 of the IRS Sixth Branerton on December 14, 2018. Whirlpool, on the other hand, contends that WOM did not earn any FBCSI on its sale of refrigerators and washers. Under either approach, Respondent's computations in the notice will be in error. As stated in Whirlpool's response to Request 13 of the IRS First Branerton on January 6, 2018, correction of these correlative computational errors necessarily is dependent upon resolution of the issues in this case.

b) Petitioner does not have any documents recomputing the calculations in the notice because those errors are self evident: if the starting point of the calculations changes, all calculations relying on the starting point will change.

c) Whirlpool's response to Request 81 was appropriate and complete.

See Petitioners' Response to Respondent's Motion to Compel Responses to Respondent's Fourth Request for Production of Documents, Response to Request 81, pp. 30-31.

DISCUSSION

I. WOM HAS FOREIGN BASE COMPANY SALES INCOME

A. Summary Judgment Standards

The purpose of summary judgment is to expedite litigation and avoid unnecessary and expensive trials. See FPL Grp., Inc. & Subs, v. Commissioner, 116 T.C. 73, 74 (2001). The Court may grant summary judgment when there is no genuine dispute of material fact and¹a decision may be rendered as a matter of law. T.C. Rule 121(b); Elec. Arts, Inc, v. Commissioner, 118 T.C. 226, 238 (2002).

The moving party has the burden of proving that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. See Rauenhorst v. Commissioner, 119 T.C. 157, 162 (2002). The party opposing summary judgment must set forth specific facts showing that there is a genuine issue for trial and may not rely merely on allegations or denials in the pleadings. T.C. Rule 121(d). See also Sundstrand Corp, v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Disputes over facts that are not outcome-determinative will not preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

B. Background Principles of Subpart F

During 2009, the earnings of foreign corporations from foreign sources were not generally subject to U.S. federal income tax unless and until such earnings were distributed to a shareholder in the United States or invested in United States property. See I.R.C. § 956. However, under section 951(a), the earnings of a controlled foreign corporation ("CFC") were currently includable in the income of the U.S. shareholders of the CFC to the extent such earnings were classified as "subpart F income," as that term was defined in section 952. See I.R.C. §§ 951(a) and (b), 957(a). Subpart F income includes "Foreign Base Company Income" ("FBCI"), which includes (among other things), FBCSI. See I.R.C. §§ 952(a) and 954(a).

The subpart F provisions were enacted as part of the Revenue Act of 1962. Pub. L. No. 87-834, 76 Stat. 960. In a message to Congress on April 20, 1961, the Kennedy Administration voiced its concerns with the abusive foreign structures increasingly used by U.S. multinationals as follows:

[M]ore and more enterprises organized abroad by American firms have arranged their corporate structures — aided by artificial arrangements between parent and subsidiary . . . which maximize the accumulation of profits in the tax haven — so as to exploit the multiplicity of foreign tax systems and international agreements in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.

Message from the President of the United States Relative to our Federal Tax System, H.R. Doc. No. 140, 87th Cong., 1st Sess. 6 (1961) (emphasis added). See also Staff of the Joint Committee on international Revenue Taxation, Tax Effects of Conducting Foreign Business Through Foreign Corporations, Appendix C (JCS-5-61) (1961) ("JCT Report") (explaining rationale for proposed changes to the method of taxing earnings of U.S.-controlled foreign corporations).

The next year, as part of the Revenue Act of 1962, Congress enacted section 954(d) to disallow deferral of U.S. tax on the earnings of a U.S. shareholder's CFC when the taxpayer situates the CFC in a low- or no-tax jurisdiction located away from both the manufacturing process and the ultimate customers and causes the CFC to buy from or sell to (and/or on behalf of) a related party in order to lodge the profits derived from the purchase or sale in the CFC:

The [FBCSI] referred to here means income from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation. This does not, for example, include cases where any significant amount of manufacturing, major assembling, or construction activity is carried on with respect to the product by the selling corporation. On the other hand, activity such as minor assembling, packaging, repackaging or labeling will not be sufficient to exclude the profits from this definition.

