Government Urges Sixth Circuit to Affirm Tax Court in Whirlpool Case

WHIRLPOOL FINANCIAL CORPORATION, et al.,
Petitioners-Appellants
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

ON APPEAL FROM THE DECISIONS OF
THE UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-3361
ARTHUR T. CATTERALL (202) 514-2937
JUDITH A. HAGLEY (202) 514-8126
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

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TABLE OF CONTENTS

Table of contents

Table of authorities

Statement regarding oral argument

Glossary

Statement of the issue

Statement of the case

Summary of argument

Argument

Conclusion

Certificate of compliance

Addendum

Certificate of service

TABLE OF AUTHORITIES

Cases:

Aston v. Commissioner, 109 T.C. 400 (1997)

Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964)

BNSF Ry. Co. v. Loos, 139 S. Ct. 893 (2019)

CFTC v. Schor, 478 U.S. 833 (1986)

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)

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

In re Davis, 960 F.3d 346 (6th Cir. 2020)

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

Farley v. Commissioner, 7 T.C. 198 (1946)

Faygo Beverages, Inc. v. United States, 640 F.2d 27 (6th Cir. 1981)

FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611 (6th Cir. 2014)

Garcia-Romo v. Barr, 940 F.3d 192 (6th Cir. 2019)

Goudas v. Commissioner, 137 F.3d 368 (6th Cir. 1998)

Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743 (2019)

Hosp. Corp. of Am. v. Commissioner, 348 F.3d 136 (6th Cir. 2003)

Howard Hughes Co. v. Commissioner, 142 T.C. 355 (2014), aff'd, 805 F.3d 175 (5th Cir. 2015)

Hueso v. Barnhart, 948 F.3d 324 (6th Cir. 2020)

I.N.S. v. Cardoza-Fonseca, 480 U.S. 421 (1987)

Kisor v. Wilkie, 139 S. Ct. 2400 (2019)

Little Sisters of the Poor v. Pennsylvania, 140 S. Ct. 2367 (2020)

Littriello v. United States, 484 F.3d 372 (6th Cir. 2007)

Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011)

RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380 (6th Cir. 2014)

Sanborn v. Parker, 629 F.3d 554 (6th Cir. 2010)

SIH Partners LLLP v. Commissioner, 923 F.3d 296 (3d Cir. 2019)

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735 (1996)

United States v. Michael, 882 F.3d 624 (6th Cir. 2018)

United States v. Woods, 571 U.S. 31 (2013)

Statutes:

Internal Revenue Code (26 U.S.C.):

Regulations:

27 Fed. Reg. 12759 (1962)

29 Fed. Reg. 6385 (1964)

67 Fed. Reg. 48020 (2002)

73 Fed. Reg. 10716 (2008)

73 Fed. Reg. 79334 (2008)

76 Fed. Reg. 78545 (2011)

Treasury Regulations (26 C.F.R.):

Legislative History:

87 H.R. 10650 §13 (as introduced in the House March 12, 1962)

87 H.R. 10650 §12 (as reported in the Senate, with amendments, August 15, 1962)

108 Cong. Rec. 5,320 (1962)

108 Cong. Rec. 17,751 (1962)

H.R. Rep. 87-1447 (1962)

H.R. Rep. 87-2508 (1962)

Hearings on HR 10650 before the Senate Committee on Finance: Pt. 11 (June 18, 19, July 2 and 3, 1962)

Joint Committee on Taxation, Tax Effects of Conducting Foreign Business Through Foreign Corporations, JCS-5-61 (1961)

S. Rep. 87-1881 (1962)

S. Rep. 99-313 (1985)

Senate Finance Committee, Draft of Statutory Language, with Accompanying Explanation, of Amendments Proposed by the Secretary of the Treasury on May 10, 1962, to Sections 13, 15, 16, and 20 of H.R. 10650 (1962)

Miscellaneous:

Bittker & Lokken, Fed. Tax'n of Income, Estates & Gifts (2019)

NYS Bar Ass'n Tax Section, Report on the Proposed Contract Manufacturing Regulations (2008)

Peroni, Getting Serious about Curtailing Deferral of U.S. Tax on Foreign Source Income, 52 SMU L. Rev. 455 (1999)

Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion (2014)

Tax Management Portfolio 6260, CFCs (2013)

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STATEMENT REGARDING ORAL ARGUMENT

This appeal presents a legal issue of first impression in the courts of appeals regarding the validity and applicability of a long-standing Treasury Regulation. Counsel for the Commissioner believes that oral argument would be beneficial.

GLOSSARY

Apx	appellants' six-volume appendix
Br.	appellants' opening brief
CFC	controlled foreign corporation
FBCSI	foreign base company sales income
Mexican-Branch/WIN	Whirlpool Internacional, S. de R.L. de C.V. (a Mexican corporation)
R.	record documents as numbered by the Tax Court
Whirlpool	appellant Whirlpool Financial Corporation, its parent corporation, Whirlpool Corporation, and its U.S. subsidiaries
Whirlpool-LUX	Whirlpool Overseas Manufacturing, S.a.r.l. (WOM) and Whirlpool Luxembourg S.a.r.l. (both Luxembourg corporations and CFCs of Whirlpool)
Whirlpool-Mexico	Whirlpool Mexico, S.A. de C.V. and its two wholly owned subsidiaries, Commercial Acros S.A. de C.V. and Industrias Acros S.A. de C.V. (all three of which are Mexican corporations and CFCs of Whirlpool)
WOM	Whirlpool Overseas Manufacturing, S.a.r.l. (a Luxembourg corporation and CFC of Whirlpool)

STATEMENT OF THE ISSUE

Whether the Tax Court correctly determined, under §954(d)(2)¹ and related regulations, that the sales income earned by Whirlpool Corporation's Luxembourg subsidiary in 2009 constituted foreign base company sales income and therefore was subject to U.S. taxation in that year.

STATEMENT OF THE CASE

A. Procedural history

This tax case involves a controlled foreign corporation (CFC) that sold personal property both to, and (by operation of §954(d)(2) and related regulations) on behalf of, related persons. The CFC (organized in Luxembourg) was a wholly owned subsidiary of Whirlpool Corporation, the parent corporation of appellant Whirlpool Financial Corporation (collectively, Whirlpool). Under §951(a)(1)(A) and §954(d) and the related Treasury regulations, if a CFC sells personal property to, or on behalf of, a corporate affiliate, then the income derived from the sale must be included in the income of its U.S. shareholder (unless certain exceptions apply). The Commissioner determined that Whirlpool's Luxembourg CFC engaged in such transactions and that therefore Whirlpool should have included in income $50 million of the CFC's earnings for the tax year at issue (2009). After Whirlpool petitioned the Tax Court for review of that determination, the parties cross-moved for summary judgment. The court denied Whirlpool's motion and granted that of the Commissioner. Whirlpool has appealed.

B. Background

1. Subpart F's limitation on U.S. tax deferral

The United States has traditionally taxed the income of its citizens and residents (including U.S. corporations) on a worldwide basis, subjecting the income from domestic and foreign activities to the same tax burden (and providing a foreign tax credit to alleviate double taxation). §§61(a), 901-909.² Therefore, when calculating its income for U.S. tax purposes, a U.S. corporation like Whirlpool must include income earned abroad, including income earned through branches operating in foreign countries.³ U.S. taxpayers, however, are able to limit worldwide taxation on their foreign income to some extent by separately incorporating their foreign operations. Prior to 1962, the earnings of foreign corporations that were controlled by U.S. taxpayers escaped U.S. taxation until distributed by the foreign corporation to the U.S. taxpayer, even though the U.S. taxpayer would otherwise be subject to full U.S. taxation on such income (i.e., for the year in which the income was earned) had the U.S. taxpayer earned the income directly. S. Rep. 87-1881, at 78 (1962). “Congress viewed this [tax] deferral as a privilege,” and sought to limit it. Tax Management Portfolio 6260, CFCs A-1 (2013) (describing Subpart F's history). The “goal” of limiting this privilege was “equal tax treatment of income earned abroad and income earned here in the United States.” 108 Cong. Rec. 5,320 (1962).

To limit that privilege, Congress enacted Subpart F of the Code (§§ 951-965), which restricts tax deferral on foreign income for U.S. shareholders of CFCs.⁴ Subpart F taxes a U.S. shareholder directly on certain types of CFC earnings, even though the earnings are not distributed to the U.S. shareholder.⁵ §951(a)(1)(A). Subpart F income includes certain types of income — such as interest, dividends, and certain sales income — that, unlike manufacturing income, is easily movable from one country to another. Congress imposes “current U.S. tax on easily movable income earned through a [CFC], since there is likely to be limited economic reason for the U.S. person's use of the foreign corporation.” S. Rep. 99-313, at 363 (1985). By “eliminating the U.S. tax benefits of such transactions, U.S. and foreign investment choices are placed on a more even footing.” Id.

Subpart F income includes several types of “foreign base company income,” including (as pertinent here) “foreign base company sales income” (FBCSI). §954(a)(2), (d). A “base company” is “a corporation, which is organized by an American parent corporation in one foreign country for the purposes of conducting operations in third countries.” Joint Committee on Taxation, Tax Effects of Conducting Foreign Business Through Foreign Corporations, JCS-5-61, at 9 (1961) (Joint Committee's Senate Report). For example, a U.S. corporation's subsidiary incorporated in Luxembourg is considered a base company if it purchases property manufactured outside of Luxembourg and sells it for use outside of Luxembourg. In a report prepared for the Senate Finance Committee as it drafted Subpart F, the Joint Committee described how U.S. taxpayers could avoid tax on sales income by establishing base companies in “tax-haven” countries and having the base company sell property that another foreign subsidiary manufactured elsewhere, thus “segment[ing]” sales income from manufacturing operations and allocating it to the “tax-haven compan[y].” Id. at 23-24.

