Whirlpool Maintains Income Wasn’t Foreign Base Company Sales Income

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

UNITED STATES TAX COURT

PETITIONERS' REPLY BRIEF IN FURTHER SUPPORT OF PETITIONERS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT UNDER SECTIONS 954(D)(1) AND 954 (D)(2)

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UNITED STATES TAX COURT

PETITIONERS' REPLY TO MOTION FOR SUMMARY JUDGMENT

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UNITED STATES TAX COURT

Judge Lauber

REPLY BRIEF IN FURTHER SUPPORT OF PETITIONERS' TAX COURT RULE 121 MOTIONS FOR PARTIAL SUMMARY JUDGMENT UNDER SECTIONS 954(d)(1) AND 954(d)(2)

Mark A. Oates
T.C. No. OM0113
Cameron C. Reilly
T.C. No. RC0458
Baker & McKenzie LLP
300 E. Randolph Dr.
Suite 5000
Chicago, IL 60601
(312) 861-7594

Robert H. Albaral
T.C. No. AR0375
Baker & McKenzie LLP
1900 North Pearl St.
Suite 1500
Dallas, Texas 75201
(214) 978-3044

Summer Austin
T.C. No. AS0208
Baker & McKenzie LLP
815 Connecticut Ave., N.W.
Washington, D.C. 20006
(202) 835-1643

Attorneys for Petitioners

June 24, 2019

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TABLE OF CONTENTS

OVERVIEW

I. WHIRLPOOL DOES NOT HAVE FBCSI UNDER SECTION 954(d)(1)

II. WHIRLPOOL DOSS NOT HAVE FBCSI UNDER THE MANUFACTURING BRANCH RULE OF SECTION 954(d)(2)

III. PETITIONERS' ALLEGED COMPUTATIONAL ERRORS DO NOT RECLUDE THIS COURT FROM RESOLVING THE SUBSTANTIVE ISSUES ON SUMMARY JUDGMENT

CONCLUSION

TABLE OF AUTHORITIES

CASES:

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

Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984)

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

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

Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934)

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

Richardson v. Commissioner, 509 F.3d 736 (6th Cir. 2007)

Shannon v. United States, 512 U.S. 573 (1994)

United States v. Larionoff, 431 U.S. 864 (1977)

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

STATUTES:

26 U.S.C. § 936

26 U.S.C. § 936(a)(2)(B)

26 U.S.C. § 936(h)(5)

26 U.S.C. § 936(h)(5)(b)(ii)

26 U.S.C. § 954(d)(1)

26 U.S.C. § 954(d)(1)(A)

26 U.S.C. § 954(d)(2)

REGULATIONS:

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)(i)

Treas. Reg. § 1.954-3(a)(4)(ii)

Treas. Reg. § 1.954-3(a)(4)(iii)

Treas. Reg. § 1.954-3(b)(1)(i)

Treas. Reg. § 1.954-3(b)(1)(ii)

Treas. Reg. § 1.954-3(b)(1)(ii)(b)

Treas. Reg. § 1.954-3(b)(1)(ii)(c)(1)

Treas. Reg. § 1.954-3(b)(2)(i)

Treas. Reg. § 1.954-3(b)(2)(i)(c)

Treas. Reg. § 1.954-3(b)(2)(i)(e)

Treas. Reg. § 31.3121(d)-1(c)(1)

Treas. Reg. § 31.3121(d)-1(c)(2)

TREATIES

Convention Between the Government of the United States and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, U.S.-Mex., art. 24(1), Sept. 18, 1992, S. Treaty Doc. No. 103-7 (1994)

Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, Lux.-Mex., 2450 U.N.T.S. 95

OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, (OECD Nov. 21, 2017)2-4, 51

LEGISLATIVE HISTORY

H.R. Rep. No. 87-1447 (1962)

S. Rep. No. 87-1881 (1962)

Joint Committee on Taxation, "Tax Effects of Conducting Foreign Business Through Foreign Company" (JCS-5-61), July 21, 1961

ADMINISTRATIVE GUIDANCE

AM 2015-002 (Feb. 9, 2015

Priv. Ltr. Rul. 200942034 (Oct. 16, 2009)

Priv. Ltr. Rul. 200945036 (Nov. 6, 2009)

Priv. Ltr. Rul. 8645062 (Aug. 12, 1986)

Priv. Ltr. Rul. 201002024 (Oct. 2, 2009)

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

Technical Advice Memorandum 8509004 (Nov. 23, 1984

Court Rules

Tax Court Rule 121

Tax Court Rule 155

MISCELLANEOUS

BNA Portfolio 6240-1st: CFCs — Foreign Base Company Income (Other than FPHCI), Chapter H (2019)

Boris Bittker et al., Federal Taxation of Income, Estates< and Gifts (2d/3d ed. 1993-2019 & 2019 Cum. Supp. No. 1)

Joseph Isenbergh, International Taxation (4th ed. 2018)

Leonard R. Jr. Olsen, "Working with the Branch Rule of Section 954(d)(2)," 27 TAX LAW. 105 (1973)

Lowell D. Yoder, "Limits on the Application of the Subpart F Branch Rules," 38 Tax Mgmt. Int'l J. 366 (June 12, 2009)

Lowell Yoder, "A Note From the Editor in Chief: Local Law Governs Manufacturing Branch Determinations," 36 Int'l Tax J. 3, at 3-4 (July-August 2010)

Lowell D. Yoder, "Final Subpart F Branch Regulations," 38 Int'l TAX J. 3 (Mar.-Apr. 2012)

Lowell Yoder, "A Note from the Editor in Chief — Subpart F Manufacturing Exception and Branch Rule: A Refresher," 43 Int'l Tax J. 4 (July 24, 2017)

Michael D. Raskhin, "The Branch Rule and the Subpart F Exclusions," 4 Int'l Tax J. 980 (1978)

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OVERVIEW¹

Despite Respondent's claims of "stateless income" and "tax haven," the income at issue in this case was fully subject to tax in Mexico in the first instance. Mexico, however, as a legitimate incentive under its maquiladora manufacturing program, offered to exempt the profits attributable to a foreign principal's permanent establishment ("PE") in Mexico from taxation by deeming a PE not to exist so long as the foreign principal complied with all maquiladora rules, including specific transfer pricing rules. Because the Mexico-Luxembourg Treaty² used the exemption method of OECD Model Treaty Article 23 A to eliminate double taxation, Luxembourg could not and did not tax the profits attributable to WOM's maquiladora foreign principal PE in Mexico.³ Thus, WOM's profits attributable to its maquiladora foreign principal PE in Mexico were not taxed by Mexico as an incentive and could not be taxed by Luxembourg under the Mexico-Luxembourg Treaty. WOM's profits attributable to its Mexican PE were not taxed by the US until those funds were repatriated.

Ironically, Whirlpool's maquiladora structure resulted in the US receiving more tax from Whirlpool when the funds were repatriated than would have resulted under Whirlpool's prior structure, under which Mexico would have fully taxed the sales of the Products and the repatriation would have been accompanied by foreign tax credits for the taxes paid. Clearly, Respondent's real complaint in this case is that, when Whirlpool reorganized to adopt a maquiladora structure, Whirlpool did not use a US maquiladora foreign principal, which would have allowed the US to tax currently the profits attributable to the foreign principal PE in Mexico.⁴ Whirlpool, of course, was under no obligation to structure its affairs so as to maximize its tax payments to the US. Richardson v. Commissioner, 509 F.3d 736, 741 (6th Cir. 2007) (citing Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934)).

The drumbeat of Respondent's cries of "stateless income" and "tax haven" appear particularly designed to divert attention away from the fact that the entirety of the profits at issue are the profits attributable to WOM's Mexican PE arising out of the maquiladora operations. With a sleight of hand, Respondent transforms these Mexican earnings into what he asserts are untaxed Luxembourg profits. Nothing could be further from the truth. As Luxembourg and Mexico both agreed, the profits attributable to WOM's Mexican PE were taxable in Mexico⁵ and not in Luxembourg.⁶ The fact that Mexico chose not to tax those profits by deeming the PE not to exist in some circumstances does not change the fact that a PE existed under the Mexico-Luxembourg Treaty. Accordingly, the profits at issue are Mexico's to tax and not Luxembourg's, a point confirmed by the Commentary to Articles 23 A and 23 B of the OECD Model Convention. This point is of critical importance and is outcome determinative on the tax rate disparity issue. Only by erroneously claiming that Luxembourg could have taxed, but did not tax, the profits attributable to WOM's Mexican PE, can Respondent even claim that a tax rate disparity exists.

Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i) require that the Luxembourg Remainder engage in "purchasing or selling activities" in order for the Manufacturing Branch Rule to apply, a point confirmed by the plain language of the regulations, Respondent's prior ruling positions, and numerous commentators over the past 50 years. Having admitted that the Luxembourg Remainder in this case had only a single part-time employee who did not perform any purchasing or selling activities, Respondent now argues that the mere act of a legal sale or transfer of ownership constitutes a "selling activity" by the Luxembourg Remainder. Under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i), however, the Manufacturing Branch is deemed to be the selling entity and the Luxembourg Branch is deemed merely to provide "selling activities" on behalf of the Manufacturing Branch. Thus, even Respondent's last ditch "sales is a selling activity" argument must fail. Summary judgment in favor of Whirlpool on the section 954(d)(2) argument is appropriate.