The sales income with which your committee is primarily concerned is income of a selling subsidiary (whether acting as principal or agent) which has been separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income. This accounts for the fact that this provision is restricted to sales of property, to a related person, or to purchases of property from a related person. Moreover, the fact that a lower rate of tax for such a company is likely to be obtained only through purchases and sales outside of the country in which it is incorporated, accounts for the fact that the provision is made inapplicable to the extent the property is manufactured, produced, grown, or extracted in the country where the corporation is organized or where it is sold for use, consumption, or disposition in that country. Mere passage of title or the place of the sale are not relevant in this connection.

Also included in foreign base company sales income are operations handled through a branch (rather than a corporate subsidiary) operating outside of the country in which the controlled foreign corporation is incorporated, if the combined effect of the tax treatment accorded the branch, by the country of incorporation of the controlled foreign corporation and the country of operation of the branch, is to treat the branch substantially the same as if it were a subsidiary corporation organized in the country in which it carries on its trade or business.

S. Rep. No. 1881, 87th Cong. 2d Sess. 84 (1962) (emphasis added).

Congress determined that U.S. taxpayers had been "siphon[ing] off sales profits from goods manufactured by related parties either in the United States or abroad. In such cases the separation of the sales function is designed to avoid either U.S. tax or tax imposed by the foreign country." H.R. Rep. No. 87-1447, 87th Cong. 2d Sess. 58 (1962) (emphasis added). Debate on the Floor of the House of Representatives illustrates that Congress understood that the term "sales function" encompassed the situation where the home office of the CFC is a paper company organized in a low-tax jurisdiction that just collects income. See 108 Cong. Rec. 5320 (1962) (Statement of Rep. Ullman). Representative Ullman, a member of the Ways and Means Committee, stated that:

Profits earned in trade by the typical tax-haven subsidiary would be subjected to U.S. tax under section 13 of the bill. Such subsidiaries frequently perform little actual business service. They merely collect income from the United States or from foreign manufacturing operations, and are located in low- or no-tax countries solely for tax-saving purposes.

These tax-haven companies are sometimes used as a device through which to sell — on paper at least — products manufactured in this country. This creates the opportunity for direct escape of U.S. taxes.

Other tax-haven companies market goods produced by U.S.-owned subsidiaries in foreign countries whose taxes are roughly comparable to our own. In that case, the availability of the tax haven serves directly to lure U.S. manufacturing operations overseas.

Id. Like the tax-haven companies referred to by Representative Ullman during the House's consideration of the Revenue Act of 1962, WOM performs little actual business service. Instead, WOM sells the Products to, and collects income from, Whirlpool U.S. and Whirlpool Mexico in an attempt to defer indefinitely U.S. tax on a portion of Whirlpool's sales profits.⁷

Thus, the FBCSI rules were enacted to target exactly the type of structure at issue in this case. Whirlpool Corporation, a U.S. corporation, has arranged its corporate structure to accumulate profits in a tax haven (Luxembourg) so as to exploit the multiplicity of foreign tax systems. Luxembourg has a territorial tax system and does not tax WOM on income from sales to customers outside Luxembourg.⁸ The sales income was not taxed by Mexico because WOM was considered not to have a permanent establishment in Mexico as long as WOM met the Maquiladora Program requirements.⁹ Whirlpool's structure results in the siphoning of sales profits (out of Whirlpool U.S. and into WOM in Luxembourg) from goods manufactured in Mexico by a branch of WOM. Indeed, sales income has been shifted to a Luxembourg entity (where it is not subject to tax) without any appreciable value being added to the Products by WOM's Luxembourg operations. Congress enacted the FBCSI rules specifically to tax the United States shareholders on that set of facts.

C. Definition of Foreign Base Company Sales Income

The definition of FBCSI is contained in section 954(d)(1), which reads in its entirety as follows:

In general. — For purposes of subsection (a)(2), the term 'foreign base company sales income' means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where —

(A) the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and

(B) the property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country.

For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.

In essence, section 954(d)(1) treats as subpart F income amounts derived from transactions where there is a related party at one end of the transaction (the purchaser) or the other (the seller), or both, and the transactions do not reflect same country economic activity because the property was not manufactured in, nor are the customers located in, the CFC's country of incorporation. If the property that is purchased or sold is either (i) manufactured in or (ii) sold for use in the country in which the CFC is organized (collectively, the "Same-Country Exceptions"), the resulting income will not be FBCSI. See also Treas. Reg. § 1.954-3(a)(2) and (3). The FBCSI provisions were intended to prevent deferral in the case of so-called base company activities, where the economically significant functions occur outside the base country of the CFC.