To illustrate, assume that a U.S. corporation has a subsidiary that is incorporated under the laws of, and manufactures products in, a developing country where the cost of labor is low. Assume further that the developing country taxes income from the manufacture and sale of those products at 28%. To avoid the 28% tax on a significant portion of that income, the U.S. corporation might (i) create a separate subsidiary in a low-tax (tax-haven) jurisdiction, (ii) cause the manufacturing subsidiary to sell the products to the tax-haven subsidiary at a price that reflects only the manufacturing costs, and then (iii) purchase the products from the tax-haven subsidiary at the full price. Although the tax-haven subsidiary added no appreciable value to the products, the tax on the sale of the products to the U.S. corporation has been significantly reduced through the simple expedient of papering the transaction to have the tax-haven subsidiary, rather than the manufacturing subsidiary, formally earn the sales income. Congress enacted §954(d) to eliminate this abuse by treating as Subpart F income any “income [of a CFC] from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation.” S. Rep. 87-1881, at 84.

2. FBCSI

Under §954(d), income earned by a CFC constitutes FBCSI, and therefore must be included in the income of the CFC's U.S. shareholders, if it meets the conditions in either §954(d)(1) or §954(d)(2). Section 954(d)(1) defines FBCSI to include any income — including profits, commissions, or fees — derived by a CFC from certain related-person transactions involving the purchase or sale of property.⁶ Four transactions are listed in §954(d)(1), including (as pertinent here):

• “sale of personal property to any person on behalf of a related person”; and

• “purchase of personal property from any person and its sale to a related person.”

By its terms, the statute does not apply to property that is manufactured in, or sold for use in, the country in which the CFC is organized. §954(d)(1)(A)&(B) (referred to as the “same-country exception”).

Also excluded from the scope of the FBCSI regime is property manufactured by the CFC. As Congress explained when enacting §954(d), if the CFC adds “appreciable value” to the property by engaging in a “significant amount of manufacturing,” as opposed to “minor assembling, packaging, repackaging, or labeling,” of the property, then the CFC's profits from selling the property should be excluded from FBCSI. S. Rep. 87-1881, at 84. To implement Congressional intent, Treasury promulgated a regulation shortly after §954(d) was enacted that provides an exception to the definition of FBCSI for situations where the selling CFC also engaged in significant manufacturing activity. 29 Fed. Reg. 6385, 6394 (1964) (codified at Reg. §1.954-3(a)(4)) (the regulatory manufacturing exception).

3. Branch rule

Section 954(d)(2) provides a special rule for determining FBCSI when a CFC operates in a third country through a branch, rather than through a separate legal entity (which would be a “related person” for purposes of §954(d)(1)). To understand this rule, and why it was enacted, some brief background is provided.

Under the United States' traditionally worldwide system of taxation, income earned by a U.S. corporation through a foreign branch is currently taxable to the U.S. corporation, whereas income earned by a foreign subsidiary of a U.S. corporation generally is not. (R.54(Opinion), Apx3257.) Certain other countries, however, have a system of taxation in which income earned by a domestic corporation through a foreign branch is exempt from taxation. Congress recognized that, in the case of a CFC incorporated in such a country, income earned by that CFC through a branch operating in a third country could escape both (i) taxation by the CFC's country, and (ii) U.S. taxation under §954(d)(1) (which limits FBCSI to transactions between CFCs and legally distinct related persons). S. Rep. 87-1881, at 84.

To address this problem, Congress included §954(d)(2) in the Subpart F legislation. Under §954(d)(2)'s branch rule, if a CFC carries on activities through a branch outside the CFC's country of incorporation, and that arrangement has substantially the same effect as if the branch were a wholly owned subsidiary of the CFC, then the branch will be treated that way — i.e., as a related person with respect to the CFC — for purposes of determining whether the CFC has FBCSI under §954(d)(1).

In 1962, shortly after Congress enacted Subpart F, Treasury proposed regulations to address newly enacted §954. 27 Fed. Reg. 12759 (1962). As pertinent here, the proposed regulations addressed when foreign branches of CFCs would be treated as separate corporations for purposes of determining FBCSI. Id. at 12767. The proposed regulations provided examples to illustrate how the branch rule operates, including (as pertinent here) an example wherein a CFC that sold property manufactured by its foreign branch was treated as having FBCSI. Id. at 12768 (example 2).

After notice and comment, Treasury finalized the regulations — including example 2 — in 1964. 29 Fed. Reg. 6385, 6397-6398. The final regulations provided separate but parallel rules for CFC branches that engaged in purchase/sale activities and CFC branches that engaged in manufacturing activities. Reg. §1.954-3(b)(1)(i) (Sales-Branch rule) & (ii) (Manufacturing-Branch rule). Treasury has amended Reg. §1.954-3 over the years, but the branch rules have remained substantially unchanged, including in the regulations that apply here. See 67 Fed. Reg. 48020 (2002).

Under the Sales-Branch and Manufacturing-Branch rules, a CFC's foreign branch and the remainder of the CFC (CFC/Remainder) are treated as separate, related corporations if the arrangement results in a substantial tax-rate disparity with regard to sales income. Reg. §1.954-3(b)(1). To make that determination, the branch rules compare (i) the effective rate of tax that (based on certain assumptions) would apply to the sales income under the laws of the jurisdiction where the manufacturing takes place (the hypothetical tax rate) and (ii) the actual effective tax rate applied to the sales income (i.e., under the laws of both the jurisdiction in which the CFC is incorporated and the jurisdiction where the branch is located). Reg. §1.954-3(b)(1)(i)(b) (sales branches), Reg. §1.954-3(b)(1)(ii)(b) (manufacturing branches). The branch will be treated as a separate corporation only when the actual tax rate is less than 90% of, and at least 5 percentage points less than, the hypothetical tax rate. Id.

If the branch and the CFC/Remainder are treated as separate corporations, they are deemed “related persons” for purposes of determining FBCSI under §954(d)(1). §954(d)(2); Reg. §1.954-3(b)(2)(ii)(a). If selling activities are performed by or through the branch, the branch is treated as selling “on behalf of” the CFC/Remainder; conversely, if manufacturing activities are performed by or through the branch, the CFC/Remainder is treated as selling “on behalf of” the branch. Reg. §1.954-3(b)(2)(ii)(b)&(c). In either situation, income from the sales is FBCSI because a sale “on behalf of a related person” is one of the four related-person transactions that give rise to FBCSI under §954(d)(1).

To illustrate the operation of the Manufacturing-Branch rule, assume a CFC organized in Bermuda is in the business of manufacturing and selling goods. Assume further that the CFC performs the manufacturing function through a branch located in Brazil, and that it performs the sales function through the “home office” in Bermuda. If neither Bermuda nor Brazil taxes the CFC's sales income, then the actual effective tax rate on that sales income is 0%. If, taking into account the assumptions set forth in Reg. §1.954-3(b)(1)(ii)(b) and (b)(2)(i), that sales income would have been taxed in Brazil (where the goods were manufactured) at 25%, then the arrangement satisfies the rule's tax-rate-disparity test — i.e., the hypothetical rate of tax on the sales income (25%) is far more than the actual rate of tax on the sales income (0%). Because there is a tax-rate disparity, the branch rule applies and the sales by the home office in Bermuda (i.e., by the CFC/Remainder) are deemed to be “on behalf of” its deemed subsidiary, the Brazilian manufacturing branch. The income that the CFC derived from those sales qualifies as FBCSI under §954(d)(1) and must be included in the U.S. shareholder's income under §951(a). See Bittker & Lokken, Fed. Tax'n of Income, Estates & Gifts ¶69.5.5 (2019) (setting out a similar example illustrating the operation of the Manufacturing-Branch rule).

Since enacting Subpart F in 1962, Congress has amended §954(d) numerous times. See R.45(Commissioner-Brief), Apx2592 (listing amendments). None of those amendments overruled or altered Treasury's branch rules promulgated in 1964. (R.54(Opinion), Apx3281-3282.)

C. Whirlpool and its Luxembourg CFC

Whirlpool is a U.S. corporation that, through domestic and foreign subsidiaries, manufactures and distributes large household appliances. (R.54(Opinion), Apx3223.) For many years, including the tax year at issue (2009), some of its appliances were manufactured in Mexico (Products). (R.54(Opinion), Apx3225-3231.)

In 2007-2008, Whirlpool restructured its operations in Mexico to achieve what was promoted to be “significant tax savings,” including indefinite “[d]eferral of US taxation of profits earned by” a new Luxembourg CFC.⁷ (R.44(Whirlpool-PowerPoint), Apx1301-1304, 1328-1329; R.44(Whirlpool-email), Apx1288.) Prior to 2007, Whirlpool had CFCs organized under Mexican law (collectively, Whirlpool-Mexico) manufacture the Products at two plants in Mexico and sell them to Whirlpool. (R.54(Opinion), Apx3225-3226; R.44(Discovery-Response), Apx1132-1133.) Mexico taxed at 28% the income that Whirlpool-Mexico derived from manufacturing and selling the Products. (R.43(Bendiksen-Affidavit), Apx1003-1011; R.44(Whirlpool-PowerPoint), Apx1304, 1328-1329; R.44(U.S./Mexico-Correspondence), Apx2004-2005, 2014-2015.)

To implement its tax planning, Whirlpool took the following steps that effectively separated the sales income attributable to the Products from the manufacturing operations in Mexico:

• Created WOM, a new CFC organized under Luxembourg law, which, together with its parent, Whirlpool Luxembourg S.a.r.l. (collectively, Whirlpool-LUX), had one part-time employee;

• Had Whirlpool-LUX enter into Supply Agreements whereby it sold Products made in Mexico to related persons (Whirlpool and Whirlpool-Mexico), deriving gross receipts in 2009 exceeding $800 million;

• Had Whirlpool-LUX purchase materials, components, and the equipment used to manufacture the Products, and hold title to the work-in-progress inventory until it was sold;

• Created a shell company organized under Mexican law (WIN) that had no employees of its own;

• Elected to treat WIN (referred to hereafter as Mexican-Branch/WIN) as a branch of Whirlpool-LUX (rather than a separate corporation) for U.S. tax purposes⁸;

• Had Mexican-Branch/WIN and Whirlpool-LUX enter into Assembly Agreements whereby Mexican-Branch/WIN agreed to supply the manufacturing services for the Products; and

• Had Whirlpool-Mexico subcontract its employees to Mexican-Branch/WIN so that they could manufacture the Products in plants that Whirlpool-Mexico leased to Mexican-Branch/WIN.