On the section 954(d)(1) issue, Respondent's position, in essence, is merely that while he admits that the Products WOM sold were "manufactured" and the sale of those Products thus did not constitute the sale of the same personal property purchased, Respondent believes that a material question of fact exists as to whether employees leased by WOM constituted common law employees of WOM, which Respondent argues is necessary for WOM to avoid FBCSI. As set forth below, as a legal matter, the plain language of the statute, the legislative history, and the regulations all establish that the definition of FBCSI covers only transactions involving both a purchase and a sale of the same personal property, and do not require that the CFC use its own common law employees to manufacture or otherwise produce the final product sold. Moreover, as WOM's operations at the Mexican manufacturing plants were substantial in nature and Respondent has admitted that the plants' operations constituted manufacture of the products, Treas. Reg. § 1.954-3(a)(4)(iii) treats WOM as the manufacturer of the Products sold and thus FBCSI does not arise. Finally, as the leased employees did constitute common law employees of WOM, and no genuine issue of material fact is present, WOM does not have FBCSI even under Respondent's position. Thus, summary judgment on the section 954(d)(1) issue in favor of Whirlpool is also appropriate.

I. WHIRLPOOL DOES NOT HAVE FBCSI UNDER SECTION 954(d)(1).

A. BECAUSE WOM DID NOT SELL THE SAME PROPERTY THAT WOM PURCHASED, WOM'S SALES OF REFRIGERATORS AND WASHERS DID NOT GIVE RISE TO FBCSI UNDER SECTION 954(d)(1).

Under section 954(d)(1), FBCSI is not present unless there is a purchase and sale of the same personal property: FBCSI means income "derived in connection with . . . the purchase of personal property from any person and its sale to a related person." This common sense reading of the plain language of section 954(d)(1) is unambiguous, and is further supported by the legislative history (FBCSI "definition covers only transactions involving both a purchase and a sale"; "sale of final product would not be [FBCSI] if . . ., in effect, the final product is not the property purchased"),⁷ and by Treas. Reg. § 1.954-3(a), which focuses upon how much change in the property purchased is required in order, in effect, for the property sold not to be the same as the property purchased.

Respondent does not dispute that the refrigerators and washers sold by WOM were manufactured at its Ramos and Horizon Manufacturing Plants and that thus those final Products sold were not the same personal property as the raw materials and component parts purchased by WOM. Respondent maintains, however, that the statute and regulations require more. Respondent maintains that it does not matter how different the final product sold is from the personal property purchased if the substantial transformation, manufacture or production of the final Products was not performed by the selling corporation's own common law employees. Respondent ultimately takes the position that there is a genuine issue of material fact as to whether the seconded and leased employees working in the Ramos and Horizon Manufacturing Plants were common law employees of WOM. In support of his position on the section 954(d)(1) issue, Respondent makes a number of arguments.

First, Respondent argues that "its" is "inherently ambiguous," in Respondent's view just referring to the purchase of any personal property and to the sale of any personal property. Respondent's Brief at 123. This argument fails to take into account the ordinary definition of "its." As more fully set forth in Whirlpool's Section 954 (d)(1) Brief at 25, Webster's defines "its" as "of or relating to it or itself[.]" "It" is defined in relevant part as "that one." "Itself" is defined as "that identical one." The statute thus requires purchase and sale of the same personal property. Respondent's one paragraph attack on the plain meaning of "its" to mean "any" is simply unsupportable. The plain language of the statute is unambiguous.

Second, Respondent argues that “its" cannot mean what "its" means because if it did, "under their [Petitioners'] construction of the statute, a company may have FBCSI under section 954(d)(1) if it⁸ sells personal property on behalf of a related person regardless of whether the property is in the same form or not." Respondent's Brief at 123. Respondent's argument is nonsensical. The "on behalf of" provisions of section 954(d)(1) cover situations in which a party buys or sells property on behalf of a related party, that is, the party does not hold title but rather acts in the role of an agent for a related party. See S. ReP. No. 87-1881 at 84 ("The provision also covers similar cases where the [CFC] does not take title to the property but acts on a fee or commission basis."). The "on behalf of" provisions provide that "[FBCSI] means income . . . derived in connection with . . . 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[.]" As is self-evident, the "on behalf of" provisions do not even use the term "its.” The "on behalf of" provisions apply to any purchase or sale of property on behalf of a related party, subject to the exceptions in section 954(d)(1)(A). Respondent's "the sky is falling" argument is simply not applicable here.

Respondent further argues that Whirlpool's review of the legislative history is somehow an admission that the term "its" is ambiguous. Respondent's Brief at 125. However, as Whirlpool stated in its Section 954(d)(1) Brief at 27, "[b]ecause the plain meaning of section 954(d)(1) is clear, it is not necessary for a court to resort to the legislative history or other extrinsic aids to determine the intent of Congress." Nonetheless, the legislative history in fact confirms the plain meaning of the statute. As recounted in the Section 954(d)(1) Brief at 27-30, Congress looked to whether, "in effect, the final product is not the property purchased." H.R. Rep. No. 87-1447, at A94-A95 (1962); S. Rep. No. 87-1881, at 245 (1962). The fact that the legislative history confirms the unambiguous language of the statute is neither surprising nor an admission of ambiguity.

Respondent also puts forward a section of his brief proclaiming that the "Legislative History Does Not Support the 'Its Argument'". Respondent's Brief at 124-25. The only legislative history Respondent cites in this section, however, is taken from the same page as the quote in the immediately preceding paragraph above. Respondent conveniently truncates the quote to avoid the fact that the Senate was using a CFC's manufacture of a product as one instance in which the property sold would not be the same as the property purchased and, therefore, the sale would not give rise to FBCSI. The quote continues from where Respondent left off:

In a case in which a [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.

S. Rep. No. 87-1881, at 245 (1962) (emphasis added). Here, WOM unquestionably transformed the raw materials and component parts into refrigerators and washers, which it then sold. While Respondent asserts WOM's transformation or manufacture must be done using WOM's own common law employees, neither the statute nor the legislative history nor the regulations so require. Indeed, the House Report, using virtually identical language to that quoted, reaffirmed that the touchstone under the statute is whether there was a purchase and a sale involving the same property: "Since the definition covers only transactions involving both a purchase and a sale, it does not apply to income of a [CFC] from the sale of a product which it manufactures." H.R. Rep. No. 87-1447, at A94-A95 (1962) (emphasis added). Thus, the rule is that the definition of FBCSI requires a purchase and sale of the same personal property. The legislative history provides, as an example (i.e., "In a case in which . . ."), that if a CFC manufactures a product, then there will be no purchase and sale of the same product. Contrary to Respondent's assertion, neither the plain language of the statute nor the legislative history requires the CFC to use its own employees to manufacture the final product sold to avoid FBCSI. If the property sold is different than the property purchased, then income from the sale will not be FBCSI, regardless of whose employees provide the manufacturing labor.

Respondent also argues that the plain meaning of the statute should be ignored because new Treasury regulations not applicable to this case "specifically reject the 'Its Argument.'" Respondent's Brief at 123. Specifically, Respondent argues that under the new regulations, WOM can avail itself of "the manufacturing exception" only if WOM, acting through its own employees, manufactured the Products. As discussed above, this new requirement is not within the scope of the statute and is not supported by the legislative history. Nor is it part of the regulations applicable to the years at issue. Obviously, the new regulations, which do not apply to this case, cannot expand the definition of FBCSI in the statute by administrative fiat.

B. THE APPLICABLE TREASURY REGULATIONS ESTABLISH THAT WOM'S PURCHASES OF RAW MATERIALS AND COMPONENT PARTS AND SALES OF REFRIGERATORS AND WASHERS DO NOT GIVE RISE TO FBCSI UNDER SECTION 954(d)(1).

1. THE REGULATIONS FOLLOW THE PLAIN MEANING OF SECTION 954(d)(1) AND PROVIDE THAT FBCSI ARISES ONLY OUT OF TRANSACTIONS INVOLVING THE PURCHASE AND SALE OF THE SAME PERSONAL PROPERTY.

Regulations must be read in a manner that is consistent with the statutory language under which the regulations were promulgated. United States v. Larionoff, 431 U.S. 864, 873 (1977) ("regulations, in order to be valid, must be consistent with the statute under which they are promulgated"). As discussed above, the plain language of section 954(d)(1) requires both a purchase and a sale of the same personal property for FBCSI to arise. The statute says absolutely nothing about who must act upon the raw materials and component parts in order to transform, produce or manufacture those items into a different product so that the sale does not involve the same property purchased. The legislative history confirms that the definition of FBCSI "covers only transactions involving both a purchase and a sale" of the same personal property, and that "the sale of the final product would not be [FBCSI] if . . ., in effect, the final product is not the property purchased." H.R. Rep. No. 87-1447, at A94-A95 (1962); see also S. Rep. No. 87-1881, at 245 (1962).

