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Whirlpool Seeks Rehearing in Sixth Circuit Subpart F Income Case

JAN. 20, 2022

Whirlpool Financial Corp. et al. v. Commissioner

DATED JAN. 20, 2022
DOCUMENT ATTRIBUTES

Whirlpool Financial Corp. et al. v. Commissioner

[Editor's Note:

 View the addendum in the PDF version of the document.

]

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 United States Tax Court

APPELLANTS' PETITION FOR REHEARING AND REHEARING EN BANC

Mark A. Oates
Robert H. Albaral
BAKER & MCKENZIE LLP
300 E. Randolph Dr.
Suite 5000
Chicago, IL 60601
(312) 861-7594

Rodney H. Standage
WHIRLPOOL CORPORATION
325 N. LaSalle Dr.
Chicago, IL 60654
(269) 277-6623

Gregory G. Garre
Counsel of Record
Jean A. Pawlow
Eric J. Konopka
LATHAM & WATKINS LLP
555 Eleventh Street, NW
Suite 1000
Washington, DC 20004
(202) 637-2207
gregory.garre@lw.com

January 20, 2022

Counsel for Petitioners-Appellants Whirlpool Financial Corporation, et al.


TABLE OF CONTENTS

DISCLOSURE OF CORPORATE AFFILIATIONS AND FINANCIAL INTEREST

TABLE OF AUTHORITIES

INTRODUCTION AND RULE 35(b)(1) STATEMENT

BACKGROUND

A. Statutory Background

B. Factual Background

C. Procedural History

ARGUMENT

I. REHEARING EN BANC IS WARRANTED

A. The Majority Improperly Nullified Congress's Command That The Statute Be Effectuated “Under Regulations”

B. The Majority's Reading Of The Statute Directly Conflicts With Decisions From The Supreme Court And This Court

C. The Exceptional Importance Of This Case Underscores The Need For En Banc Review

II. AT A MINIMUM, PANEL REHEARING IS WARRANTED

CONCLUSION

TABLE OF AUTHORITIES

CASES

Averett v. United States Department of Health & Human Services, 943 F.3d 313 (6th Cir. 2019)

Billeke-Tolosa v. Ashcroft, 385 F.3d 708 (6th Cir. 2004)

Commissioner v. Krein Chain Co., 72 F.2d 424 (6th Cir. 1934)

Dunlap v. United States, 173 U.S. 65 (1899)

Handy & Harman v. Burnet, 284 U.S. 136 (1931)

Kenco Restaurants, Inc. v. Commissioner, 206 F.3d 588 (6th Cir. 2000)

Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021)

Misewicz v. City of Memphis, 771 F.3d 332 (6th Cir. 2014)

Roberts v. United States, 745 F.3d 1158, 1162 (Fed. Cir. 2014)

SIH Partners LLLP v. Commissioner, 150 T.C. 28 (2018), aff'd, 923 F.3d 296 (3d Cir. 2019)

STATUTES AND REGULATIONS

I.R.C. § 901

I.R.C. § 954(d)(1)

I.R.C. § 954(d)(2)

Treas. Reg. § 1.954-3(a)(4) (2009)

Treas. Reg. § 301.7701-2(a)

OTHER AUTHORITIES

29 Fed. Reg. 6385 (May 15, 1964)

Fed. R. Civ. P. 35(b)(1)(A)

Fed. R. Civ. P. 35(b)(1)(B)

Mindy Herzfeld, The Sixth Circuit Knows Subpart F Income When It Sees It — Or Does It?, 174 Tax Notes Fed. 316 (2022)

IRS Tech. Adv. Mem. 85-09004 (Nov. 23, 1984), 1984 WL 269913

PricewaterhouseCoopers, IRS Wins Subpart F Case with Wide-Ranging Impact, But Questions Remain (Aug. 27, 2020), https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-its-whirpool-sub-f-case.pdf

S. Rep. No. 87-1881 (1962), as reprinted in 1962 U.S.C.C.A.N. 3297

Lowell D. Yoder et al., Implications of the Sixth Circuit's Whirlpool Opinion (Dec. 21, 2021), https://www.mwe.com/insights/implications-of-the-sixth-circuits-whirlpool-opinion/


INTRODUCTION AND RULE 35(b)(1) STATEMENT

This case presents an important and recurring question concerning the federal tax treatment of foreign income earned by foreign subsidiaries of U.S. corporations that split the panel in this case. But ultimately, the panel's divided decision resolving that tax dispute turned on a fundamental question of administrative law with much broader implications: Whether a law that Congress explicitly states shall be effectuated “under regulations” may be enforced independent of any such regulations. The majority's affirmative answer to that question adopts a position never advanced by the IRS in this case or any other, conflicts with prior precedent holding that Congress's use of identical “under regulations” language requires regulations to effectuate the statute, and negates the role that Congress gave to the Treasury Department to implement the statute through regulations. Moreover, the regulations are outcome-determinative here. As Judge Nalbandian explained in dissent (at 27-29), under the regulations that the majority disregarded, the taxpayer in this case — Whirlpool Corporation (“Whirlpool”) — must prevail.