(R.54(Opinion), Apx3227-3231; R.44(Discovery-Response), Apx1134-1140). See R.45(Commissioner-Brief), Apx2493 (chart reflecting Whirlpool reorganization).

After the reorganization, Whirlpool-LUX rather than Whirlpool-Mexico sold Products to Whirlpool. (R.54(Opinion), Apx3226, 3230-3231.) The reorganization had no real impact on the manufacture of the Products. (R.54(Opinion), Apx3267-3268.) Whirlpool's manufacturing activity in Mexico remained “exactly” the same, using the same plants, workers, and equipment before and after the reorganization. (Id.) The two new entities — Whirlpool-LUX and Mexican-Branch/WIN — collectively had one part-time employee who “had nothing to do with manufacturing.” (R.54(Opinion), Apx3246.) Although Whirlpool-LUX “added no appreciable value” to the arrangement (R.54(Opinion), Apx3224), it nevertheless earned substantial income from selling the Products, deriving over $45 million in sales income in 2009 (R.44(Discovery-Response), Apx2146).

D. Foreign taxation of sales income attributable to the Products

Whirlpool-LUX did not pay any income tax to Luxembourg on the $45 million it derived from selling the Products. (R.54(Opinion), Apx3234; R.44(Discovery-Response), Apx1442.) During 2009, Luxembourg companies that had income above a certain amount generally were taxed at a composite rate above 28%. (R.54(Opinion), Apx3233.) But Luxembourg exempted from income tax any income earned by a Luxembourg company that was attributable to a “permanent establishment” (essentially, a fixed place of business) in Mexico. (R.54(Opinion) Apx3233-3234.) Based on representations made by Whirlpool-LUX, the Luxembourg taxing authorities issued a ruling that (i) the income Whirlpool-LUX derived from selling the Products was attributable to its operations in Mexico and (ii) those operations constituted a permanent establishment. (R.54(Opinion), Apx3234, 3259; R.33(Schaffner-Affidavit), Apx688-691.)

Nor did Whirlpool-LUX pay any income tax to Mexico on its sales income. (R.54(Opinion), Apx3233; R.43(Discovery-Response), Apx1102.) During 2009, Mexico generally taxed the income of Mexican corporate residents and corporate non-residents with a Mexican permanent establishment at 28%. (R.54(Opinion), Apx3232; R.44(U.S./Mexico-Correspondence), Apx2002-2015.) Pursuant to a program designed to encourage manufacturing in Mexico by foreign corporations (“maquiladora program”), Mexico allowed foreign corporations that met certain requirements⁹ to sell goods manufactured by their Mexican subsidiary without the arrangement being deemed a Mexican permanent establishment, thereby exempting from tax any income derived from those sales. (Id.) Thus, for Mexican tax purposes (and contrary to the position that it took for Luxembourg tax purposes), Whirlpool-LUX was treated as not having a permanent establishment in Mexico, such that its $45 million in sales income was exempt from Mexican tax. (R.54(Opinion), Apx3233, 3259-3260, 3264-3265, 3273; R.44(U.S./Mexico-Correspondence), Apx2003, 2013; R.52(Bendiksen-Affidavit), Apx3096-3099.)

E. Whirlpool's U.S. tax reporting

On its 2009 federal tax return, Whirlpool reported that Whirlpool-LUX earned approximately $50 million ($45 million of which was derived from selling the Products) and that none of its sales income was subject to tax under Subpart F. (R.54(Opinion), Apx3234-3235 & n.3; R.44(Form-5471), Apx1445.) After audit, the IRS determined that Whirlpool-LUX's sales income was FBCSI that should have been included in Whirlpool's income for 2009.¹⁰ (R.54(Opinion), Apx3235; R.1(IRS-Deficiency-Notice), Apx42.) That inclusion reduced the amount of a net operating loss, portions of which had been carried back to Whirlpool's 2005 tax year and to the 2000 tax year of a separate sub-group of related corporations, resulting in tax deficiencies for those years.

F. Tax Court proceedings

Whirlpool and the separate sub-group filed petitions in the Tax Court, and the court consolidated the two cases. (R.1(Petition), Apx13, 15.) The parties cross-moved for partial summary judgment on the question whether the sales income was FBCSI under §954(d)(2)'s branch rule. (R.33(Whirlpool-Motion), Apx347; R.42(Commissioner-Motion), Apx998.) Whirlpool filed a separate motion for partial summary judgment under §954(d)(1) (R.27(Whirlpool-Motion), Apx131), which the Commissioner opposed (R.45(Commissioner-Brief), Apx2596-2609).¹¹

The Tax Court first addressed Whirlpool's motion for partial summary judgment under §954(d)(1). The court concluded that it “agree[d]” with the Commissioner that “genuine disputes of material fact may exist with respect to the application of subsection (d)(1).” (R.54(Opinion), Apx3225.) The court explained that it was unnecessary to decide that question because it agreed with the Commissioner's determination of FBCSI under §954(d)(2). (Id.)

The Tax Court determined that Whirlpool-LUX's sales income constituted FBCSI under the “branch rule” of §954(d)(2) and its implementing regulations. (R.54(Opinion), Apx3252-3274.) The court determined that §954(d)(2)'s two preconditions were satisfied: (i) Whirlpool-LUX operated its manufacturing business through a branch in Mexico (R.54(Opinion), Apx3254-3256), and (ii) the arrangement had “substantially the same effect” as if the branch were a wholly owned subsidiary of Whirlpool-LUX (R.54(Opinion), Apx3260-3265).

To support the latter determination, the Tax Court applied the Manufacturing-Branch rule's tax-rate-disparity test to the facts here. See Reg. §1.954-3(b)(1)(ii)(b) (comparing actual and hypothetical “effective rate of tax” applicable to the sales income allocated to the CFC/Remainder). The court first allocated income between Mexican-Branch/WIN and Whirlpool-LUX/Remainder. (R.54(Opinion), Apx3261-3263.) In doing so, the court relied on Whirlpool's own determination of an arm's-length charge paid to Mexican-Branch/WIN by Whirlpool-LUX for the manufacturing services, and Whirlpool's allocation of the rest of the profit related to the Products to Whirlpool-LUX/Remainder. Id. The court next determined that there was a tax-rate disparity, finding that the actual effective tax rate applied by Luxembourg and Mexico to Whirlpool-LUX's sales income was 0%, and that the hypothetical effective tax rate that Mexico would have applied to that same income was 28%. (R.54(Opinion), Apx3264-3265.) Based on that tax-rate disparity, the court concluded that Whirlpool-LUX's operating through a branch had the same effect as operating through a subsidiary. (Id.)

After concluding that the two preconditions were met, the Tax Court addressed the consequences under §954(d)(2) and the Manufacturing-Branch rule. Under that rule, Mexican-Branch/WIN is deemed to be a separate subsidiary (and thus a related person) of Whirlpool-LUX/Remainder and Whirlpool LUX/Remainder is deemed to have sold the Products on behalf of Mexican-Branch/WIN. (R.54(Opinion), Apx3266.) Consequently, the court concluded that Whirlpool-LUX's sales income was FBCSI within the meaning of §954(d)(1). As the court explained, Whirlpool-LUX derived income in connection with one of the four property transactions listed in §954(d)(1) — “'the sale of personal property to any person on behalf of a related person.'” (R.54(Opinion), Apx3266 (quoting §954(d)(1)).) And, as the court further explained, the income did not qualify for the same-country exception because the Products were manufactured outside Luxembourg and were sold for use outside Luxembourg. (R.54(Opinion), Apx3266-3267.)

The Tax Court rejected Whirlpool's argument that the Manufacturing-Branch rule is invalid. (R.54(Opinion), Apx3274-3281.) The court also rejected Whirlpool's alternative arguments that application of the Manufacturing-Branch rule to the facts of this case results in no FBCSI. (R.54(Opinion), Apx3268-3274.)

After the Tax Court issued its summary-judgment opinion, the parties agreed that, based on the opinion, the deficiencies determined by the Commissioner were correct. (R.57(Order), Apx3283.) The court then issued decisions upholding those deficiencies. (R.58(Decisions), Apx3285-3286.)

SUMMARY OF ARGUMENT

This case involves laws designed to limit tax deferral by U.S. taxpayers who control foreign corporations. Pursuant to this anti-deferral regime, if a CFC derives income in connection with the sale of property manufactured and sold for use outside the CFC's country of organization, and the property is sold on behalf of, or to, a related person, then that CFC has “foreign base company sales income” that must be included in the income of its U.S. shareholders. Whirlpool's tax-haven CFC, Whirlpool-LUX, engaged in such sale transactions, deriving almost $50 million in income that went untaxed by any jurisdiction. The Commissioner determined that this income constitutes FBCSI under both §954(d)(1) and §954(d)(2). The Tax Court held for the Commissioner under §954(d)(2), finding — after extensive analysis — that Whirlpool's foreign operations epitomize the abuse that Congress sought to end by enacting that provision.

1. The Tax Court correctly rejected Whirlpool's argument that Treasury's Manufacturing-Branch rule — promulgated over 50 years ago — is invalid. The sales-branch limitation that Whirlpool attempts to graft onto the statute conflicts with the text, structure, context, and history of §954(d)(2) and wholly undermines Congress's purpose in enacting §954(d) in the first place.

2. The Tax Court also correctly determined that Whirlpool-LUX's sales income constitutes FBCSI under the Manufacturing-Branch rule. Whirlpool's arguments to the contrary are premised on ignoring the facts, rewriting the regulations, and disavowing the form of the transaction that it selected in the hope of avoiding all tax on Whirlpool-LUX's sales income.

ARGUMENT

The Tax Court correctly determined, under §954(d)(2) and Treasury's Manufacturing-Branch rule, that Whirlpool-LUX had almost $50 million in unreported Subpart F income that was taxable to Whirlpool

Standard of review

This Court reviews the Tax Court's interpretation of statutory provisions and agency regulations de novo. Hosp. Corp. of Am. v. Commissioner, 348 F.3d 136, 140 (6th Cir. 2003).