Treas. Reg. § 1.954-3(a) (2002)⁹ is easily read in a manner consistent with the plain language of the statute, as further confirmed by the legislative history.¹⁰ As set forth in the Section 954(d)(1) Brief at 30-42, each of the applicable regulations contains language that mirrors the language of the statute and the legislative history. Treas. Reg. § 1.954-3(a)(1) sets forth the general rule and follows the language of the statute, providing in relevant part: FBCSI shall consist of gross income "derived in connection with . . . (c) the purchase of personal property from any person and its sale to a related person[.]" Examples 1 (purchasing from a related party and selling to an unrelated party) and 2 (purchasing from an unrelated party and selling to a related party) under the general rule both speak in terms of the CFC at issue purchasing personal property and selling it "in the form in which purchased” and conclude that such purchases and sales of the same personal property give rise to FBCSI.

Similarly, Treas. Reg. § 1.954-3(a)(4)(i) mirrors the legislative history in stating the general rule that FBCSI "does not include income of a [CFC] derived in connection with the sale of personal property manufactured, produced, or constructed by such corporation." While Respondent will undoubtedly point to the "by such corporation" language in the first sentence of Treas. Reg. § 1.954-3(a)(4)(i) just quoted, importantly the very next sentence of the regulation uses language consistent with the plain language of the statute by providing that a CFC "will be considered, for purposes of this subparagraph, to have manufactured, produced, or constructed personal property which it sells if the property sold is in effect not the property which it purchased." (Emphasis added.) This second sentence literally provides that it matters not who actually manufactures, produces or transforms the product, but nonetheless the CFC will be considered to have manufactured the personal property which it sells if the property sold is in effect not the property which it purchased. This language in the regulation follows the plain language of the statute and the House and Senate Reports in which Congress laid down the rule: since the definition of FBCSI covers only transactions involving both a purchase and a sale of the same property, sale of a final product that is different from the raw materials and component parts purchased does not give rise to FBCSI. The second sentence of Treas. Reg. § 1.954-3(a)(4)(i) faithfully follows this command by providing that the CFC "will be considered . . . to have manufactured . . . personal property which it sells if the property sold is in effect not the property which it purchased." This language properly does not require the CFC to do the actual manufacturing; if the final product sold is not in effect the product purchased, the CFC will be considered to have manufactured the product.

Treas. Reg. § 1.954-3(a)(4)(i) continues in the third sentence using language again that teaches that the rule is that FBCSI includes only transactions in which the same personal property is both bought and sold: "In the case of the manufacture . . . of personal property, the property sold will be considered . . . as not being the property which is purchased if the provisions of subdivision (ii) or (iii) are satisfied.” This regulation could not be clearer in showing that Treasury and the IRS fully understood that the plain language of section 954(d)(1) required both the purchase and sale of the same personal property. And again this sentence says nothing about who must do the manufacturing.

Treas. Reg. § 1.954-3(a)(4)(ii) again establishes that it does not matter who actually provides the labor to manufacture the product. Treas. Reg. § 1.954-3(a)(4)(ii) states unequivocally that: ”[i]f purchased personal property is substantially transformed prior to sale, the property sold will be treated as having been manufactured . . . by the selling corporation." (Emphasis added.) Thus, if raw materials are substantially transformed prior to sale, the regulations deem the selling corporation to be the manufacturer. This regulatory language deeming the selling corporation to be the manufacturer would not be necessary if the selling corporation had to itself be the instrumentality of the manufacture. This regulatory language deeming the seller to be the manufacturer is also consistent with the plain language of the statute and the legislative history, which do not require the CFC to be the actual manufacturer. All that is required to escape FBCSI is that the property sold be different than the property purchased.

Treas. Reg. § 1.954-3(a)(4)(iii) deals with the manufacture of products from component parts and once again is consistent with the plain language of the statute. Treas. Reg. § 1.954-3(a)(4)(iii), like the general rule in Treas. Reg. § 1.954-3(a)(4)(i) and the substantial transformation rule in Treas. Reg. § 1.954-3(a)(4)(ii), does not require the selling CFC to actually provide the manufacturing labor to be considered the manufacturer. Treas. Reg. § 1.954-3(a)(4)(iii) provides in relevant part:

If purchased property is used as a component part of personal property which is sold, the sale of the property will be treated as the sale of a manufactured product, rather than the sale of component parts, if the operations conducted by the selling corporation in connection with the property purchased and sold are substantial in nature and are generally considered to constitute the manufacture . . . of property.

(Emphasis added.) Notably, this regulation requires the selling corporation to have operations that (a) are substantial in nature, and (b) are generally considered to constitute the manufacture of property. If both conditions are true, then the selling corporation is once again treated as having sold a manufactured product. This regulation again is entirely consistent with the plain language of the statute and the legislative history which provide that the definition of FBCSI does not include income from transactions where, "in effect, the final product is not the property purchased." H.R. Rep. No. 87-1447, at A94-A95 (1962); S. Rep. No. 87-1881, at 245 (1962); see section 954(d)(1).

In this case, Respondent has already admitted that WOM's operations at the Ramos and Horizon Manufacturing Plants resulted in the manufacture of the Products. Accordingly, the only requirement left for WOM to fulfill under Treas. Reg. § 1.954-3(a)(4)(iii) is to have operations that are substantial in nature. As discussed in the Section 954(d)(1) Brief at 39-42, there can be no question but that WOM's operations were substantial in nature, comprising the manufacture and sale of a million refrigerators and a half-million washers in plants with more than 1.3 million square feet of manufacturing space, housing over $146 million of equipment and machinery used to manufacture the refrigerators and washers. Over 3,300 leased employees worked 24/7 six days a week to produce the Products. WOM's total costs to produce the million refrigerators and halfmillion washers was over $700 million. Without question, WOM's operations were substantial in nature. Accordingly, WOM is treated under Treas. Reg. § 1.954-3(a)(4)(iii) as having sold a manufactured product.

2. RESPONDENT HAS COMPLETELY FAILED TO RESPOND TO WHIRLPOOL'S ARGUMENTS UNDER TREAS. REG. §§ 1.954-3(a)(1) AND 1.954-3(a)(4).

Rather than respond to the arguments made by Whirlpool under the section 954(d)(1) regulations, Respondent set forth a section in his brief entitled "Attribution and Substantial Contribution."¹¹ In the first sentence of this section, Respondent asserts without any direct support that "[u]nder the 2002 regulations, manufacturing performed outside the CFC's country of organization is only attributed to the CFC when the property is manufactured 'by such corporation,' i.e., the CFC." Respondent's Brief at 128. Presumably, Respondent is referring to the "by such corporation" language found in the first sentence of the Treas. Reg. § 1.954-3(a)(4)(i). However, as discussed supra at 14-15, the very next sentence of Treas. Reg. § 1.954-3(a)(4)(i), the second sentence, provides unambiguously that a CFC "will be considered . . . to have manufactured . . . personal property which it sells if the property sold is in effect not the property which it purchased."

Respondent then cites Electronic Arts, Inc. v. Commissioner, 118 T.C. 226, 229 (2002), which Respondent acknowledges did not resolve the issues under consideration in that case, for dicta found in the opinion. Respondent's Brief at 128-29. Ultimately, Respondent uses the Electronic Arts opinion, as well as the Tax Court's opinion in Medchem (P.R.), Inc. v. Commissioner, 116 T.C. 308 (2001), to argue that "Electronic Arts and Medchem demonstrate that a robust factual record is necessary to decide whether a corporation is engaged in manufacturing. Treas. Reg. § 1.954-3(a)(4)(iii) makes the same point when it indicates that the substantive test (regarding whether the manufacturing activities of a selling corporation qualify) depends on the facts and circumstances of each case.” Respondent's Brief at 130-31.

Neither Electronic Arts nor Medchem are relevant to the case at hand. Medchem, a case under the active conduct of a trade or business test of section 936(a)(2)(B), had nothing to do with the plain meaning of the section 954(d)(1) statute, or the section 954(d)(1) regulations.

Electronic Arts was closer to the issues in this case, but as Respondent advises, the Court did not resolve the legal issues in denying summary judgment. Moreover, in Electronic Arts, the issue before the Court was an issue under section 936(h)(5)'s final flush language which provided, in essence, that a possessions corporation could not apply the profit split or cost sharing methods under section 936 unless the possessions corporation not only satisfied one of the three "significant business presence" tests under section 936(h)(5)(B)(ii), but also could establish that its "product is manufactured or produced in the possession by the electing corporation within the meaning of subsection (d)(1)(A) of section 954.” See section 936(h)(5) final flush language. The issue in Electronic Arts involved the interplay of the requirement under section 936(h)(5) and the regulations thereunder that the possessions corporation actually be the entity manufacturing or producing the product, with “manufacturing" to be determined within the meaning of section 954(d)(1)(A). Thus, unlike Whirlpool's case, section 936 and its regulations literally required that the possessions corporation itself do the physical manufacturing. As Judge Chabot stated in his opinion, the interplay of the two statutes required him to "harmonize" the provisions of the two statutes, which he preferred to do on a fuller evidentiary record. Accordingly, he denied summary judgment without deciding the legal issues. Moreover, the reference to section 954 is to section 954(d)(1)(A), the same country exception for FBCSI for goods sold in the country of manufacture. That provision is not at issue under section 954(d)(1) in this case. Finally, in this case, Respondent has admitted that the Products were manufactured at WOM's Ramos and Horizon Manufacturing Plants. Respondent's Brief at 132 ("respondent has admitted that the Products were manufactured in Mexico"). The questions to be decided in this case are whether (a) the plain language of the statute required anything more than a finding that the final Products sold were not the same property as the raw materials and components purchased, or (b) whether WOM's operations to produce the million refrigerators and half-million washers were "substantial in nature" under Treas. Reg. § 1.954-3(a)(4)(iii). These questions have little or less to do with the conundrum faced and left undecided by Judge Chabot in attempting to harmonize section 936 (h)(5) and section 954 (d)(1)(A) in Electronic Arts.