Section 954(d) of the Internal Revenue Code defines when income constitutes “foreign base company sales income” or “FBCSI,” an exception to the general rule that income earned abroad is not taxed by the United States until it is repatriated to the United States. And § 954(d)(2) — the particular provision at issue here — explicitly provides that certain income shall be FBCSI “under regulations prescribed by the Secretary.” The panel majority, however, held (at 13-14) that the income at issue could be declared FBCSI without consulting the regulations or considering Whirlpool's arguments that they are invalid. Judge Nalbandian dissented. He concluded (at 21) that the “under regulations” limitation in § 954(d)(2) cannot be ignored, because it “means that Congress gave Treasury a role in defining when [certain] transactions generate FBCSI.” Moreover, as he explained (at 25-29), the income at issue here is not FBCSI under the regulations, even if they are valid.

This basic disagreement over whether a statute, like § 954(d)(2), that Congress — through the use of such “under regulations” language — conditioned on regulations may be enforced independent of the terms or validity of the regulations warrants rehearing en banc. Confronting structurally identical statutes, the Supreme Court and this Court long ago held that the words “under regulations” must be given effect. Dunlap v. United States, 173 U.S. 65, 76 (1899); Commissioner v. Krein Chain Co., 72 F.2d 424, 425 (6th Cir. 1934). As the Supreme Court explained in Dunlap, this language shows that Congress “conditioned” the statute on the issuance of regulations, leaving the “matter to the [agency] to ascertain what would be needed in order to carry the section into effect.” Dunlap, 173 U.S. at 76. This conflict of authority alone justifies rehearing. Fed. R. App. P. 35(b)(1)(A).

So does the importance of this issue. Fed. R. App. P. 35(b)(1)(B). The tax dispute that prompted this case has major consequences for many U.S. companies, like Whirlpool, that legitimately operate through foreign subsidiaries and have for decades relied on the § 954(d)(2) regulations in ordering their affairs. Yet, as commentators have observed, the decision in this case denies taxpayers the ability to rely on regulations that have been in effect for over 50 years. Infra at 14-15. Moreover, the impact of the majority's decision extends far beyond FBCSI and the tax realm. Hundreds of laws — tax and non-tax alike — contain similar “under regulations” conditions. And the presence of such statutory language is critical, because it mandates valid regulations before a statute can be enforced and gives agencies authority to delineate — and thereby narrow — the impact of a statute through such regulations. Yet, under the majority's decision, the regulations on which Congress conditioned the statute are rendered nugatory.

At a minimum, panel rehearing is warranted to confront an issue left unaddressed by the majority's decision. The majority held (at 14) that only “income from sales” would be subject to U.S. taxation under § 954(d)(2), but it did not address the parties' arguments over whether and how much of the income at issue was “from sales” as opposed to manufacturing. As Judge Nalbandian explained (at 29), “[a]t the very least, there's a question of fact” on these issues that “should've precluded summary judgment.” This issue is critical if the majority's interpretation is allowed to stand, because — as the majority itself stressed (at 13-14) — the statute captures only sales income. If the panel does not believe it is positioned to resolve this issue, it should at least remand this case to the Tax Court.

The petition should be granted.

BACKGROUND

A. Statutory Background

The U.S. has traditionally not taxed income earned abroad by foreign corporations — including those controlled by a U.S. taxpayer — until it is repatriated to the U.S. Op. 2. This case concerns a narrow exception to that rule — contained in I.R.C. § 954(d) — for FBCSI, which allows immediate U.S. taxation on sales income that has been artificially separated from manufacturing income through sales of goods between foreign subsidiaries. Op. 2-4; see S. Rep. No. 87-1881, at 84 (1962), as reprinted in 1962 U.S.C.C.A.N. 3297, 3386-87. But when there has been no such separation — such as when a foreign subsidiary sells goods that it manufactures — there cannot be FBCSI. See I.R.C. § 954(d)(1); Treas. Reg. § 1.954-3(a)(4) (2009).

To illustrate, suppose U.S. Co. has a Chinese subsidiary, China Sub, that manufactures computers in China for $1,000. If China Sub sells those computers for use in Europe for $1,100, it earns $100. But that income is not FBCSI — it comes from selling computers that China Sub manufactures — and so is not taxed by the U.S. until it is distributed to U.S. Co. If China Sub instead sells those computers to U.S. Co.'s Cayman Islands subsidiary, Cayman Sub, for $1,075, and Cayman Sub simply resells them for use in Europe for $1,100, the $25 of income that Cayman Sub earns from reselling the computers has been separated from the manufacturing activities and is FBCSI. See Op. 2-4. Thus, the U.S. taxes that sales income — but not China Sub's manufacturing income — in the year it is earned.