WOM is related to Whirlpool U.S. within the meaning of section 954(d)(3)(A) because Whirlpool Corporation controls WOM, see I.R.C. § 954(d)(3)(A), and because Maytag. Sales, Inc. is controlled by the same persons that control WOM. See I.R.C. § 954 (d) (3) (B).¹⁰ WOM is also related to Whirlpool Mexico pursuant to the common-control test.¹¹ See id. The Products are manufactured outside Luxembourg and they are sold for use outside Luxembourg.¹² Thus, WOM is not entitled to the Same-Country Exceptions.

Another exception to FBCSI treatment is the regulatory manufacturing exception. See Treas. Reg. § 1.954-3(a)(4)(ii)-(iv) (collectively, the "Manufacturing Exception"). Under the Manufacturing Exception, the income derived in connection with a CFC's sale of personal property to a related person or on behalf of a related person is not FBCSI if the CFC manufactured the property. Although not explicit in the statute, Congress clearly contemplated an exception from FBCSI when the CFC manufactures the property it sells. See S. Rep. No. 1881 at 84. For purposes of his Cross-Motion, respondent assumes that the Products were manufactured within the meaning of Treas. Reg. § 1.954-3 by WIN, WOM^'s Mexican manufacturing branch. However, as discussed below, WOM is not entitled to the Manufacturing Exception due to the application of the Branch Rules.

D. WOM Has FBCSI Under the Branch Rules

Section 954(d)(2) states that where a CFC carries on activities through a branch or similar establishment outside its country of organization, and the use of the branch or similar establishment has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, the branch or similar establishment will be treated as a wholly owned subsidiary corporation of the CFC and the income attributable to the carrying on of the activities through the branch or similar establishment will be treated as income derived by the wholly owned subsidiary corporation for purposes of determining FBCSI. Congress enacted section 954(d)(2) because it became aware, during its study of the abuses involving the use of base companies before the passage of the 1962 Act, of the possibility that taxpayers would evade section 954(d)(1) by causing a CFC to conduct its selling or manufacturing activities through an offshore branch. Congress recognized that, under a territorial taxation system, separate subsidiaries were not necessary in order to shift sales income to a tax haven, and that the same result could be achieved by establishing a CFC and a branch in a separate foreign country that behaves like a subsidiary of the CFC.¹³ As Congress explained, the situations targeted by section 954(d)(2) are ones in which:

[T] he combined effect of the tax treatment accorded the branch, by the country of incorporation of the controlled foreign corporation and the country of operation of the branch, is to treat the branch substantially the same as if it were a subsidiary corporation organized in the country in which it carries on its trade or business.

S. Rep. No. 1881 at 84. To effectuate Congress' intent, section 954(d)(2) authorized the issuance of regulations to determine when a branch of a CFC should be treated as a separate subsidiary corporation of the CFC for purposes of determining whether the CFC has FBCSI.

Section 954(d)(2) and the regulations thereunder (specifically, Treas. Reg. § 1.954-3(b), as amended in 2002)¹⁴ therefore prevent taxpayers from circumventing the FBCSI rules by separating manufacturing and sales income through use of a branch. Under these regulations, known as the Branch Rules, WOM has FBCSI.