Rather than respond to Whirlpool's arguments under Treas. Reg. 1.954-3(a)(1) and (4), Respondent merely claims that "a robust factual record is necessary to decide whether a corporation is actually engaged in manufacturing," despite having "admitted that the Products were manufactured" at WOM's plants. Respondent's Brief at 130, 132. In essence, Respondent is hoping to avoid a decision on the section 954(d)(1) issues raised by Whirlpool by claiming that a material question of fact precludes summary judgment. As discussed above and summarized below, the issues under section 954(d)(1) are ripe for summary judgment.

C. RESPONDENT'S ATTEMPT TO EXPLAIN AWAY REV. RUL. 75-7 IS UNCONVINCING.

At pages 134 to 135 of his brief, Respondent attempts to explain away the fact that Rev. Rul. 75-7, 1975-1 C.B. 244,¹² shows that the IRS believed that the touchstone of section 954(d)(1) was that the definition of FBCSI included only income earned in transactions involving both a purchase and sale of the same personal property. The question of who manufactured, transformed, or produced the final product was irrelevant. Rev. Rul. 75-7 showed that the IRS agreed that manufacturing occurred and thus the final product sold was not the same as the raw materials purchased even when the manufacturing was performed by a contract manufacturer processing raw materials owned by the CFC. Rev. Rul. 75-7 shows that it simply was not a requirement of the statute or the regulations that the CFC's own employees manufacture the product.

In his brief, Respondent admits that the IRS revoked Rev. Rul. 75-7 because the IRS lost the branch issues in Ashland and Vetco. Respondent candidly admits that, in his view, if a taxpayer could avoid the section 954(d)(2) manufacturing branch rules by simply using an unrelated contract manufacturer or a related contract manufacturer organized in a corporate form, then the consequence "would be to 'enlarge out of all proportion the manufacturing exception[.]'" Respondent's Brief at 134.

However, it was not up to the IRS to change the statute by administrative fiat. If the IRS thought that the Ashland and Vetco cases had made the statutory definition of FBCSI unworkable, it was incumbent upon the IRS and the Treasury Department to convince Congress to amend the law. This the IRS and the Treasury Department did not do.

Rev. Rul. 75-7 puts the lie to Respondent's position in this case.

D. EVEN IF MANUFACTURING MUST BE PERFORMED BY THE CFC'S COMMON LAW EMPLOYEES UNDER TREAS. REG. §§ 1.954-3(a)(1) AND (4), THE SECONDED AND LEASED EMPLOYEES CONSTITUTED COMMON LAW EMPLOYEES OF WOM.

As set forth above, the plain language of section 954(d)(1), the legislative history, and a careful review of the regulations all establish that the definition of FBCSI covers only income from transactions involving both a purchase and sale of the same personal property. Respondent has admitted that "the Products were manufactured[.]" Respondent's Brief at 132. Respondent has thus conceded the obvious — WOM's sales of refrigerators and washers were not the sales of the personal property purchased by WOM (i.e., the raw materials and component parts). Accordingly, there is no genuine dispute as to a fact material to the Court's decision of the issues in this case.

Nonetheless, Respondent's contention is that manufacture of the Products from raw materials and component parts is not enough. Respondent contends that the manufacturing must be done by common law employees of WOM. On this issue, Respondent asserts that there are issues of fact that remain in dispute that are material to the determination of whether the leased employees are legally considered common law employees of WOM. At pages 130 to 132 of his brief, Respondent argues that Whirlpool's motion for summary judgment must be denied, because "a robust factual record is necessary to decide whether a corporation is actually engaged in manufacturing." Respondent then makes five assertions about facts he contends are material to the Court's decision and are in dispute. Respondent's Brief at 131-32. Whirlpool's responses to Respondent's assertions below assume arguendo that the issue of whether the seconded and leased employees were common law employees of WOM is material to the Court's decision under section 954(d)(1).

First, Respondent asserts that the Secondment Agreements and the Employee Services Agreements provide that the seconded and leased employees remain the employees of IAW and CAW, WOM's affiliates from whom WOM seconded and leased the employees. Respondent's Brief at 131. This point is not in dispute and is not material to the determination of whether the employees were common law employees of WOM. The issue would not exist if in fact the seconded and leased employees were actual employees of WOM. Though this is an issue the Court should never have to reach, the question is whether the employees of IAW and CAW that were leased or seconded to WOM constituted common law employees of WOM.

Second, Respondent asserts that "[t]here is no evidence that Mr. Eduardo Elizondo Williams, WIN's Board member, who was concurrently a manager of IAW, exercised his authority in his capacity as a board member, and petitioners do not contend that he was an employee of WOM.” Respondent's Brief at 131. Respondent's assertions ignore Mr. Elizondo's Affidavit, attached as Exhibit B to the Section 954(d)(1) Brief. In his Affidavit, Mr. Elizondo provides sworn testimony that he is currently the General Director of WIN and has been associated with WIN since its formation in 2007, initially holding a power of attorney from WIN's Board to act on behalf of the corporation, and serving as a member of WIN's Board from 2008 to the present. See Elizondo Aff. at ¶ 2.¹³ Moreover, Mr. Elizondo was not just a "manager" of IAW, he was IAW's Vice President of Manufacturing, Technology, and Procurement (Elizondo Aff. at ¶ 2), in which role he was responsible for all of Whirlpool's manufacturing operations in Mexico, including the manufacturing operations at the Ramos and Horizon Manufacturing Plants. See Elizondo Aff. at ¶ 3. Mr. Elizondo specifically testified that "[i]n my capacity as the head of Whirlpool's Mexican manufacturing operations and as a member of WIN's Board of Directors, the Plant Managers of both the Ramos and Horizon Manufacturing Plants reported to me." See Elizondo Aff. at ¶ 3. Thus, contrary to Respondent's assertion that there is "no evidence," Mr. Elizondo himself testifies that he acted in his capacity as a Board member. See Elizondo Aff. at ¶ 3.

Third, Respondent asserts that "there is no evidence that any board member exercised control of the factory employees in their capacity as WOM or WIN board members, or that any member of WOM's Board of Directors exercised control over Mr. Elizondo Williams." Respondent's Brief at 131-32. As a factual matter, this statement is untrue. Mr. Elizondo testified that the Ramos and Horizon Manufacturing Plant Managers were his direct reports. Mr. Elizondo was head of all 'Whirlpool manufacturing operations in Mexico, including Ramos and Horizon, which are two of Whirlpool's largest plants in Mexico. Respondent's assertion that Mr. Elizondo did not do his job is without any factual support.

Further, as a legal matter, the definition of a common law employee is concerned with the right to exercise control rather than the actual exercise of control. Treas. Reg. § 31.3121(d)-1(c)(1) provides that "[e]very individual is an employee if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee." Treas. Reg. § 31.3121(d)-1(c)(2) further explains that:

Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services.

WOM had the right to control the method and manner by which the refrigerators and washers were manufactured at its Mexican Manufacturing Plants. Under the Manufacturing Assembly Services (IMMEX) Agreements between WIN and WOM, WIN guaranteed that the maquiladora services were to be provided "in strict compliance with the instructions and specifications of" WOM.¹⁴ Further, the Employee Services Agreements between WIN (and therefore WOM) and IAW provided that IAW "shall take all necessary steps to ensure that the Services comply with WIN's requirements."¹⁵ Finally, the Plant Managers that were seconded by IAW to WIN (and therefore WOM) were to "work under the instructions and direction of WIN" and to "perform services as directed by WIN."¹⁶ While IAW retained the sole right to dismiss a seconded individual, WIN had the right to terminate the secondment of an individual "at any time" after the commencement of the secondment.¹⁷ All of the WIN (and therefore WOM) manufacturing employees at the Ramos and Horizon Manufacturing Plants reported up to the Plant Managers of the Ramos and Horizon Manufacturing Plants, who in turn reported to Mr. Elizondo, a member of WIN's Board of Directors and Whirlpool's head of manufacturing in Mexico.¹⁸

WOM thus had the legal right to control the method and manner by which the seconded and leased employees produced the refrigerators and washers manufactured at its Ramos and Horizon Manufacturing Plants.

WOM in fact exercised that legal right to control the method and manner of production through the provision of detailed manufacturing instruction sheets for every step in the manufacturing process. These manufacturing instruction sheets dictated to WOM's 3,300 Leased employees the exact manner and method by which the leased employees would carry out each task in the manufacturing process for the refrigerators and washers. Through these manufacturing instruction sheets, for example, WOM told the leased employees exactly how to cut rolls of steel to length, including the machines to use and the process by which to use them. The manufacturing instruction sheets also dictated how the flat steel was to be stamped, punched, and pressed in a series of manufacturing steps to create the washer enclosures, washer drums, brackets, supports and other steel components for use in the manufacture of the washers. As an affirmative disclosure of facts, Whirlpool provided thousands of pages of the detailed manufacturing instruction sheets for the Horizon Manufacturing Plant's production of washers to Respondent in discovery.¹⁹ A small representative sample of these detailed manufacturing instruction sheets are attached for the Court's benefit.²⁰

WOM thus had the legal right to dictate the method and manner of the production of its Products and in fact exercised its authority to do so. As provided in Treas. Reg. § 31.3121(d)-1(c)(2), dictating the method and manner of production is the hallmark of a common law employee.