A. Introduction

This case involves a U.S. company (Whirlpool) that reorganized its foreign operations so that Products manufactured in Mexico were sold to Whirlpool by its Luxembourg CFC (Whirlpool-LUX) for resale to Whirlpool's U.S. and Mexican customers. Channeling the sales function through Luxembourg added nothing of value to the Products. But doing so purportedly allowed Whirlpool to avoid paying any tax — foreign or U.S. — on that income (almost $50 million). As the Tax Court aptly observed, Whirlpool's reorganization “epitomizes the abuse at which Congress aimed” in enacting §954(d). (R.54(Opinion), Apx3267.)

Section 954(d) was enacted to target tax-avoidance structures like the one utilized here. Congress enacted §954(d)(1) to end “tax deferral” where “the multiplicity of foreign tax systems has been taken advantage of by American controlled businesses to siphon off sales profits from goods manufactured by related parties,” thus “avoid[ing] either U.S. tax or tax imposed by the foreign country.” H.R. Rep. 87-1447, at 58 (1962). And Congress enacted §954(d)(2) to address situations where taxpayers achieved the same result through a CFC's own branch rather than a related person. S. Rep. 87-1881, at 84; H.R. Rep. 87-2508, at 31 (1962) (Conf. Rep.).

Whirlpool arranged its corporate structure to accumulate profits in a tax haven in order to exploit how multiple foreign tax systems treated the sales income from that arrangement. Luxembourg did not tax Whirlpool-LUX on income that it received from selling products manufactured in Mexico to purchasers outside Luxembourg (Whirlpool and Whirlpool-Mexico). And Mexico taxed only the manufacturing income earned by Mexican-Branch/WIN, not the sales income earned by Whirlpool-LUX. As the Tax Court concluded, if Whirlpool-LUX had conducted its manufacturing operations in Mexico through a separate entity, “its sales income would plainly have been FBCSI under section 954(d)(1).” (R.54(Opinion), Apx3268.) Section 954(d)(2) and its implementing regulations prevent Whirlpool from escaping the tax consequences of §954(d)(1) by using a branch in a situation that mimics the tax effects of using a separate corporate subsidiary.

Whirlpool contends that Whirlpool-LUX's sales income does not qualify as FBCSI under either §954(d)(1) or §954(d)(2). Because the Tax Court correctly determined that the income constitutes FBCSI under §954(d)(2) and the Manufacturing-Branch rule, see, below, §C, it is unnecessary to address whether it would also qualify under §954(d)(1). In any event, that question raises material issues of disputed fact that would require a remand. See, below, §D. We first address Whirlpool's threshold challenge to Treasury's long-standing Manufacturing-Branch rule.

B. The Tax Court correctly concluded that the Manufacturing-Branch rule is valid

The threshold issue in this appeal is whether §954(d) permits the Manufacturing-Branch rule that Treasury promulgated over 50 years ago (as the Commissioner contends), or whether Treasury is precluded from enforcing Congress's anti-deferral regime when a U.S. shareholder organizes a CFC in a tax-haven country and uses a third-country branch of that CFC for its manufacturing operations in order to funnel the related sales income to the tax-haven CFC (as Whirlpool contends).

When reviewing the validity of an agency's regulation under the two-step framework set out in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-844 (1984), the Court first asks “whether Congress has directly spoken to the precise question at issue” (Chevron step one). If Congress has not so spoken, then the Court evaluates whether the agency's interpretation of the statute, as reflected in the regulation, is “reasonable” (Chevron step two). On appeal, Whirlpool rests its argument solely on Chevron step one.¹² Thus, Whirlpool contends that Congress has directly spoken to the precise question at issue — fairly stated, whether a CFC operating through a branch outside the country of the CFC's incorporation can have FBCSI where the sales income is “earned outside the branch” (Br.34-36, 38) — and that, by means of §954(d)(2) (the branch rule), it answered “no.” Whirlpool is wrong.

As demonstrated below, Treasury was authorized to prescribe the Manufacturing-Branch rule pursuant to specific rule-making authority under §954(d)(2) and its general rule-making authority under §7805(a). (R.54(Opinion), Apx3281.) The text, context, and history of §954(d)(2) reveal that Congress did not intend to limit Treasury's explication of the branch rule — an explication that the provision itself expressly contemplates — to the situation where the branch performs the selling activity, i.e., where the sales income is earned “inside” the branch. Rather, Congress intended the branch rule to apply whenever a CFC uses a branch to separate sales income from manufacturing operations in a way that avoids taxation on that income, without regard to whether the branch or the CFC/Remainder is handling the manufacturing activity or the selling activity. Whirlpool's arguments to the contrary — which read statutory snippets in isolation from their fuller text and context — lack merit and would render §954(d)(2) a nullity.

1. Text

Statutory interpretation necessarily begins with the text of the statute, and “'the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.'” Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743, 1748 (2019) (citation omitted). The text of §954(d)(2) is dense: one long sentence that is best understood when broken down to its component parts, which include two preconditions and two consequences — the latter to be fleshed out in Treasury regulations — “[f]or purposes of determining foreign base company sales income.”

Broken into its component parts, §954(d)(2) provides that:

• “For purposes of determining foreign base company sales income . . .” (i.e., for purposes of determining whether a CFC has income derived from one of the four related-person property transactions listed in §954(d)(1));

• “. . . in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation . . .” (Precondition 1);

• “. . . has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, . . .” (Precondition 2);

• “. . . under regulations prescribed by the Secretary . . .” (i.e., if Preconditions 1 and 2 are satisfied, then, as provided in Treasury regulations);

• “. . . the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation . . .” (Consequence 1);

• “. . . and shall constitute foreign base company sales income of the controlled foreign corporation.” (Consequence 2).

Parsing the statute makes clear that Treasury is authorized to flesh out the two separate consequences. Thus, §954(d)(2) specifically authorizes regulations that govern (i) the allocation of income between the resulting deemed corporations corresponding to the branch and the CFC/Remainder, respectively, and (ii) the imputation of the branch-deemed-corporation's resulting income to the CFC as FBCSI. Treasury issued regulations implementing Consequence 1 (allocation of income) both in the Sales-Branch rule, see Reg. §1.954-3(b)(1)(i)(b), and in the Manufacturing-Branch rule, see Reg. §1.954-3(b)(1)(ii)(b). And it implemented Consequence 2 (imputation of income) as part of the Sales-Branch rule, i.e., in the situation where the income allocated to the branch-deemed-corporation constitutes FBCSI.¹³ Thus, the rules set out in Reg. §1.954-3(b) track the language of §954(d)(2).

Whirlpool contends (Br.13-14) that the text of §954(d)(2) permits only the “Sales Branch Rule” but not the “Manufacturing Branch Rule.” That is incorrect. Section 954(d)(2) refers generically to a “branch”; it does not limit the scope of that term to sales branches. Similarly, §954(d)(2) refers generically to “activities”; it does not limit the scope of those activities to sales. And §954(d)(2) does not limit FBCSI to income earned by the branch; rather, it provides that, under regulations prescribed by the Secretary, income attributable to the branch's “activities” — again not limited to sales — is treated as income derived by a separate corporation (Consequence 1) for “purposes of determining [FBCSI]” under §954(d)(1). Thus, by its plain terms, §954(d)(2) is not limited to sales branches, as Whirlpool contends, but broadly covers all branches.

Whirlpool seeks support for its contrary interpretation in the last clause of §954(d)(2) (Br.29-30) — Consequence 2 — and reads that clause in isolation from the rest of the subsection and §954(d)'s overall structure. As this Court has admonished, however, courts cannot read text in isolation but must instead “'consider the entire text, in view of its structure and of the physical and logical relation of its many parts.'” Hueso v. Barnhart, 948 F.3d 324, 333 (6th Cir. 2020) (citation omitted). As demonstrated above, the full preamble of §954(d)(2) refers to “branch” and “activities” generically, without the “sales” qualification Whirlpool attempts to read into the subsection. When §954(d)(2) applies, the CFC's foreign “branch” — not “sales branch” — is treated as a wholly owned subsidiary of the CFC — and therefore as a “related person” — pursuant to Consequence 1 for purposes of determining whether the CFC has engaged in one of the four FBCSI transactions listed in §954(d)(1). Sometimes that branch may be engaged in sales activities and sometimes it may be engaged in manufacturing activities; by using the unqualified terms “branch” and “activities,” §954(d)(2) covers both. The last clause of §954(d)(2) (Consequence 2) indicates that, as provided in regulations prescribed by the Secretary, income attributed to the deemed subsidiary pursuant to Consequence 1 is imputed to the CFC as FBCSI. That language merely contemplates the situation where the FBCSI resulting from the application of Consequence 1 resides in the deemed subsidiary. It does not, as Whirlpool suggests, operate to limit the entirety of §954(d)(2) to sales branches. If that had been Congress's intent, it would not have been so broad in its text.

The structure of §954(d) confirms this point. Section 954(d)(2)'s branch rule applies “[f]or purposes of determining FBCSI.” FBCSI, in turn, is defined in §954(d)(1). By its plain terms, §954(d)(1)'s definition includes income derived by CFCs that sell products manufactured by related persons. See §954(d)(1) (including within the scope of the CFC's FBCSI “income . . . derived in connection with . . . the sale of personal property to any person on behalf of a related person”).¹⁴ The entire point of §954(d)(2) is to determine when a branch should be treated as a related person so that a CFC that derives sales income that would otherwise qualify as FBCSI cannot escape the consequences attendant to §954(d)(1) by using a branch rather than a separate corporation. If Mexican-Branch/WIN were a separate related corporation, Whirlpool-LUX would have FBCSI under §954(d)(1) from selling products manufactured by that corporation. Section 954(d)(2) ensures that Whirlpool-LUX faces the same tax consequences when it uses a branch instead of a separate subsidiary, because the arrangement allowed Whirlpool-LUX (and thus, indirectly, Whirlpool) to enjoy a 0% tax rate on more than $45 million in sales income derived by Whirlpool-LUX in 2009.