i. WIN Is a Branch of WOM for U.S. Tax Purposes

The first step in determining whether WOM has FBCSI under the Branch Rules is to determine whether WOM carried on manufacturing, producing, constructing, growing, or extracting activities by or through a branch or similar establishment located outside of Luxembourg. See Treas. Reg. § 1.954-3(b)(1)(ii)(a). Effective as of its date of formation, June 1, 2007, WIN's shareholder elected for WIN to be treated as a branch for U.S. federal income tax purposes under the check-the-box regulations set forth in Treas. Reg. § 301.7701-3.¹⁵ Generally, a foreign entity for which an election has been made to be disregarded as an entity separate from its owner under Treas. Reg. § 301.7701-3 is in fact a subsidiary corporation and is treated as such by the jurisdiction where it is organized and the jurisdiction where its foreign parent is organized. Thus, WIN is regarded as a subsidiary corporation of WOM by both Luxembourg and Mexico and is only treated as a disregarded entity, and thus a branch, for certain U.S. tax purposes by reason of its check-the-box election. See Treas. Reg. § 301.7701-2(a) ("A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner."). On December 19, 2018, in response to Respondent's First Request for Admissions, petitioners admitted that WOM had a manufacturing branch in Mexico that produced the Products reported as sold on WOM's 2009 Form 5471.¹⁶

ii. Tax Rate Disparity Exists

The Branch Rules provide a TRD test to determine whether, with respect to property sold by or through the remainder of a CFC, the use of a manufacturing branch or similar establishment has substantially the same tax effect as if the branch or similar establishment were a wholly owned subsidiary corporation of the CFC. See Treas. Reg. § 1.954-3(b)(1)(ii)(a). In general, the test is applied by employing a number of assumptions to isolate certain income derived by the remainder of the CFC. Specifically, the determination whether to treat a branch as a separate corporation includes the following steps:

• First, allocate to the remainder of the CFC only that income derived by the remainder of the CFC, which, when the special rules of Treas. Reg. § 1.954-3(b)(2)(i) are applied, is described in Treas. Reg. § 1.954-3(a) (but determined without applying subparagraphs (2), (3), and (4) of such paragraph);

• Second, determine the Actual Effective Rate of Tax, i. e., the rate at which the income allocated to the remainder was taxed, by statute, treaty, or otherwise;

• Third, determine the Hypothetical Effective Rate of Tax, i.e., the rate at which the income allocated to the remainder would be taxed under the laws of the country in which the manufacturing branch or similar establishment is located if, under the laws of such country, the entire income of the CFC were considered derived by such corporation from sources within such country from doing business through a permanent establishment therein, received in such country, and allocable to such permanent establishment, and the corporation were created or organized under the laws of, and managed and controlled in, such country (collectively, the "TRD Assumptions"); and

• Fourth, compare the Actual Effective Rate of Tax with the Hypothetical Effective Rate of Tax.

If the Actual Effective Rate of Tax is less than 90 percent of, and at least 5 percentage points below, the Hypothetical Effective Rate of Tax, the use of the manufacturing branch has substantially the same tax effect as if the branch were a separate wholly owned subsidiary, in which case the manufacturing branch and the remainder of the CFC will be treated as separate corporations for purposes of determining the FBCSI of the CFC. See Treas. Reg. § 1.954-3(b)(1)(ii)(b).

Petitioners argue that WOM cannot have FBCSI in 2009 under the Branch Rules because WOM did not have sales or purchasing activities in the remainder. Specifically, petitioners argue that income cannot be allocated to the remainder of WOM for purposes of determining TRD because the remainder of WOM did not engage in sales or purchasing activities and

the only income to be allocated to the Remainder is income derived by the Remainder from the sales and purchasing activities set forth in Treas. Reg. § 1.954-3(a), determined without regard to the exceptions to FBCSI, but with all sales or purchasing activities by the Remainder deemed to be made 'on behalf of' the Manufacturing Branch under Treas. Reg. § 1.954-3(b)(2)(i)(c).

Brief in Support of Petitioners' Tax Court Rule 121 Motion for Partial Summary Judgment under section 954(d)(2), pp. 20-21. Petitioners' reading of the regulations is erroneous.

Notably, "the sales and purchasing activities set forth in Treas. Reg. § 1.954-3(a)" referenced by petitioners include the sale of property to a related person and on behalf of a related person. See Treas. Reg. § 1.954-3(a)(1). WOM sold the Products to related persons (Whirlpool U.S. and Whirlpool Mexico).¹⁷ Furthermore, the manufacturing branch rule applies in situations where a CFC's branch manufactures property that is then "sold by or through the remainder" of the CFC. See Treas. Reg. § 1.954-3(b)(1)(ii)(a). The Products were sold by the remainder of WOM.¹⁸ In allocating income to the remainder, the special rules of Treas. Reg. § 1.954-3(b)(2)(i) are an overlay to the rules described in Treas. Reg. § 1.954-3(a) and (b)(1); the special rules of Treas. Reg. § 1.954-3(b)(2)(i) apply in conjunction with the rules articulated in Treas. Reg. § 1.954-3(a) and (b)(1) in determining whether the income allocated to the remainder is described in Treas. Reg. § 1.954-3(a) (but determined without applying subparagraphs (2), (3), and (4) of such paragraph, i.e., the Same-Country Exceptions and Manufacturing Exception). Petitioners err in applying the special rules in isolation.