Treas. Reg. § 31.3121(d)-1(c)(2) also provides that the ability to dismiss the leased employees is "an important factor." While the seconded and leased employees remained employees of IAW and CAW and those entities had the sole right to fire those employees, WOM had the right under the Secondment Agreements to terminate the secondment of any individual at "any time."²¹ Similarly, although the leased employees remained employees of IAW and CAW and those entities retained the sole right to fire those employees, through the seconded employees, WOM had the ability to remove leased employees from its premises and to terminate their work on its production at any time.

Treas. Reg. § 31.3121(d)-1(c)(2) also provides that "[o]ther factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services." WOM owned the machinery, equipment, tooling, and materials used by the seconded and leased employees to manufacture the Products. WOM also provided the Ramos and Horizon Manufacturing Plants with their 1.3 million square feet of space to house the machinery, equipment, tooling, and materials, and thus furnished the seconded and leased employees a place to work.

At bottom, the Court has all the facts necessary to conclude that the seconded and leased employees were common law employees of WOM under Treas. Reg. § 31.3121(d)-1(c)(2).

Fourth, Respondent asserts that the leased employees on the factory floor might not "be aware that they are performing services for WIN[.]" Respondent's Brief at 132. Whether or not the employees knew that they were performing services on behalf of WOM is irrelevant to the determination of whether the leased employees were common law employees under Treas. Reg. § 31.3121(d)-1(c)(2).

Fifth and finally, Respondent asserts that "[e]xcept for the intercompany agreements, there are no contemporaneous documents in the record supporting petitioners' characterizations that the IAW employees are manufacturing on WOM's behalf or that employees purportedly leased to WOM work on its behalf." Respondent's Brief at 132. This statement is highly surprising in light of Respondent's many factual admissions and the intercompany agreements. The intercompany agreements are in fact the operative legal documents establishing that the services of the seconded and leased employees have been contracted by WOM (the contracts are in the name of WIN, WOM's disregarded subsidiary) for the production of WOM's Products using WOM's plants, machinery, equipment, tooling, raw materials and components, and all inventories. If Respondent does not think these seconded and leased employees worked to produce WOM's Products for WOM, for whose benefit does Respondent think the seconded and leased employees were working? Respondent's statement is ridiculous, particularly in light of his admissions that the Products were manufactured at the Ramos and Horizon Manufacturing Plants in Mexico (Respondent's Brief at 43 (¶ 85) and 132), that the Products were manufactured at the Ramos and Horizon Manufacturing Plants "using personnel supplied by IAW pursuant to a Secondment Agreement and the Employee Services Agreements" (Respondent's Brief at 47 (¶ 99)), that "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" (Respondent's Brief at 47 (¶ 100)), as well as the various other admissions made by Respondent with regard to the seconded and leased employees set forth at pages 48 and 49 (¶¶ 101 to 105) of Respondent's Brief.

The law under Treas. Reg. § 31.3121(d)-1(c)(2) is straightforward and there are no genuine disputes over facts material to a determination under the regulations. WOM controlled the method and manner by which the seconded and leased employees produced the Products, had the right and ability to terminate the seconded and leased employees work at WOM's plants (even though WOM did not have the right to terminate the seconded and leased employees from IAW's and CAW's employment), and WOM provided the machinery, equipment, tooling and materials required to manufacture the Products, as well as the plant sites at which the seconded and leased employees worked. Under Treas. Reg. § 31.3121(d)-1(c)(2), the seconded and leased employees were common law employees of WOM.

E. THE SECTION 954(d)(1) ISSUE IS RIPE FOR SUMMARY JUDGMENT.

If Whirlpool is correct that under the plain language of the statute the definition of FBCSI requires the purchase and sale of the same personal property, there is no genuine issue of material fact at issue in this case. Respondent has admitted that the Products were manufactured at the Ramos and Horizon Manufacturing Plants. This admission means that the Products sold were not the personal property purchased. The "its argument," as Respondent likes to call Whirlpool's plain language argument, is ripe for summary judgment.

Similarly, if Whirlpool prevails on the plain language of the statute, then the regulations must be read in a fashion consistent with that plain language. As discussed above, each provision of the regulations has language, like the statute and the legislative history, that establishes that FBCSI cannot arise unless there is a transaction involving both the purchase and sale of the same personal property. Accordingly, as Respondent has admitted that the Products sold were not the same personal property as the raw materials and component parts purchased, the arguments under the regulations are also ripe for summary judgment.

In particular, Respondent's admission that the Products were manufactured at the Ramos and Horizon Manufacturing Plants has also made the issue under Treas. Reg. § 1.954-3(a)(4)(iii) ripe for summary judgment, even if Respondent prevails on the plain language argument. Specifically, as set forth above, Treas. Reg. § 1.954-3(a)(4)(iii) treats WOM as having sold a manufactured product, and hence outside the scope of the definition of FBCSI, if WOM's operations at its Ramos and Horizon Manufacturing Plants are substantial in nature and generally considered to constitute manufacturing. Respondent has admitted that the Products were manufactured at the Ramos and Horizon Manufacturing Plants. Thus, there is no material question of fact at issue as to whether the operations at those plants generally constituted manufacturing. There is also no material question of fact as to whether WOM's operations at those plants were substantial in nature. As discussed above, the operations were very substantial in nature.²² Respondent has refused to address this argument, presumably because of the futility of doing so. Summary judgment is ripe on Treas. Reg. § 1.954-3(a)(4)(iii) as well.

Finally, even if Respondent were correct in his contention that section 954(d)(1) and Treas. Reg. §§ 1.954-3(a)(1) and (4) require manufacturing to be performed by common law employees of WOM in order for such manufacturing to eliminate FBCSI on WOM's sales of the Products, summary judgment would still be appropriate under section 954(d)(1), as there is no genuine dispute of material facts as to whether the seconded and leased employees used by WOM constituted common law employees of WOM under Treas. Reg. § 3.3121(d)-1(c)(2).

Accordingly, this Court should grant partial summary judgment in favor of Whirlpool on the section 954(d)(1) issue.

II. WHIRLPOOL DOES NOT HAVE FBCSI UNDER THE MANUFACTURING BRANCH RULE OF SECTION 954(d)(2).

The sine qua non of the Manufacturing Branch Rule is the separation of a CFC's manufacturing activities in a foreign branch from the CFC's purchasing or selling activities in the Remainder of the CFC. Indeed, the structure of the Manufacturing Branch Rule makes it impossible to apply the rule if there are no purchasing or selling activities in the Remainder. See Section 954(d)(2) Brief at 20-21.

Whirlpool and Respondent agree on the applicable facts: the Luxembourg Remainder had only a single part-time employee who did not perform any purchasing or selling activities. Section 954(d)(2) Brief at 11-12; Respondent's Brief at 45 (¶ 90) and 50 (¶¶ 107-108).²³

A. RESPONDENT'S MANUFACTURING BRANCH RULE ARGUMENTS ARE NOVEL, BUT WRONG.

Having admitted that WOM had only a single part-time employee in the Luxembourg Remainder who did not engage in any purchasing or selling activities, Respondent makes two novel arguments to try to save his case. First, Respondent argues that the Luxembourg Remainder need not engage in sales activities in a traditional sense, but need only have a "legal sale or transfer of ownership or title[.]" Respondent's Brief at 95. Second, Respondent argues that under Treas. Reg. § 3(b)(1)(ii)(b), the special rules of Treas. Reg. § 1.954-3(b)(2)(i) should be treated as "an overlay" and should "apply in conjuction with" the general rules of Treas. Reg. § 1.954-3(a). Respondent's Brief at 86. In Respondent's view, WOM has FBCSI under the Manufacturing Branch Rule for two independent reasons: (a) WOM sold Products to related parties that it did not manufacture under Treas. Reg. § 1.954-3(a); and (b) WOM sold Products on behalf of the Manufacturing Branch to related parties under Treas. Reg. § 1.954-3(b)(2)(i). Respondent's Brief at 92.

Respondent's novel arguments have no support in the law, violate the plain language of Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i)(c), are contrary to Respondent's ruling positions, find no support in the views of leading commentators, and turn the Manufacturing Branch Rule on its head.²⁴ For these and the other reasons discussed below, Petitioners are entitled to partial summary judgment as a matter of law that WOM's income from its sales of refrigerators and washers in 2009 did not constitute FBCSI under section 954(d)(2).

1. WOM CANNOT HAVE FBCSI UNDER THE MANUFACTURING BRANCH RULE BECAUSE WOM HAD NO PURCHASING OR SELLING ACTIVITIES IN THE LUXEMBOURG REMAINDER.