Given the text and structure of §954(d), the last clause of §954(d)(2) (Consequence 2) makes perfect sense. As explained above, that clause accounts for the situation involving a sales branch, where the income constituting the CFC's FBCSI is derived by the branch. It contemplates that, in that situation, Treasury's implementing regulations will provide for imputation of the deemed subsidiary's income to the CFC as FBCSI. Such imputation is not necessary in the situation involving a manufacturing branch, where by definition the CFC/Remainder derives the sales income. That §954(d)(2) calls for regulations treating a deemed subsidiary's income as FBCSI of the CFC does not mean — as Whirlpool suggests (Br.30-32, 35-37) — that it precludes Treasury from treating a CFC/Remainder's income as FBCSI when the deemed subsidiary is the manufacturer. Section 954(d)(1) already provides Treasury that authority and there was no need for Congress to repeat it in §954(d)(2). Read in context, the sole operative effect of §954(d)(2)'s final clause is to make explicit that the CFC itself has FBCSI even if, under the fiction that treats the branch as a separate corporation, the income would be considered FBCSI of the branch-deemed-subsidiary.

Even if §954(d)(2) were construed as not addressing Treasury's authority to promulgate the Manufacturing-Branch rule, it certainly does not preclude the rule, which — as the Tax Court explained — is well within the general rule-making authority provided to Treasury in §7805(a).¹⁵ (R.54(Opinion), Apx3278-3279.) Section 7805(a) is a broad grant of authority that gives Treasury the power to promulgate “all needful rules and regulations for the enforcement” of the Code, including enforcement of §954(d)'s anti-deferral provisions. See Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 56-58 (2011); Littriello v. United States, 484 F.3d 372, 378 (6th Cir. 2007); Faygo Beverages, Inc. v. United States, 640 F.2d 27, 28-29 (6th Cir. 1981). Treasury's general authority in §7805(a) augments the specific “grant of agency power in section 954(d)(2)” (Br.37). And regulations issued under §7805(a) stand on equal footing with regulations issued under a specific statutory provision. Mayo, 562 U.S. at 57-58.

If §954(d)(2) were construed as being silent on the issue, nothing therein prohibits Treasury from exercising its authority under §7805(a) to address manufacturing branches. “'It is a fundamental principle of statutory interpretation that absent provision[s] cannot be supplied by the courts.' This principle applies not only to adding terms not found in the statute, but also to imposing limits on an agency's discretion that are not supported by the text.” Little Sisters of the Poor v. Pennsylvania, 140 S. Ct. 2367, 2381 (2020) (citation omitted). To hold that §954(d)(2) affirmatively precludes Treasury from enacting the Manufacturing-Branch rule would require the Court “to alter, rather than to interpret,” §954(d)(2). Id.; see SIH Partners LLLP v. Commissioner, 923 F.3d 296, 304 & n.4 (3d Cir. 2019) (refusing to “read absent words into a statute” so as to invalidate Treasury's long-standing regulations under a different part of Subpart F (§956)).

Whirlpool also relies (Br.30) on the “title” of §954(d)(2) (“Certain branch income”). That title — a notoriously unenlightening component in statutory analysis¹⁶ — does not provide the limitation that Whirlpool attempts to graft onto the statute. Indeed, the fact that the title speaks of “certain branch income” instead of sales branch income contradicts Whirlpool's argument that only sales branches are covered by §954(d)(2). Nor does the title suggest that “only” branch income can be considered FBCSI (Br.31); rather, the title is a reference to §954(d)(2)'s primary purpose — treating the branch and its income separately from the CFC/Remainder and its income for “[p]urposes of determining [FBCSI]” under §954(d)(1).¹⁷

2. Context

Treasury's Manufacturing-Branch rule is also supported by the context of §954(d)(2). For almost 60 years, Treasury has consistently interpreted §954(d)(2) to permit the Manufacturing-Branch rule. See 27 Fed. Reg. 12759 (proposing regulations); 29 Fed. Reg. 6385 (1964 final regulations); 67 Fed. Reg. 48020 (version of regulations applicable here); 76 Fed. Reg. 78545 (2011) (current regulations). Although the §954 regulations have been amended over the years, the Manufacturing-Branch rule remains unchanged in all relevant respects. That the “IRS's reading of the [statutory branch rule] as it appears in [§954(d)(2)] has remained constant” for decades is an important consideration for interpreting the statute. BNSF Ry. Co. v. Loos, 139 S. Ct. 893, 898-899 (2019) (adopting statutory interpretation that was “[i]n line with . . . the IRS's long held construction”).

Although not dispositive, Treasury's long-standing interpretation of the statutory terms is highly relevant to interpreting §954(d)(2) because “it is rare that error [in an agency's interpretation of the statute it administers] would long persist.” Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 740 (1996). Congress has had decades to supersede Treasury's understanding of §954(d)(2)'s branch rule but has taken no steps to do so, despite amending §954(d) multiple times. See R.45(Commissioner-Brief), Apx2592 (listing amendments). “[W]hen Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the 'congressional failure to revise or repeal the agency's interpretation is persuasive evidence that the interpretation is the one intended by Congress.'” CFTC v. Schor, 478 U.S. 833, 846 (1986) (citation omitted); see RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380, 386 (6th Cir. 2014) (declining to “invalidate a regulation over a disagreement with an agency's policy which Congress has had time and opportunity to reverse”).

Indeed, Congress has declined to overrule Treasury's long-standing interpretation, despite a 1990 Tax Court challenge and tax-bar commentary advocating for the invalidity of the Manufacturing-Branch rule. (R.33(Whirlpool-Brief), Apx387 n.50.) In the face of such advocacy, Congress nevertheless has declined to limit the scope of §954(d)(2)'s anti-deferral provision to sales branches and thereby facilitate the very abuse it sought to eliminate in the first place.

Another critical contextual aspect of §954(d)(2) is the fact that it is part of Congress's anti-deferral regime set out in Subpart F. “Deferral[s] of income tax,” as “exceptions to the normal income recognition rules[,] must be strictly construed” against the taxpayer. Howard Hughes Co. v. Commissioner, 142 T.C. 355, 383 (2014) (collecting cases), aff'd, 805 F.3d 175 (5th Cir. 2015). Whirlpool presses the statutory canon positing that “tax statutes” should be “narrowly” construed against the drafter (Br.31-32) but ignores that the statutory provision here is a limitation on tax deferral.

More apt is the statutory canon regarding the “presumption against ineffectiveness,” which “reflects 'the idea that Congress presumably does not enact useless laws.'” In re Davis, 960 F.3d 346, 354 (6th Cir. 2020) (citation omitted). To adopt Whirlpool's interpretation would effectively render the statutory branch rule a “'dead letter.'” Id. (citation omitted). As the Tax Court explained, and Whirlpool does not deny, if §954(d)(2) applied only to sales branches “[t]axpayers could easily evade taxation simply by switching the functions around, placing the sales activities in the CFC rather than in the branch.” (R.54(Opinion), Apx3280.) Indeed, Whirlpool's interpretation of §954(d)(2) is contrary to common sense because it fails to explain why Congress would have left such a gaping loophole in a statutory provision designed to attack the very scheme that Whirlpool claims is exempt from the anti-deferral rules.

3. History

“'[T]raditional tools' of construction” include examining a text's “history” and “purpose.” Kisor v. Wilkie, 139 S. Ct. 2400, 2415 (2019) (quoting Chevron); see I.N.S. v. Cardoza-Fonseca, 480 U.S. 421, 449 (1987) (examining “legislative history” under Chevron step one). The history and purpose of §954(d)(2) support Treasury's Manufacturing-Branch rule.

When it enacted §954(d)(2), Congress was aware of the problem posed by manufacturing branches. The issue was highlighted by the Joint Committee in a report prepared for the Senate Finance Committee in 1961, shortly after that Committee began to consider legislative language that would ultimately become §954(d). The report specifically provided an example of a CFC organized in Switzerland and engaging in manufacturing activity in Germany so that the higher German tax “will apply only to the manufacturing profits” and the lower “Swiss tax will apply to the [sales] profit.” Joint Committee's Senate Report at 9. The report cited this situation — whereby a U.S. taxpayer separates foreign manufacturing and sales between two foreign tax jurisdictions by using a selling CFC organized in one country and its manufacturing branch operating in another — as the paradigmatic example of a “base company” that abuses the privilege of U.S. tax deferral.¹⁸ Id. The following year, the Senate floor manager of the legislation (Senator Kerr) relied on this same example to describe the income that would be subject to tax under §954(d). See 108 Cong. Rec. 17,751 (1962). As Senator Kerr explained, profits from products manufactured in Germany and sold by a Swiss CFC to non-Swiss countries would be included in the income of the CFC's U.S. shareholders. Id.

That abusive arrangement is exactly what Whirlpool implemented here. See, above, pp.26-27. By adopting §954(d)(2), Congress intended the “[r]ounding out of coverage with respect” to tax-haven sales income, not the halving of coverage that Whirlpool posits, whereby sales branches — but not manufacturing branches —would be covered by §954(d)(2)'s branch rule.¹⁹ Senate Finance Committee, Draft of Statutory Language, with Accompanying Explanation, of 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 (1962). As this report emphasized, “the purpose” of the branch rule is “to effectively eliminate deferral of taxation for tax haven activities.” Id. The text of §954(d)(2) is properly understood in this context.

To be clear, by discussing the history of the statute, and the purpose motivating the enactment of §954(d)(2), we are not asking the Court to rewrite the statute to better effectuate that purpose. Rather, we rely on the statute's history and purpose as yet another reason for this Court to reject Whirlpool's attempt to rewrite the statute to include a limitation that Congress did not — and given the statute's history and purpose, logically would not — choose to include.

4. Crediting Whirlpool's interpretation would only render §954(d)(2) ambiguous, which would not help Whirlpool

Even if the Court were to credit Whirlpool's interpretation of §954(d)(2) as a reasonable one, that would only suggest that §954(d)(2) is “ambiguous with respect to the specific issue,” Chevron, 467 U.S. at 843, i.e., the issue whether a CFC operating through a branch outside the CFC's country of incorporation can have FBCSI where the sales income is “earned outside the branch” (Br.34-36, 38). And that would only get Whirlpool to Chevron step two, a legal battleground that Whirlpool has chosen to abandon on appeal. See, above, n.12; cf. Garcia-Romo v. Barr, 940 F.3d 192, 205 (6th Cir. 2019) (holding for the Government at Chevron step one and noting that the petitioner would have lost at Chevron step two in any event).