Section 1.954-3(a) of the Income Tax Regulations states that FBCSI consists of gross income (whether in the form of profits, commissions, fees or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person. Under Treas. Reg. § 1.954-3(b)(1), income is properly allocated to the selling remainder of a CFC if the income is derived in connection with the purchase of personal property from a related person and its sale to any person or from the purchase of personal property from any person and its sale to a related person. The special rule described in Treas. Reg. § 1.954-3(b)(2)(i)(c) is only relevant in analyzing whether the income allocated to the remainder of a CFC was derived in the remaining situations described in Treas. Reg. § 1.954-3(a) (i.e., the sale of personal property to any person on behalf of a related person or the purchase of personal property from any person on behalf of a related person).

Here, because the remainder of WOM sold the Products to Whirlpool U.S. and Whirlpool Mexico, both related parties, the remainder of WOM derived income described in Treas. Reg. § 1.954-3(a).¹⁹ Specifically, in this context, the remainder of WOM derived income from the purchase of personal property from any person and its sale to a related person (Whirlpool U.S. and Whirlpool Mexico).²⁰

Additionally, once the special rule of Treas. Reg. § 1.954-3(b)(2)(i)(c) is applied, the income allocated to the remainder of WOM is also described in Treas. Reg. § 1.954-3(a) because the remainder of WOM is deemed to have sold personal property to any person on behalf of a related person and the special rule treats the sale as being made on behalf of WOM's manufacturing branch (WIN). Petitioners' argument that the remainder of WOM did not engage in selling activities is addressed below.

In accordance with the above, the income allocated to the remainder of WOM in 2009 was $78,891,850.²¹ After allocating income to the remainder of WOM, the TRD test is performed. Here, the TRD test is satisfied. The Actual Effective Rate of Tax with respect to the income allocated to the remainder of WOM is zero percent. This sales income was not taxed by Luxembourg (or any other jurisdiction).²²

Next, the Hypothetical Effective Rate of Tax is determined by taking into account the TRD Assumptions. When the TRD Assumptions are applied in the instant case, WOM is assumed to be a Mexican corporation (i.e., organized under the laws of Mexico and managed and controlled in Mexico), doing business in Mexico through a permanent establishment in Mexico, and the entire income of WOM is assumed to be received in, derived from sources within, and allocable to its permanent establishment in Mexico. The Hypothetical Effective Rate of Tax is 28 percent (because, applying the TRD Assumptions to WOM's sales income, it would have been taxed by Mexico, the manufacturing jurisdiction, at a rate of approximately 28 percent in 2009).²³

The SAT has provided written confirmation that the foreign principal in a maquiladora arrangement does not have a permanent establishment in Mexico to the extent its activities are within, and compliant with, the Maquiladora Program.²⁴ The SAT has also confirmed that the relevant Mexican income tax rate on sales in 2009 was 28 percent.²⁵ Article 2 of the Mexican Income Tax Law ("MITL") (in effect through 2013) provided that a foreign principal of a maquiladora arrangement (such as WOM) would not be considered to have a permanent establishment in the country solely by reason of owning the machinery, equipment and inventory, as required by the Maquiladora Program; thus, the foreign principal would not be subject to taxation in Mexico if certain additional requirements were met.²⁶ However, for purposes of determining the Hypothetical Effective Rate of Tax' under the TRD test, the TRD Assumptions require us to assume both that there is a permanent establishment in Mexico and that the entire income of WOM is derived from sources in Mexico allocable to that permanent establishment. Applying the TRD Assumptions, the Hypothetical Effective Rate of Tax is approximately 28 percent in this case, as confirmed by Jaime Alan Gonzalez Bendiksen, who applied Mexican law to the relevant items of income and expense to calculate the hypothetical tax due under the TRD test in an affidavit submitted in support of respondent's Cross-Motion.²⁷