As discussed in the Section 954(d)(2) Brief at 18-23, the Manufacturing Branch Rule cannot be applied unless a tax rate disparity exists. To determine whether a tax rate disparity exists, Treas. Reg. § 1.954-3(b)(1)(ii)(b) requires all income to be allocated to the Manufacturing Branch except for income derived by the Remainder from purchasing or selling activities. Specifically, Treas. Reg. § 1.954-3(b)(1)(ii)(b) provides that income allocated to the Remainder of the CFC shall be:

only that income derived by the remainder of such corporation, which, when the special rules of subparagraph (2)(i) of this paragraph are applied, is described in paragraph (a) of this section (but determined without applying subparagraphs (2), (3), and (4) of such paragraph).

(Emphasis added.) The "special rules" of Treas. Reg. § 1.954-3(b)(2)(i) provide in subparagraph (a) that the Manufacturing Branch hypothetically will be deemed to be a separate corporation incorporated in the jurisdiction in which it manufactures (in this case, Mexico), and further provide in subparagraph (c) that "purchasing or selling activities performed by or through" the Remainder with respect to the Products manufactured "shall be treated as performed on behalf of the [Manufacturing Branch]." In essence, this rule provides that income should be allocated to the Remainder (the Luxembourg Remainder in this case) in an amount that accords with the Remainder's actual purchasing or selling activities.

Under Treas. Reg. § 1.954-3(b)(1)(ii)(b), the Tax Rate Disparity test is then applied to the "income allocated to the [Remainder] under the immediately preceding sentence[.]" If the Remainder has no purchasing or selling activities, then the Manufacturing Branch Rule is inapplicable because there will have been no separation of purchasing or selling activities from the manufacturing activities, which in turn would make it impossible to apply the Tax Rate Disparity test. See Section 954(d)(2) Brief at 20-23.

The inapplicability of the Manufacturing Branch Rule in cases in which the Remainder carries out no purchasing or selling activities is confirmed in Respondent's TAM 8509004, which observed that "the home office (or 'remainder') of F1 performs no selling or sales activities with respect to Product Z." Further, "[s]ince 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." See Section 954(d)(2) Brief at 22-23.

Some twenty-five years after the IRS ruling in TAM 8509004, Treasury amended the multiple branch rule in the section 854(d)(2) regulations and enshrined the teaching from TAM 8509004 in the regulations: if the Remainder undertakes no purchasing or selling activities, then the Manufacturing Branch Rule does not apply to the Remainder.²⁵ The multiple branch rule of Treas. Reg. § 1.954-3(b)(1)(ii)(c)(1) provides that if in fact no purchasing or selling activities are carried out in the Remainder in the CFC's country of incorporation, then the Manufacturing Branch Rule cannot be applied to the Remainder.

Specifically, in the Example illustrating Treas. Reg. § 3(b)(1)(ii)(c)(1), the manufacturing branch has a tax rate of 20%, the CFC's country of incorporation has a tax rate of 0%, and the sales branches are located in two jurisdictions that have tax rates of 20% and 18%. In the Example, the facts state "FS does not conduct any manufacturing or selling activities apart from the activities of Branches A, B and C [the manufacturing and sales branches]." In other words, as in this case, the CFC Remainder engages in no selling activities in its country of incorporation. The example perfunctorily finds no tax rate disparity in the Remainder's country of incorporation, even though that country imposes an effective rate of tax on sales income of 0%. The lesson is clear: unless there are purchasing or selling activities by the Remainder in its country of incorporation, there will be no tax rate disparity and the manufacturing branch rule will not apply.

The inapplicability of the Manufacturing Branch Rule when the Remainder carries out no purchasing or selling activities is further confirmed by the leading commentators and treatises. For example, BNA Portfolio 6240-1st: CFCs — Foreign Base Company Income (Other than FPHCI), Chapter H, (2019) at (4)(c)(2)(a) (the "BNA Branch Rule Portfolio") similarly states: "Under both the sales branch rule and the manufacturing branch rule, the tested income is thus limited to income actually derived by the branch or remainder from its purchasing or selling activities." The BNA Branch Rule Portfolio continues in footnote 876:

The manufacturing branch rule should be inapplicable if the remainder (or the purchase or sales branch if it is treated as the remainder) does not engage in purchasing or selling activities, insofar as no income would be allocated to the remainder (or to the purchase or sales branch) for rate testing purposes.

(Emphasis added.) The BNA Branch Rule Portfolio continues on to cite TAM 8509004 for the same proposition. See also Lowell Yoder, "A Note from the Editor in Chief — Subpart F Manufacturing Exception and Branch Rule: A Refresher," 43 Int'l Tax J. 4, 2 (July 24, 2017) ("The branch rule should not apply if the CFC has a manufacturing branch, but the home office and other branches do not engage in any purchasing or selling activities"); supra at 38-39, fn. 24.

2. UNDER TREAS. REG. § 1.954-3(b)(1)(ii)(b) AND TREAS. REG. § 1.954-3(b)(2)(i)(c), THE REMAINDER DOES NOT SELL PRODUCTS TO RELATED PARTIES, BUT RATHER PERFORMS SELLING ACTIVITIES ON BEHALF OF THE MANUFACTURING BRANCH.

The plain language of the regulations, Respondent's prior ruling positions, and the teachings of leading commentators and treatises, all demonstrate that the Manufacturing Branch Rule is inapplicable if the Remainder does not engage in selling or purchasing activities. Nonetheless, in his Brief at 85-86, Respondent asserts that Whirlpool's reading of Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i) "is erroneous."

Respondent's reasoning is less than clear. His position is that "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. § 3(a) and (b)(1)[.]" Respondent's Brief at 86 (emphasis in original). According to Respondent, "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), and (2) WOM's sales of personal property are deemed to be on behalf of a related person, i.e., WIN." Respondent's Brief at 92.

Respondent's position directly conflicts with the language of the regulations on both scores. Respondent's first argument, that WOM sold Products to related parties, is completely contrary to the language of the "special rule" of Treas. Reg. § 1.954-3(b)(2)(i)(c), which unambiguously commands that "purchasing or selling activities performed by or through the remainder of the [CFC] with respect to the personal property manufactured . . . by or through the branch . . . shall be treated as performed on behalf of the branch[.]" (Emphasis added.) Thus, Treas. Reg. § 1.954-3(b)(2)(i) mandates that the Remainder is to be treated as an agent not holding title. Thus, while the Remainder can engage in selling activities on behalf of the Manufacturing Branch, the Remainder cannot "sell" the Products to related parties under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i)(c).

Moreover, the second sentence of Treas. Reg. § 1.954-3(b)(1)(ii)(b) provides that the only income to be tested under the Tax Rate Disparity test is the income identified in the first sentence of the same regulation (i.e., "income allocated to the remainder of the [CFC] under the immediately preceding sentence"). The first sentence of that regulation provides that the Tax Rate Disparity "determination . . . shall be made by allocating to the remainder of such [CFC] only that income derived by the remainder of such corporation, which, when the special rules of subparagraph (2)(i) of this paragraph are applied, is described in [Treas. Reg. § 1.954-3 (a)] (but determined without applying [Treas. Reg. §§ 1.954-3(a)(2), -3(a)(3), and -3(a)(4)]." As the special rules of Treas. Reg. § 3(b)(2)(i) treat the Manufacturing Branch as a separate corporation incorporated in Mexico and the Remainder as performing purchasing or selling activities as an agent "on behalf of" the Manufacturing Branch, the only transactions under Treas. Reg. § 1.954-3 (a) that can give rise to income for the Remainder under the Tax Rate Disparity test thus are the purchase of property or the sale of property on behalf of the Manufacturing Branch. In order to determine the amount of income to allocate to the Remainder for its purchase of property or sale of property on behalf the Manufacturing Branch, it is necessary to identify the actual purchasing or selling activities carried out by the Remainder on behalf of the Manufacturing Branch.

As discussed above, if the Remainder carries out no purchasing or selling activities, the Manufacturing Branch Rule does not apply and no FBCSI can arise under section 954(d)(2).

3. A SALE OR TRANSFER OF OWNERSHIP BY THE MANUFACTURING BRANCH IS NOT A SELLING ACTIVITY BY THE REMAINDER.

Respondent's second argument is that all of the profits attributable to WOM's PE in Mexico should be allocated to the Remainder for purposes of applying the Tax Rate Disparity test of Treas. Reg. § 1.954-3(b)(1)(ii)(b) because "WOM's sales of personal property are deemed to be on behalf of a related person, i.e., WIN."²⁶ Respondent's Brief at 92. Respondent's second argument is a variant of his first in that he is asserting that "WOM's sales" are the "selling activities" required under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and 3(b)(2)(i)(c). See Respondent's Brief at 92-96. Literally, Respondent is arguing that the "legal sale and transfer of ownership" are "selling activities" (Respondent's Brief at 94) for purposes of the Tax Rate Disparity test of Treas. Reg. § 3(b)(1)(ii)(b). As just discussed, however, under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i), the Remainder is deemed to act as an agent on behalf of the Manufacturing Branch, is thus deemed not to hold title, and thus cannot legally sell or transfer ownership of the Products. Therefore, the "legal sale and transfer of ownership" cannot be selling activities of the Remainder. If "the legal sale and transfer of ownership" constitute selling activities, those activities were necessarily performed by the Manufacturing Branch.