C. The Tax Court correctly concluded that Whirlpool-LUX had FBCSI under the Manufacturing-Branch rule

The Tax Court correctly determined that Whirlpool-LUX's sales income constitutes FBCSI under the Manufacturing-Branch rule. Like the statute, that rule is predicated on two preconditions, both of which are met here: (i) Whirlpool-LUX carried on its manufacturing activities through a third-country branch (Mexican-Branch/WIN), Reg. §1.954-3(b)(1)(ii)(a); and (ii) using that branch had substantially the same tax effect as if Mexican-Branch/WIN were a separate subsidiary of Whirlpool-LUX, as evidenced by the tax-rate-disparity test, Reg. §1.954-3(b)(1)(ii)(b). (R.54(Opinion), Apx3259-3265.) There was a tax-rate disparity because Luxembourg and Mexico taxed the sales income at an appreciably lower rate — 0% — than the rate Mexico would have applied to the sales income under the assumptions set forth in Reg. §1.954-3(b)(1)(ii)(b) (28%), far more than the 5-percentage-point tax-rate disparity permitted under the regulations. (R.54(Opinion), Apx3263-3265.)

Because both branch-rule preconditions are met, Mexican-Branch/WIN is properly treated as a wholly owned subsidiary of Whirlpool-LUX for purposes of determining Whirlpool-LUX's FBCSI. §954(d)(2); Reg. §1.954-3(b)(2)(ii)(a). So treated, Whirlpool-LUX has FBCSI for two alternative reasons. First, Whirlpool-LUX/Remainder is deemed to have sold the Products “on behalf of” Mexican-Branch/WIN, a related person, Reg. §1.954-3(b)(2)(ii)(c), and selling property “on behalf of a related person” is one of the four property transactions described in §954(d)(1). Second, Whirlpool-LUX/Remainder purchased property (components) from “any person” (its suppliers) and sold it (as part of the Products) to “related person[s]” (Whirlpool and Whirlpool-Mexico), Reg. §1.954-3(a)(1)(i), which is another property transaction described in §954(d)(1).

Whirlpool-LUX/Remainder's sales do not qualify for §954(d)(1)'s same-country exception because the Products were manufactured outside Luxembourg and were sold for use outside Luxembourg. §954(d)(1)(A)&(B); Reg. §1.954-3(a)(2)&(3). Nor do they qualify for the regulatory manufacturing exception, Reg. §1.954-3(a)(4), since Whirlpool-LUX/Remainder — treated as a separate entity from Mexican-Branch/WIN under the branch rules — did not engage in any manufacturing activity. Accordingly, the sales income derived by Whirlpool-LUX/Remainder constitutes FBCSI of Whirlpool-LUX under §954(d) and is taxable to Whirlpool as Subpart F income under §951(a), as the Tax Court correctly determined. (R.54(Opinion), Apx3266-3267.)

The Tax Court's determination is not only consistent with the language of the statute and the regulation, but also serves Congress's purpose in enacting Subpart F. Subpart F was enacted to eliminate tax deferral on the “income of a selling subsidiary” that had been “separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income.” H.R. Rep. 87-1447, at 62. That is exactly what happened here. Pursuant to Whirlpool's reorganization, the Products continued to be manufactured in Mexico — exactly as they had been manufactured before the reorganization. But the sales income related to those products was carved off and allocated to Whirlpool-LUX, where it enjoyed a 0% rate of tax under the combined effect of Luxembourg's and Mexico's laws rather than the 28% Mexican tax rate to which it was subject before Whirlpool artificially separated it from the manufacturing activities. (R.54(Opinion), Apx3267-3268.) The selling company — Whirlpool-LUX — derived “income from the . . . sale of property, without [adding] any appreciable value . . . to the product.” S. Rep. 87-1881, at 84. This arrangement “epitomizes the abuse at which Congress aimed.” (R.54(Opinion), Apx3268.)

Whirlpool challenges the Tax Court's application of the Manufacturing-Branch rule on two alternative bases. First, Whirlpool contends that there is no tax-rate disparity because (according to Whirlpool) Whirlpool-LUX derived no income from selling activities (Br.39-45). Alternatively, Whirlpool contends that, if there is a tax-rate disparity, the court should have allocated income between Whirlpool-LUX/Remainder and Mexican-Branch/WIN based on the relative value of their activities (Br.45-47). As demonstrated below, these arguments lack merit and are predicated on Whirlpool's (i) rewriting of the branch rules, and (ii) disregarding the form of the transaction it selected, including the amount that Whirlpool-LUX paid to Mexican-Branch/WIN for the manufacturing services.

1. Whirlpool-LUX engaged in selling activity within the meaning of the Manufacturing-Branch rule

Whirlpool's contention that Whirlpool-LUX did not engage in any selling activity conflicts with the undisputed facts. As noted by the Tax Court, Whirlpool-LUX:

• executed Supply Agreements with related persons (Whirlpool and Whirlpool-Mexico) whereby Whirlpool-LUX agreed “to sell them the Products” assembled at the Mexican plants (R.54(Opinion), Apx3230);

• was required under Mexican law to “take title to and sell the finished goods” to qualify Mexican-Branch/WIN for Mexico's tax-advantaged “maquiladora program” (R.54(Opinion), Apx3232);

• “sold” the Products “to related parties” (Whirlpool and Whirlpool Mexico) (R.54(Opinion), Apx3255), and, in doing so, “transferred title and risk of loss” to them (R.54(Opinion), Apx3231);

• “derived gross receipts that exceeded $800 million” from its sales (id.);

• “derived income of $45,231,843 from sale of the Products” (R.54(Opinion), Apx3235 n.3, 3273); and

• took the position that it — and not Mexican-Branch/WIN — sold the Products in order to exempt that sales income from Mexican tax (R.54(Opinion), Apx3233).

It is also undisputed that Mexican-Branch/WIN reported to Mexico, and paid Mexican tax on, only the manufacturing income related to the Products and none of the sales income. (R.54(Opinion), Apx3232-3233, 3273.) All of these undisputed facts are established by the record, including Whirlpool's own contemporaneous documentation of the transaction. (R.44(Discovery-Response), Apx1125-1139, 1442, 1885, 2146; R.44(Whirlpool-PowerPoint), Apx1322; R.51(Whirlpool-Transfer-Pricing-Study), Apx3025-3026; R.44(Form-5471/Form-8858), Apx1445, 2333; R.45(Commissioner-Brief), Apx2529-2530 (explaining tax forms); R.50(Commissioner-Brief), Apx2807-2808.)

Ignoring the Tax Court's acknowledgment of these undisputed facts, Whirlpool asserts (Br.41) that “the Manufacturing Branch — the principal — sold the property.” That unsupported assertion conflicts with (among other things) the predicate for the Mexican tax benefits that Whirlpool enjoyed. To claim those benefits, Whirlpool-LUX, and not Mexican-Branch/WIN, had to “take title to and sell the finished goods” to qualify Mexican-Branch/WIN for Mexico's tax-advantaged “maquiladora program.” (R.54(Opinion), Apx3232.) The parties' experts agreed that the “foreign principal” — Whirlpool-LUX — “was the entity that sold the finished goods.” (R.43(Bendiksen-Affidavit), Apx1006; accord R.33(Perez-Affidavit), Apx420.) Correspondence between the U.S. and Mexican taxing authorities confirms that “the Foreign Principal, and not the maquiladora (nor any other Mexican entity or branch) was the entity that sold the finished products.” (R.44(U.S./Mexico-Correspondence), Apx2003, 2013.)

Indeed, in the Transfer Pricing Study prepared to support its Mexican tax benefits, Mexican-Branch/WIN represented that it did not sell the Products. That Study expressly provides that “[a]ll responsibility for the distribution, marketing, and sale of products manufactured by the Company [Mexican-Branch/WIN] falls to WOM [Whirlpool-LUX].” (R.51(Transfer-Pricing-Study), Apx3026.) As the Study emphasized, Mexican-Branch/WIN's “functions are limited to contract manufacturing services and it does not take part in any distribution and/or marketing activity.” (R.51(Transfer-Pricing-Study), Apx3027-3028.) Accordingly, Whirlpool-LUX, and not Mexican-Branch/WIN, bore “credit risk,” “market risk,” and “inventory risk” related to selling the Products (id.), despite Whirlpool's unsupported claim to the contrary (Br.11).²⁰

The Tax Court aptly observed that “it ill behooves [Whirlpool] to urge that Whirlpool Luxembourg 'performs no sales activities'” when Whirlpool obtained massive tax benefits from Mexico that were predicated on the exact opposite representation. (R.54(Opinion), Apx3270.) If Mexican-Branch/WIN had in fact sold the Products and earned the sales income, it would have had to pay 28% in tax to Mexico on that sales income. (R.54(Opinion), Apx3232; R.44(U.S./Mexico-Correspondence), Apx2004, 2014; R.43(Bendiksen-Affidavit), Apx1008.) The whole point of Whirlpool's reorganization was to sever the sales income from its Mexican manufacturing operations and siphon it off to a tax-haven entity where it would be subject to 0% tax. (R.54(Opinion), Apx3273; see R.44(Whirlpool-PowerPoint), Apx1301, 1303 (explaining the “[s]ignificant tax savings” achieved by “[s]etting up legal agreements” for “[s]ales from WOM [Whirlpool-LUX]” to Whirlpool and Whirlpool-Mexico, including “[d]eferral” of U.S. tax).)

a. Attempting to avoid the consequence of its own tax planning, Whirlpool contends (Br.40) that Whirlpool-LUX could not engage in “selling activities” or hold “title” to the Products — despite undisputed facts to the contrary — because it was deemed under the regulations to sell the Products “on behalf of” Mexican-Branch/WIN. That illogical argument finds no support in the regulation itself.