Based on the foregoing discussion, the Actual Effective Rate of Tax (zero percent) is both less than 90 percent of the Hypothetical Effective Rate of Tax (28 percent), and at least five percentage points below the Hypothetical Effective Rate of Tax. Accordingly, TRD exists in this case.

iii. Application of the Branch Rules to WOM's Sales

Because TRD exists, WIN and the remainder of WOM are treated as separate corporations for purposes of determining the FBCSI of WOM. See Treas. Reg. § 1.954-3(b)(1)(ii)(b). Petitioners fail to consider that Treas. Reg. § 1.954-3(b)(2)(ii)(c) is not the only way to determine whether income allocated to the remainder constitutes FBCSI. WOM can, and in fact does, have FBCSI because it sold to related parties in 2009 (i.e., the purchase of personal property from any person and its sale²⁸ to a related person).²⁹ In addition, Treas. Reg. § 1.954-3(b)(2)(i)(c) provides that where there is a manufacturing branch, selling activities performed by or through the remainder of the CFC with respect to personal property manufactured by the branch shall be treated as performed on behalf of the branch or similar establishment. Thus, application of the Branch Rules clearly causes WOM to have FBCSI for two independent reasons: (1) WOM sold personal property that it did not manufacture (i.e., property manufactured by WIN) to related persons (Whirlpool U.S. and Whirlpool Mexico), and (2) WOM's sales of personal property are deemed to be on behalf of a related person, i.e., WIN. Thus, WOM's sales income was derived from sales both on behalf of a related person and to a related person.

Based on the foregoing, WOM has FBCSI because:

Furthermore, due to the application of the Branch Rules, WIN is treated as a separate subsidiary corporation, and therefore, WOM's sales income does not qualify for the Manufacturing Exception from FBCSI.

iv. Petitioners' Counter-arguments Lack Merit

1. Sale of Products by the Remainder: The Act of Selling Is an Activity

Petitioners incorrectly argue that there is no basis for asserting that the remainder of WOM performed any purchasing or selling activities on behalf of the manufacturing branch and, thus, there is no basis for applying the Branch Rules in the first instance. Petitioners' position implies that if WOM did not have a sales department working on behalf of the Mexican branch, then the Branch Rule cannot be applied. This is simply incorrect and has no basis in the law. In fact, WOM is treated as selling on behalf of the Mexican manufacturing branch because the Branch Rule applies. See Treas. Reg. § 1.954-3(b)(2)(ii)(a).

Petitioners erroneously interpret the phrase "selling activities" in such a narrow manner as to suggest that the legal sale and transfer of ownership of the Products by WOM would not constitute selling activities. Not only is this interpretation inconsistent with a plain reading of the phrase "selling activities" but such an interpretation would also yield results under the branch regulations and the underlying FBCSI rules that directly contradict Congressional intent and sound tax policy. Congress was concerned with "income of a selling subsidiary (whether acting as principal or agent) which has been separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income." S. Rep. No. 1881 at 84 (emphasis added).

The designated Senate floor manager of the Revenue Act of 1962, in discussing section 12, described that section as being aimed at "the abuse of tax haven foreign subsidiaries." See 108 Cong. Rec. 17751 (1962) (Statement of Sen. Kerr). Senator Kerr went on to describe examples of income subject to tax:

Another example of income taxed to U.S. shareholders under the bill is income of a tax haven trading company, such as the Swiss corporation which often merely serves as an address for sales made in every country in Europe except Switzerland. The ability to siphon off profits from Common Market operations into Switzerland or some other low-tax-rate country in many cases makes it more advantageous to manufacture in European countries, such as Germany and France, than to export from the United States to those countries.

Id. (emphasis added). Congress was clearly aware that a corporation needs no sales force to sell to a related party.

Petitioners' argument that' "selling activities" should be interpreted to include only sales-related activities such as sales calls does not comport with congressional intent. If the term "selling activities" does not include a legal sale or transfer of ownership or title, then taxpayers could avoid an inclusion under subpart F merely by affecting the sale through the same types of entities that Congress identified as abusive. WOM sold over $800 million in appliances to Whirlpool U.S. and Whirlpool Mexico.' The argument that an actual sale is not a selling activity should fail.