4. A TAX RATE DISPARITY MUST EXIST BEFORE THE MANUFACTURING BRANCH RULE APPLIES.

Three other arguments by Respondent are also of note. First, at pages 93-94 of Respondent's Brief, he argues that "WOM is treated as selling on behalf of the Mexican manufacturing branch because the Branch Rule applies."²⁷ (Emphasis in original.) According to Respondent, WOM need not engage in "selling activities" in order to have FBCSI.²⁸ In so arguing, Respondent has the rule completely backwards. Under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and 3(b)(2)(i), the Remainder is treated as selling on behalf of the Manufacturing Branch so that income can be allocated to the Remainder relating to its "purchasing and selling activities" on behalf of the Manufacturing Branch under the Tax Rate Disparity test. If a Tax Rate Disparity is found to exist, then and only then does the Manufacturing Branch Rule apply.

5. THE REMAINDER'S ACTUAL EFFECTIVE TAX RATE IS DETERMINED UNDER LUXEMBOURG LAW, WHICH PROVIDES THAT THE PROFITS ATTRIBUTABLE TO WOM'S MEXICAN PE ARE TAXABLE BY MEXICO AND NOT LUXEMBOURG.

Second, at pages 89-91 and 99-102, Respondent asserts that WOM did not have a Mexican PE. The parties' difference on this point is largely semantics, but they are semantics with an importance.

As Whirlpool's foreign law expert, Mr. Perez Robles, Respondent's foreign law expert, Mr. Gonzalez Bendiksen, and the Mexican tax authority's written responses to Respondent's questions (the "SAT") all agree (collectively, the "Mexican Law Experts"), Article 1(11) of the Mexican income tax law (the "ITL") authorizes the Mexican tax authorities to tax the profits attributable to a non-resident's PE in Mexico. Article 2 of the ITL defines the term PE for purposes of Mexican domestic law, while Article 3 of the ITL defines exceptions to the definition of a PE, and Article 4 of the ITL defines the revenues attributable to a PE in Mexico. The Mexican Law Experts are also in agreement that, but for a specific provision in the eighth paragraph of Article 2 of the ITL ("Article 2(8)"), a foreign principal of a maquiladora (in this case, WOM) would have a PE in Mexico as a result of its interactions with entities carrying on maquiladora operations in Mexico (in this case, WIN). The Mexican Law Experts also all agree that under Article 2(8), a foreign principal of a maquiladora "shall not be deemed to have a permanent establishment in Mexico," so long as (i) the maquiladora operations are properly authorized, (ii) the foreign principal complies with the transfer pricing provisions of Article 216-bis of the ITL, and (iii) the foreign principal is a resident in a jurisdiction with a tax treaty with Mexico. Finally, the Mexican Law Experts are all in agreement that, under Article 2(8), if the foreign principal fails to comply with the requirements of Article 216-bis, the provisions of Article 2(8) will not apply and Mexico reserves the right to tax the foreign principal's PE under Article 1(II).²⁹

As a result of Article 2(8), Mexico, as part of its maquiladora manufacturing incentive program, chose to exempt WOM's Mexican PE from Mexican taxation, subject to the right to tax the PE in the event WOM failed to comply with Article 216-bis. Respondent prefers to say that WOM "was deemed not to have a permanent establishment in Mexico" as a result of Article 2(8), since WOM was located in a treaty jurisdiction and in fact complied with Article 216-bis.

The difference between the parties' characterization of the effect of Article 2(8) is largely semantics, but in this case, those semantics matter.

The semantics matter because under Treas. Reg. §§ 1.954-3(b)(1)(ii)(b) and -3(b)(2)(i)(e), Mexico's right under the Mexico-Luxembourg Treaty to tax the profits attributable to the WOM Mexican PE is relevant to the computation of the actual effective rate of tax for the Luxembourg remainder.

Specifically, while Mexico has chosen not to deem a foreign principal of a maquiladora like WOM to have a PE in Mexico as a result of Article 2(8), even though it clearly has one, Mexico had the right under the Mexico-Luxembourg Treaty to tax the profits attributable to WOM's Mexican PE. See Article 7(2) of the Mexico-Luxembourg Treaty.³⁰ Indeed, Mexico reserves the right to tax the profits attributable to the PE in the event of non-compliance with Article 216-bis. Because Mexico "may tax" the profits attributable to PE in Mexico under Article 7(2) of the Mexico-Luxembourg Treaty, under Article 23(a)(1)³¹ of the Treaty, Luxembourg cannot tax the profits attributable to WOM's Mexican PE. See Perez Aff. at ¶¶ 27 and 35; Schaffner Aff. at ¶¶ 18 and 32. This conclusion is confirmed by the Commentary to the OECD Model Convention, Articles 23 A and 23 B, OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Commentary on Articles 23 A and 23 B Concerning the Methods for Elimination of Double Taxation at C(23)-19, ¶ 34 (OECD Nov. 21, 2017) ("The State of residence [Luxembourg] must accordingly exempt income and capital which may be taxed by the other State [Mexico] in accordance with the Convention whether or not the right to tax is in effect exercised by that other State [Mexico]").

In turn, the application of the treaty is of critical importance, because under Treas. Reg. § 1.954-3(b)(2)(i)(e) and the IRS ruling position, the actual effective tax rate in Luxembourg is determined by reference to Luxembourg law. See PLR 200942034 (Oct. 16, 2009); PLR 200945036 (Nov. 6, 2009); BNA Branch Rule Portfolio at (4)(c)(2)(b) [Relevant Laws]; Lowell Yoder, "A Note From the Editor in Chief: Local Law Governs Manufacturing Branch Determinations," 36 Int'l Tax J. 3, at 3-4 (July-August 2010) ("Local Law Governs"). As summarized by the BNA Branch Rule Portfolio at (4)(c)(2)(b):

The applicable regulatory provision [Treas. Reg. § 1.954-3(b)(2)(i)(e)] thus indicates that foreign law should be used to determine the income subject to the tax rate disparity test, including the nature and amount of deductions allocated thereto.

. . . Likewise, for purposes of the manufacturing branch rule, the provision may indicate that the tax laws of the remainder should be used to determine the actual effective tax rate, while the tax laws of the manufacturing branch should be used to determine the hypothetical effective tax rate.

Under the above reading of the regulations, the actual effective tax rate should be computed as the amount of tax actually paid by the . . . remainder (in the case of the manufacturing branch rule), divided by the amount of the income in the tax base of the . . . remainder, determined under the laws of the countries in which each such entity or branch is located. In most cases, this will cause the actual effective rate to equal the statutory rate in the country in which sales or purchase branch is located, which is consistent with the examples in the regulations, which merely refer to the tax rates in relevant countries.

In two private letter rulings issued in 2009, the IRS followed the approach outlined in the BNA Branch Rule Portfolio, ruling that in the case of a manufacturing branch, the local law of the country in which the Remainder is incorporated should be used to determine both actual effective taxes paid (the numerator) and the applicable income tax base for the Remainder (the denominator). See PLR 200942034 (Oct. 16, 2009) ("For purposes of determining the effective rate of tax to which the sales income derived by Corporation B is subject under Treas. Reg. § 1.954-3(b)(1)(i)(c), the effective rate of tax is determined by applying local law. The effective rate of tax in Country 2 with regards to Corporation B is calculated by taking Country 2 income taxes paid by Corporation B attributable to its FBCSI, which may require adjustments to allocate or apportion expenses in accordance with Country 2 tax law"); PLR 200945036 (Nov. 6, 2009) ("Therefore, it is necessary to determine the amount of taxable FBCSI under the principles of local law in each jurisdiction in order to compare the tax on that income"). See also Local Law Governs at 4 ("The LTRs confirm that the laws of the country in which the sales are derived apply for purposes of determining the amount of taxable income in the denominator"); BNA Branch Rule Portfolio at (4)(c)(2)(b) ("PLR 200942034 concludes that the actual effective tax rate is computed under the tax laws of country 2 (i.e., the country in which the sales branches were located), and that such laws should determine the amount of income subject to rate testing (i.e., the denominator of the fraction) as well as the amount of tax imposed on such income (i.e., the numerator of the fraction).”).

The regulatory and ruling positions mandate that Luxembourg tax law must be applied to determine the numerator and denominator of the fraction used to determine the actual effective tax rate in Luxembourg. Under the Mexico-Luxembourg Treaty, the profits attributable to WOM's Mexican PE may be taxed by Mexico, are thus exempt from taxation in Luxembourg, and must be excluded from the denominator of any effective tax rate calculation.

6. NO TAX RATE DISPARITY EXISTS.

As discussed above, as the Luxembourg Remainder performs no purchasing or selling activities on behalf of the Manufacturing Branch, there is no separation of manufacturing and selling activities, the Tax Rate Disparity test cannot be applied, and the Manufacturing Branch Rule is simply inapplicable. However, to the extent that the administrative and accounting functions performed by the Luxembourg Remainder are considered indirect expenses related to purchasing or selling activities, the actual effective tax rate for the Luxembourg remainder was 24.2%. See Schaffner Aff. at ¶ 30. As this rate is not five percentage points less than the 28% hypothetical rate calculated by Respondent's foreign law expert, no Tax Rate Disparity exists.³²

B. THE MANUFACTURING BRANCH RULE EXCEEDS THE SCOPE OF SECTION 954(d)(2) AND IS INVALID.

Respondent makes two broad-sweeping arguments as to the validity of the Manufacturing Branch Rules in Treas. Reg. § 1.954-3(b)(1)(ii). The first is that section 954(d)(2), by its plain language, permits the IRS to treat sales income generated by the remainder of a CFC that has a Manufacturing Branch as FBCSI. The second is that the Manufacturing Branch Rules are a reasonable interpretation of this broad statutory authority. For the reasons stated below, the Court should reject both arguments.