Nothing in the “on behalf of” clause of the Manufacturing-Branch rule (Reg. §1.954-3(b)(2)(i)(c), (ii)(c)) alters which part of the CFC engaged in the selling activity or held title to the property sold. Rather, the “on behalf of” clause — which Whirlpool itself acknowledges is a “legal fiction” (Br.40) — is simply a mechanism to address the fact that, when §954(d)(2)'s branch rule applies, two parts of a single CFC are treated as separate but related entities and, so treated, the selling entity (the CFC/Remainder) is deemed to act on behalf of the manufacturing entity (the branch). And selling “on behalf of” a related person is one of the four types of transactions that generate FBCSI within the meaning of §954(d)(1) and its regulatory counterpart, Reg. §1.954-3(a)(1)(i). Indeed, the regulations make clear that a CFC has FBCSI under the Manufacturing-Branch rule when it sells property “on behalf of” its branch-deemed-subsidiary by providing an example that mirrors the facts here. See Reg. §1.954-3(b)(4), Ex. 2.

Similarly, nothing in the statute or the regulation precludes the CFC/Remainder from holding title to the property when selling on the branch's behalf, as the Commissioner explained (R.50(Commissioner-Brief), Apx2835-2838). Congress sought to tax the “income of a selling subsidiary (whether acting as principal or agent)” if it had been “separated from manufacturing activities” to “obtain a lower rate of tax for the sales income.” S. Rep. 87-1881, at 84. That is exactly what happened here. It does not matter whether Whirlpool-LUX is viewed as holding title to, and selling, the Products as a principal or an agent.

In any event, Whirlpool-LUX also sold property to related persons (Whirlpool and Whirlpool-Mexico), and selling to related persons is another type of transaction that generates FBCSI under §954(d)(1) and Reg. §1.954-3(a)(1)(i). Therefore, the Commissioner's determination that Whirlpool-LUX had FBCSI does not depend on deeming it to have sold on behalf of a related person. See R.45(Commissioner-Brief), Apx2561-2567; R.50(Commissioner-Brief), Apx2830-2834.

b. Whirlpool's alternative contention (Br.42-45) — that Whirlpool-LUX's selling activities were insufficiently “active” to qualify as sales within the meaning of §954(d) and Reg. §1.954-3 — conflicts with the text, context, and history of those provisions. Nothing in the statute or the regulation requires “active efforts,” such as “soliciting orders” or “negotiating terms” (Br.42) to qualify. Only a “sale of personal property,” §954(d)(1); Reg. §1.954-3(a)(1)(i), is required, and the plain meaning of “sale” includes the legal sale and transfer of ownership of property. Accord Reg. §1.954-3(b)(1)(ii) (the Manufacturing-Branch rule applies when property is “sold by or through the remainder” of the CFC). Whirlpool's contrary argument conflicts with the example provided in the regulations. See Reg. §1.954-3(b)(4), Ex. 2 (illustrating that the Manufacturing-Branch rule applies even if the CFC/Remainder's “only activities” are selling the products).²¹

Whirlpool's argument also conflicts with the context of §954(d). Section 954(d) ends tax deferral on income attributable to sales to, from, or on behalf of “related person[s].” As the Tax Court recognized (R.54(Opinion), Apx3270), transactions with related persons do not require the “active steps” (Br.42) that transactions with non-related persons might entail. In a related-person sale, the sale itself (a mere transfer of title) is often the only activity. Whirlpool-LUX's sales were prearranged transactions with corporate affiliates; it did not need to solicit their business or negotiate terms.

Whirlpool's argument to the contrary ignores the very reason for §954(d). Congress enacted §954(d) to deter tax-haven CFCs like Whirlpool-LUX by subjecting to U.S. tax any income “from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation.” S. Rep. 87-1881, at 84; see Joint Committee's Senate Report at 9. The drafters and their staff recognized that, in the “typical” scenario, the “tax-haven subsidiary” would “perform little actual business service,” 108 Cong. Rec. 5,320, creating only “the illusion that it is actually engaged in business operations,” Joint Committee's Senate Report, Appendix C at 38. When Senator Kerr discussed the Joint Committee's example of the Swiss CFC selling products manufactured by its German branch (to illustrate the paradigmatic case covered by §954(d)(2)), he emphasized that the Swiss CFC “often serves as merely an address for sales made” elsewhere. 108 Cong. Rec. 17,751. Congress thus was fully aware that a CFC needs no sales force or marketing activities to inappropriately “syphon off profits.” Id.

As this statutory history illustrates, the artificiality of the base company's sales office does not immunize the CFC from §954(d). Indeed, that artificiality is part of the abuse that §954(d) is designed to eliminate. To hold otherwise, as Whirlpool urges, would turn the statute on its head.

2. Whirlpool's valuation argument has been waived, and it lacks merit in any event

Finally, Whirlpool contends (Br.45-51) (i) that some of the income allocated by the Tax Court to Whirlpool-LUX as sales income was actually “manufacturing income” that should have been allocated to Mexican-Branch/WIN, and (ii) that there are “material questions of fact regarding the amount of sales income properly allocable” to Whirlpool-LUX. The predicate for this argument is Whirlpool's contention (Br.46) that the court should have allocated income between Whirlpool-LUX/Remainder and Mexican-Branch/WIN based on the relative “objective value” of the “selling activities” and the manufacturing activities. This newly raised argument has been waived and, in any event, lacks merit.

In the Tax Court proceeding, Whirlpool took an all-or-nothing approach regarding allocating sales income to Whirlpool-LUX, arguing that “no income” should be so allocated. (R.33(Whirlpool-Brief), Apx380; R.53(Whirlpool-Brief), Apx3206.) At no point did Whirlpool make an alternative argument that the court should determine the monetary value of having Whirlpool-LUX sell the Products and assume the related risks. Moreover, Whirlpool did not produce any evidence from which the court could have made any such valuation.

Nor did Whirlpool argue that disputed factual issues regarding income allocation precluded granting summary judgment to the Commissioner under §954(d)(2). See R.46(Whirlpool-Brief), Apx2619-2681. On the contrary, in responding to the Commissioner's summary-judgment motion, Whirlpool affirmatively acknowledged that “no genuine questions of material fact exist.” (R.46(Whirlpool-Brief), Apx2681.) Having failed to preserve these arguments in the Tax Court, Whirlpool has waived them. See FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611, 630 (6th Cir. 2014).

Whirlpool's valuation argument also lacks merit. Nothing in §954(d) or Reg. §1.954-3 requires a valuation of CFC activities.²² Income is allocated between the branch and the CFC/Remainder under the regulations for purposes of applying the tax-rate-disparity test, not for repricing a related-person transaction under §482.²³ Subpart F was designed to be a “'backstop' to the section 482 transfer [i.e., inter-company] pricing rules” because “U.S. companies were engaging in transfer pricing manipulation to earn profits in tax havens.”²⁴ Because §954(d) applies here, the Commissioner's authority under §482 is not implicated.

Whirlpool chose to (i) have Mexican-Branch/WIN be designated as the manufacturer and derive a fee for that activity, (ii) have Whirlpool-LUX/Remainder be designated as the seller and derive the profit from those sales, and (iii) allocate the income between the two parts of the CFC accordingly. Any values for the respective activities other than those reported by the taxpayer are irrelevant under §954(d). Indeed, separately valuing the contribution of a tax-haven CFC like Whirlpool-LUX, and then treating only a commensurate amount of income as FBCSI, would thwart the very purpose of §954(d). Section 954(d) was enacted to end tax deferral on income shifted to a CFC that adds no “appreciable value” to the property. S. Rep. 87-1881, at 84. Congress denied the privilege of deferral for situations in which a taxpayer separates sales income from manufacturing income and reports the former in a low- or no-tax jurisdiction, without regard to the taxpayer's rationale for doing so.

While the above is dispositive of the valuation issue, we also note that Whirlpool's own U.S. tax reporting supports the Tax Court's determination of FBCSI. Whirlpool reported the income from selling the Products on its Form 5471 for Whirlpool-LUX, not on its Form 8858 for Mexican-Branch/WIN. (R.44(Form-5471/Form-8858), Apx1445, 2333; R.44(Discovery-Response), Apx2146; see R.45(Commissioner-Brief), Apx2530, 2536, 2541-2542, 2577; R.50(Commissioner-Brief), Apx2807-2808.) Whirlpool's Form 8858 reports that Mexican-Branch/WIN earned $4 million in manufacturing income, as Whirlpool acknowledges (Br.12).

Despite that acknowledgement, Whirlpool nevertheless complains (Br.46) that “over 90% of the profit” was assigned to Whirlpool-LUX/Remainder, and that only 10% was assigned to Mexican-Branch/WIN. But Whirlpool itself dictated that outcome when it determined how much income Mexican-Branch/WIN would receive for its manufacturing services and thus how much of the income related to the Products would be subject to tax by Mexico. (R.44(Whirlpool-PowerPoint), Apx1304, 1328.) Whirlpool's newly raised suggestion that the income Mexican-Branch/WIN received was not an objective, arm's-length amount conflicts with its contemporaneous transfer-pricing documents. According to its documentation, the fee paid to Mexican-Branch/WIN was an “arm's length” amount for its “manufacturing services” and “therefore in compliance with Mexican transfer pricing regulations.” (R.51(Transfer-Pricing-Study), Apx3002, 3048.) Whirlpool's own expert confirmed that Mexican-Branch/WIN “charged an arm's length service fee” to Whirlpool-LUX for the manufacturing services that it provided (taking into account its use of equipment owned by Whirlpool-LUX). (R.33(Perez-Affidavit), Apx424.)

Whirlpool has also failed to demonstrate that the sales income reported on its Form 5471 included the manufacturing income that it allocated to Mexican-Branch/WIN. According to that form, Whirlpool-LUX received over $800 million in gross receipts from selling the Products, and, after deducting costs (including manufacturing expenses), derived approximately $45 million in income from selling that property. (R.44(Form-5471), Apx1445; R.44(Discovery-Response), Apx1439, 1966, 1982-1983, 2146.) One of Whirlpool-LUX's costs was the arm's-length fee that it paid to Mexican-Branch/WIN for “manufacturing services.” (R.51(Transfer-Pricing-Study), Apx3048.) Moreover, even if the $4 million in manufacturing income earned by Mexican-Branch/WIN was not deducted from the $45 million in sales income reported on the Form 5471 (as Whirlpool suggests (Br.12 n.8)), the entire $45 million is properly included in the Commissioner's determination of Subpart F income under §954(b)(3)(B)'s full-inclusion rule. See R.45(Commissioner-Brief), Apx2594-2595 (explaining application of full-inclusion rule to Whirlpool-LUX's income). And, as noted above (n.10), Whirlpool has not challenged the Commissioner's application of that rule.