The factual evidence before this Court lends further support to the position that the remainder of WOM performed selling activities. At the outset, the intercompany agreements in this case, and more specifically, the Manufacturing Supply Agreements, which were executed between WOM and Whirlpool U.S. and WOM and Whirlpool Mexico to effectuate WOM's sales of the Products at issue, were signed by managers of WOM in their capacity as managers of WOM.³⁰ Moreover, a transfer pricing study performed for WIN that evaluated its intercompany arrangements under Mexican Income Tax Law found that WIN performed no sales activities with respect to the Products, and all distribution, marketing, and sales functions in connection with the Products were WOM's responsibility.³¹ Petitioners' claim that WOM did not conduct sales activities in 2009 therefore defies reality.

Furthermore, as explained above, not only is the remainder of the CFC treated as selling on behalf of the manufacturing branch, WOM is actually selling to related persons. Thus, income derived by WOM from sales of the Products to Whirlpool U.S. and Whirlpool Mexico is FBCSI regardless of whether, or what, selling activities are performed by or through the remainder of WOM.

Petitioners attempt to support their argument with technical advice, specifically Technical Advice Memorandum (TAM) 8509004. This attempt should be rejected because among other things, section 6110(j)(3) prohibits the TAM from being cited or used as precedent. To the extent petitioners seek to draw upon the reasoning of the TAM, that reasoning does not help their case because the facts of the TAM are completely different from the facts of this case.

The facts of TAM 8509004 are as follows. Parent, a domestic corporation, established F1, a Country X corporation, to "assume responsibility for the production and marketing of Product Z." F2, a Country Y corporation, manufactured Product Z. Parent indirectly wholly owned F1 and F2. F1 retained the services of F2 to contract manufacture Product Z and established a branch in Country Y to supply the materials necessary for the manufacture of Product Z and to oversee the manufacturing process. Except for sales of Product Z and parts to Parent for subsequent resale in the United States, F1's branch sold all of its Product Z production directly to unrelated third party customers. The TAM concluded that F1 did not have FBCSI because the product was not sold by or through the remainder of F1 but through F1's offshore branch.

The branch in the TAM held itself out as doing business on its own behalf, entered into contracts in its own name, and apparently reported sales income in the jurisdiction in which it was operating (although the TAM does not specify whether the branch was taxed in that jurisdiction):

The branch supplied all materials necessary for the manufacture of Product Z. The materials were purchased from unrelated suppliers which recognized and accepted that they were dealing with the branch. The branch was responsible for the collection and provision of data, technical engineering and information necessary in the manufacturing process. Upon completion of the manufacture of Product Z the branch conducted product testing, inspection and quality control procedures to assure that the machines conformed with its standards. All goods in process, as well as finished products awaiting delivery, were situated in designated areas clearly demarcated as belonging to the branch and were kept separate and apart from any goods belonging to F2. Title to, and ownership of, all work in process, as well as finished goods, was clearly in the branch. All risk of loss remained in the branch from the time of submission of raw materials to delivery of finished products. Also, export financing provided by the Country Y Credit Guarantee Department, an arm of the Country Y government, was furnished in the name of the branch. In consideration for the service performed by F2, the branch paid F2 compensation calculated on the cost plus profit method. . . .

F1's Country Y branch sold all of its Product Z production directly to unrelated third parties, except for Product Z and parts sold to Parent for subsequent resale in the United States. Since none of the Product Z manufactured by the branch is purchased or sold by or through the remainder of F1, section 1.954-3(b)(1)(ii) does not apply, (emphasis added)

In contrast to the facts of the TAM, WOM held title to the raw materials, work in process, and finished products.³² Even more critically, the Products were, in fact, sold by or through the remainder of the CFC (WOM), as substantiated by the records evidencing sales from WOM to related persons, Whirlpool U.S. and Whirlpool Mexico. Petitioners' arguments that WOM needs a sales force in Luxembourg as a prerequisite for the application of the Branch Rules is not supported by the regulations, any precedent, or common sense.