Section 954(d)(2) only addresses FBCSI attributable to a sales branch and does not contemplate sales performed by the remainder of the corporation with respect to manufacturing activities of a branch, while Petitioners agree with Respondent that it is appropriate to look at the legislative history as well as the context of a statute to determine congressional intent, see Fullenkamp v. Veneman, 383 F.3d 478, 481-84 (6th Cir. 2004), those tools provide no support for Respondent's interpretation of section 954(d)(2).

On its face, section 954(d)(2) provides statutory language that supports the Sales Branch Rule, but provides no language that supports the Manufacturing Branch Rule. Specifically, the Sales Branch Rule of Treas. Reg. § 1.954-3 (b)(1)(i), if a Tax Rate Disparity exists, treats income of the Sales Branch as income of a separate corporation which is earned from purchasing and selling activities on behalf of the Remainder (i.e., the CFC). The Sales Branch Rule then tests that income of the Sales Branch to see if it constitutes FBCSI. If it does, then the Sales Branch Rule treats the FBCSI of the Sales Branch as the FBCSI of the Remainder (i.e., the CFC). In relevant part, section 954(d)(2) provides:

[U]nder regulations prescribed by the Secretary 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 and shall constitute foreign base company income of the controlled foreign corporation.

(Emphasis added). Parsing the language further, the statute says that "the income . . . of such branch . . . shall constitute [FBCSI] of the [CFC]." This statutory language completely supports the Sales Branch Rule under the regulations.

The Manufacturing Branch Rule essentially does the opposite. Specifically, the Manufacturing Branch Rule of Treas. Reg. § 1.954-3(b)(1)(ii), if a Tax Rate Disparity exists, treats the income of the Remainder (i.e., the CFC) as income from purchasing or selling activities performed on behalf of the Manufacturing Branch (the Manufacturing Branch is treated as a separate corporation), and tests that income to determine if it constitutes FBCSI. If it does, the Manufacturing Branch Rule provides that the income of the CFC — and not the branch — constitutes FBCSI.

Returning to the language of the statute, when parsed, the language of section 954(d)(2) provides "the income . . . of such branch . . . shall constitute [FBCSI] of the [CFC]." The language of section 954(d)(2) does not provide that the income of the CFC in these circumstances shall constitute FBCSI. (By definition, the income of the CFC does not constitute FBCSI under section 954(d)(1) if the Manufacturing Branch Rule applies.) Accordingly, section 954(d)(2) simply does not authorize the treatment of the CFC's income as FBCSI under these circumstances.

Nor does the legislative history save Respondent's regulation. First, the plain language of the statute is unambiguous: there is no need to resort to the legislative history. Second, the legislative history is of no help to Respondent in any event. None of the legislative history refers to any manufacturing branch scenario, save the JCT Report. Joint Committee on Taxation, "Tax Effects of Conducting Foreign Business Through Foreign Companies" (JCS-5-61), July 21, 1961 ("JCT Report"). The JCT Report, which is the only piece of legislative history that even remotely refers to a manufacturing branch, was written nearly a year prior to any statutory language being drafted by or submitted to Congress. Not only was there no pending statutory language at the time the JCT Report was written, statutory language was not even on the horizon yet. When the first bill creating section 954 was drafted, it had no provision relating to branches. The bill passed by the House still contained no language relating to branches. Only two months later, a year after the JCT Report, did Treasury submit a proposed amendment to the Senate Finance Committee containing language relating to branches. That amendment, which was ultimately enacted as section 954(d)(2), had no language as shown above which would authorize the Manufacturing Branch Rule.

Thus the legislative history is completely barren of even the most remote mention of a manufacturing branch, save for the mention in passing in the JCT Report. The JCT Report, while it mentioned a single example of a CFC using a manufacturing branch, made no recommendation and provided no draft language for any sort of manufacturing branch rule.

The Supreme Court has made it plain that a cited piece of legislative history must be anchored in the text of the statute. If the "legislative history" has no statutory reference point, the Supreme Court will not give weight or effect to such an unanchored piece of legislative history. In Shannon v. United States, 512 U.S. 573, 583-84 (1994), the Supreme Court observed: "We are not aware of any case, however . . . in which we have given authoritative weight to a single passage of legislative history that is in no way anchored in the text of the statute." The Supreme Court continued: "To give effect to this snippet of legislative history, we would have to abandon altogether the text of the statute as a guide in the interpretative process. We agree with the District of Columbia Circuit that 'courts have no authority to enforce [a] principle] gleaned solely from legislative history that has no statutory reference point." Id. (quoting International Brotherhood of Elec. Workers Local Union No. 474, AFL-CIO v. NLRB, 814 F.2d 697, 712 (D.C. Cir. 1987)(emphasis deleted)).

Under Chevron step one, the plain language of the statute and the legislative history show that Congress has spoken directly to the question of the branch rule and authorized only the Sales Branch Rule. Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 842 (1984). As Respondent also observed, "If the intent of Congress is clear, that is the end of the matter, for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43.

If a statute is silent or ambiguous with respect to the question at issue, step two of Chevron requires the court to give deference to the agency's construction, so long as the construction is not "arbitrary, capricious, or manifestly contrary to the statute." Id. In this case, the Manufacturing Branch Rule promulgated by Treasury is manifestly contrary to the statute. In short, Treasury was given authority to promulgate the Sales Branch Rule whereby Congress commanded that FBCSI of the Sales Branch shall constitute FBCSI of the CFC. Treasury not only promulgated regulations creating the Sales Branch Rule, but exceeded its authority by creating a new rule not even considered by Congress that provided for income of the CFC itself to constitute FBCSI in circumstances not authorized either directly under section 954(d)(1) or indirectly through a Sales Branch Rule under section 954(d)(2).

Finally, Respondent resorts to "context” in which he argues that section 954(d)(2) was intended as a "loophole-plugging provision." Respondent's Brief at 113. Respondent made this same argument in both Ashland Oil, Inc. v. Commissioner, 95 T.C. 348, 354, 358 (1990), and Vetco, Inc. v. Commissioner, 95 T.C. 579, 593 (1990). In Ashland, 95 T.C. at 354, 358, the Tax Court rejected the loophole argument, ruling:

Respondent's most general contention is that Congress, in enacting the branch rule of section 954(d)(2), intended it to be a broad "loophole closing" provision. The applicable loophole here, according to respondent, is any arrangement that separates the manufacturing and sales functions so as to avoid or limit tax on the sales . . . In sum, we reject respondent's contention that Congress intended the branch rule to apply to "any arrangement" with a specified tax effect. 

In Vetco, 95 T.C. at 593, Respondent took another swing at the same argument and missed:

We also reject respondent's assertion that the branch rule was intended as a broad loophole-closing device to prevent the use of multiple foreign countries to take advantage of lower tax rates in those countries. Respondent, in effect, repeats his argument from Ashland Oil, Inc. v. Commissioner, supra, where he unsuccessfully attempted to use the tax rate disparity test, found in section 1.954-3(b)(1)(i)(b) and 1.954-3(b)(1)(ii)(b), Income Tax Regs., to define a branch.

Respondent's third swing at the pitch in this case should fare no better.

The Manufacturing Branch Rule set forth in Treas. Reg. § 1.954-3(b)(1)(ii) exceeds the statutory grant of authority in section 954(d)(2) and is invalid under both steps one and two of the Chevron standard.

III. PETITIONERS' ALLEGED COMPUTATIONAL ERRORS DO NOT PRECLUDE THIS COURT FROM RESOLVING THE SUBSTANTIVE ISSUES ON SUMMARY JUDGMENT.

Whirlpool's Petitions allege various computational errors made by Respondent in his calculations of the Notices of Deficiency. See Petitions, para. 5.e. The errors referenced in the Petitions are in the nature of correlative computational errors flowing from Respondent's misinterpretation and erroneous application of the facts and law to the interpretation of sections 954(d)(1) and (2) and are necessarily dependent on this Court's findings and conclusions with respect to the substantive issues in this case.

Correlative computational errors should be resolved pursuant to the procedures identified in Tax Court Rule 155 once this Court has issued its opinion on the interpretation of sections 954(d)(1) and (2) and need not be addressed on summary judgment prior to resolution of the substantive issues in the case.

CONCLUSION

As no genuine questions of material fact exist, Petitioners pray that this Court grant Petitioners' Motion for Partial Summary Judgment Under Section 954(d)(1), Motion for Partial Summary Judgment Under Section 954(d)(2), and grant such other and further relief as this Court deems just and proper.

Dated: June 24, 2019

Respectfully submitted,

Mark A. Oates
T.C. No. OM0113
BAKER & MCKENZIE LLP
300 East Randolph Street
Suite 5000
Chicago, IL 60601
(312) 861-7594
Mark.Oates@bakermckenzie.com
Attorney for Petitioners