Finally, Whirlpool's reliance (Br.50-51) on the tax ruling it acquired from Luxembourg, which was frequently employed as a tax haven during this time period, is unavailing. First, any such ruling is not binding for U.S. tax purposes. See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 413-414 (1964). Moreover, Luxembourg did not address the “exact same question” (Br.50) as that posed under §954(d)(2). Rather, Luxembourg ruled — based on Whirlpool's representations — that all “profits related to manufacturing and sales activities” with respect to the Products manufactured in Mexico were “exempt” from Luxembourg tax. (R.44(Luxembourg-Ruling), Apx1188 (emphasis added).) Luxembourg did not rule that all those profits were derived from “manufacturing” rather than “sales.” On the question posed here under §954(d)(2) — how much income did Whirlpool-LUX derive from selling the Products — the Luxembourg ruling is silent, and does not create a disputed factual issue, as Whirlpool belatedly contends.

* * * * *

At bottom, Whirlpool's arguments regarding Whirlpool-LUX's selling activity, and the amount of income allocated to that activity, are an attempt to disavow the form and pricing of its transactions. It is fundamental, however, that a taxpayer, having chosen how to structure a transaction, may not renounce that chosen form to avoid the form's tax consequences. “[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not, and may not enjoy the benefit of some other route he might have chosen to follow but did not.” Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974) (citations omitted); accord Goudas v. Commissioner, 137 F.3d 368, 371 (6th Cir. 1998) (applying National Alfalfa).

Whirlpool structured its operations in a manner that allowed it to (i) report to Luxembourg and to the United States that Whirlpool-LUX earned over $45 million in sales income, and (ii) not include that amount in the income that Mexican-Branch/WIN reported — and paid tax on — to Mexico. Control over inter-company charges — even as tempered by arm's-length principles — allowed Whirlpool to allocate much of the profit associated with the Products to a tax-haven subsidiary, by minimizing the amount paid to Mexican-Branch/WIN and maximizing the amount charged by Whirlpool-LUX for the Products. By so structuring the transaction, Whirlpool enjoyed a 0% foreign tax rate on that income. That such manipulations result in Subpart F income is no basis for Whirlpool to disavow its own transfer pricing. Cf. Reg. §1.482-1(a)(3) (subject to a limited exception, only the Commissioner, not the taxpayer, may invoke §482). Whirlpool cannot now disavow its form and reporting to counteract the U.S. tax consequences of its chosen structure, namely, that the steps it took to avoid foreign tax preclude it from claiming U.S. tax deferral on that same income. Nat'l Alfalfa, 417 U.S. at 149.

D. If this Court disagrees with the Tax Court's determination that Whirlpool-LUX has FBCSI under §954(d)(2), a remand would be required so that the Tax Court could make findings regarding whether Whirlpool-LUX has FBCSI under §954(d)(1)

As noted above, Whirlpool must demonstrate that it does not have FBCSI under either §954(d)(1) or §954(d)(2). Because the Tax Court granted the Commissioner summary judgment under §954(d)(2), it did not decide whether Whirlpool-LUX had FBCSI under §954(d)(1), an issue that raised “factual uncertainties” on which the “record is unclear.” (R.54(Opinion), Apx3252.) If this Court affirms the court's ruling under §954(d)(2), Whirlpool's arguments under §954(d)(1) (Br.19-27) are moot. But if this Court were to reject the §954(d)(2) ruling, then a remand would be needed so that the Tax Court could resolve whether Whirlpool-LUX has FBCSI under §954(d)(1) after the parties further develop the record. Whirlpool's suggestion that a remand is unnecessary misstates the law, the record, and the Tax Court's opinion.

Section 954(d)(1) includes as FBCSI any income derived from “the purchase of personal property from any person and its sale to a related person.” §954(d)(1). Here, Whirlpool-LUX purchased personal property (raw materials and component parts) from “any person” (suppliers) and sold them to “related person[s]” (Whirlpool and Whirlpool-Mexico) as incorporated into the Products. (R.54(Opinion), Apx3244.) Under the plain language of §954(d)(1), Whirlpool-LUX's property transaction generated FBCSI (unless a regulatory exception, discussed below, applies).

Whirlpool contests (Br.20-23) this reading of §954(d)(1), arguing that the property sold must be in the “same” form as the property purchased. The text of the statute, however, does not contain that qualification. Whirlpool seeks to graft that qualification onto the statute by relying on the pronoun “its.” That pronoun does not support Whirlpool's statutory revision. The word “its” refers to the purchased “property,” and that property can be sold, even if it is altered before the sale. For example, if a CFC purchases a refrigerator, places a company logo on it, and then sells the now-branded refrigerator, it has purchased and sold the refrigerator, even though the purchased (unbranded) refrigerator is not the same as the sold (branded) refrigerator. At most, the term “its” introduces an ambiguity. See R.45(Commissioner-Brief), Apx2596-2597; R.50(Commissioner-Brief), Apx2856-2864.

The legislative history confirms the Commissioner's reading of §954(d)(1). Congress sought to end tax deferral on income “from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation.” S. Rep. 87-1881, at 84 (emphasis added). As the Senate Report explains, if the CFC “purchases parts or materials which it then transforms or incorporates into a final product, income from the sale of the final product would not be [FBCSI] if the corporation substantially transforms the parts or materials, so that, in effect, the final product is not the property purchased.” Id. at 245. Thus, Congress intended income derived by a CFC's purchase/sale transaction to qualify as FBCSI unless (i) the purchased property is substantially transformed, and (ii) the transformation is accomplished by the selling CFC. In arguing to the contrary, Whirlpool misreads the legislative history (Br.22). See R.45(Commissioner-Brief), Apx2546-2548; R.50(Commissioner-Brief), Apx2865-2867.

Consistent with that history, Treasury promulgated regulations shortly after §954(d) was enacted, creating an exception to FBCSI for products manufactured by the CFC. 29 Fed. Reg. at 6394. This regulatory exception applies only if the product is manufactured “by the corporation.” Reg. §1.954-3(a)(4)(i) (emphasis added). Similarly, if the CFC purchases component parts of a product and then sells the finished product, the exception applies only if the manufacturing “operations conducted by the selling corporation” are “substantial in nature.” Reg. §1.954-3(a)(4)(iii) (emphasis added). The regulations emphasize that the exception is “dependent on the facts and circumstances of each case.” Id.

In the Tax Court, the parties disputed whether this manufacturing exception applied here. The Commissioner argued that it did not because Whirlpool-LUX (including Mexican-Branch/WIN) did not actually perform any manufacturing operations and that material factual disputes would have to be resolved before the court could decide that question. (R.54(Opinion), Apx3246, 3251-3252.) Although the Commissioner assumed for purposes of his argument under §954(d)(2) that Mexican-Branch/WIN engaged in manufacturing activity (R.42(Commissioner-Motion), Apx999-1000), for purposes of his argument under §954(d)(1) the Commissioner relied on the fact that the actual manufacturing was performed by the employees of a different Whirlpool entity (Whirlpool-Mexico), and not Mexican-Branch/WIN (which had no employees of its own).

Whirlpool contends (Br.24-25) that the manufacturing exception applies so long as the purchased property is “substantially transformed” before being sold, even if the transformation is not accomplished by the CFC. That argument was correctly rejected by the Tax Court (R.54(Opinion), Apx3251) because it conflicts with the express language of the regulation.²⁵ As emphasized above, the regulation limits the requisite transformative activity to that performed “by the corporation.” Reg. §1.954-3(a)(4)(i) (“by the corporation”), (iii) (“by the selling corporation”). See R.45(Commissioner-Brief), Apx2600-2606; R.50(Commissioner-Brief), Apx2868-2870.

Whirlpool alternatively contends (Br.25-27) that the property here was transformed by Whirlpool-LUX because the transaction documents purported to give Mexican-Branch/WIN legal control over Whirlpool-Mexico's manufacturing employees, and that such control was sufficient to satisfy the manufacturing exception. This contention, however, raises disputed issues of fact that require further record development, as the Commissioner has detailed. (R.45(Commissioner-Brief), Apx2605-2606; R.50(Commissioner-Brief), Apx2873-2890.)

In arguing that it was entitled to summary judgment under §954(d)(1), Whirlpool distorts the Commissioner's position and the Tax Court's analysis. It is not “undisputed” (Br.6) that Whirlpool-LUX had “the legal right to control the method and manner in which the personnel [of Whirlpool-Mexico] manufactured the Products.” The Commissioner cited numerous provisions in the inter-company agreements and other related facts that belie Whirlpool's assertion that Whirlpool-LUX — as opposed to Whirlpool-Mexico and Whirlpool — had control over the manufacturing personnel. (R.50(Commissioner-Brief), Apx2880-2886.)

Nor did the Tax Court “f[i]nd” that Whirlpool-LUX had “legal control” over the manufacturing personnel (Br.13). To the contrary, the court recognized that Whirlpool-LUX (through Mexican-Branch/WIN) was only the “nominal manufacturer” of the Products, and the actual manufacturing of the Products was done “exactly” as it had been done prior to Whirlpool's reorganization — by employees who were managed, paid, and employed by Whirlpool-Mexico. (R.54(Opinion), Apx3246-3247, 3267-3268.) Although the court observed that the formal agreements “appear to have given WIN [Mexican-Branch] the right to control the employees' work,” it further recognized the Commissioner's argument that “this right was illusory because WIN had no managers who could have done this.” (R.54(Opinion), Apx3252 (emphasis added).) In light of this dispute, as well as “other factual uncertainties” and the “unclear” record (id.), the §954(d)(1) issue cannot be resolved on summary judgment and would require a remand.

CONCLUSION

The decisions of the Tax Court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-3361
ARTHUR T. CATTERALL (202) 514-2937
JUDITH A. HAGLEY (202) 514-8126
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

JANUARY 22, 2021