Congress also addressed transactions between a corporation's home office and its foreign branch — i.e., its direct operations in a foreign country — which are not between related parties and thus cannot generate FBCSI under § 954(d)(1). So, using the example above, if China Sub sells the computers it manufactures to its Cayman branch (rather than a related Cayman subsidiary), which resells them for use in Europe, there is no FBCSI under § 954(d)(1). Congress understood that foreign tax laws may nonetheless treat such a branch like a related entity and could allow results similar to those that animated the general FBCSI rules. Op. 4, 10-12. So Congress enacted § 954(d)(2), which provides:

For purposes of determining [FBCSI] in situations in which [branch activities have] substantially the same effect as if such branch . . . were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to [such branch activities] shall constitute [FBCSI.]

Shortly after the FBCSI exception was enacted, the IRS issued regulations under § 954(d)(2). 29 Fed. Reg. 6385 (May 15, 1964). Those regulations further delineate the application of § 954(d)(2) in situations involving a branch.

B. Factual Background

This case arises out of Whirlpool's participation in Mexico's “maquiladora” program, which is designed to create jobs by incentivizing companies to manufacture goods in Mexico for export to other countries. Op. 6. That program requires two entities — a foreign principal organized outside Mexico and a Mexican maquiladora company. The efforts and investments of both companies are necessary to manufacture goods in Mexico. The foreign principal provides the primary inputs — raw materials and machinery — in Mexico; holds title to the work-in-process and finished inventory in Mexico; and exports the finished goods from Mexico to other countries. The maquiladora company provides the labor used in the manufacturing process. Id.; 2-App'x-420.

Whirlpool subsidiaries have long manufactured appliances in Mexico for sale internationally. In 2007, to qualify for the maquiladora program, Whirlpool formed two subsidiaries. 6-App'x-3226-27. Whirlpool Overseas Manufacturing (“Lux”) is the foreign principal. 6-App'x-3233. Its home office in Luxembourg engages in limited administrative activities; its branch in Mexico manufactures and exports refrigerators and washing machines for sale to — and under specifications from — other Whirlpool subsidiaries. Op. 5-6; 2-App'x-404-07. To manufacture those appliances, Lux acquired hundreds of millions of dollars of raw materials, inventory, and equipment, which are located in Mexico and are part of its Mexican branch. 2-App'x-873. Lux also owns Whirlpool Internacional (“WIN”), a maquiladora company that supplies labor to build the appliances through contracts with other Whirlpool subsidiaries — an “extremely common” practice in Mexico. 2-App'x-425. Because (as all agree) WIN is disregarded for U.S. tax purposes, it is treated as part of Lux's Mexican branch. Op. 8; Treas. Reg. § 301.7701-2(a). Lux's Mexican branch thus comprises both the manufacturing assets Lux directly owns in Mexico and WIN's operations supplying the labor to build the appliances.

After this reorganization, all of Lux's Mexican branch income was earned in, and taxable by, Mexico, but Mexican taxes were reduced. Under the maquiladora program, Mexico lowers the tax rate on WIN's income and exempts the rest of the branch's income from tax. 2-App'x-419-22. But to be clear, neither this reorganization nor the maquiladora program shelters Whirlpool from U.S. taxes. Whirlpool's Mexican operations always generated manufacturing income, not FBCSI; the reorganization did not alter that income's character. In fact, due to this reorganization, the U.S. will ultimately collect more taxes, because reducing Mexican taxes also reduces the foreign tax credits Whirlpool can take against its U.S. taxes when the income is repatriated to the U.S. See I.R.C. § 901.1

C. Procedural History

In 2017, the IRS issued notices of deficiency finding that roughly $45 million in income that Lux derived from its Mexican branch operations in 2009 was FBCSI. Op. 7-8; 1-App'x-37, 76. Throughout this proceeding, the IRS's position has been that the income is FBCSI under the § 954(d) regulations. Whirlpool petitioned the Tax Court for redetermination, explaining that this income was from manufacturing appliances in Mexico, and therefore was not FBCSI under the regulations. 1-App'x-13-91. Whirlpool also argued that the regulations were invalid insofar as they allowed income earned outside the branch to be FBCSI. On cross-motions, the Tax Court granted summary judgment to the IRS, holding that all $45 million was FBCSI under the regulations and that the regulations were valid. 6-App'x-3222, 3235 & n.3, 3261-68.

The panel affirmed in a 2-1 decision. Although the parties had focused their arguments on the applicability and validity of the regulations, the majority held (at 13-14) that all $45 million was FBCSI under the text of § 954(d)(2) alone — and that this determination obviated any need to consider the parties' arguments about the regulations. The majority further held (at 14) that only “income from sales” can be FBCSI under § 954(d)(2), but it did not address Whirlpool's arguments that the $45 million was from manufacturing rather than sales and, at a minimum, that factual disputes over the extent of sales income precluded summary judgment for the IRS.

Judge Nalbandian dissented (at 17-29).

ARGUMENT

I. REHEARING EN BANC IS WARRANTED

Rehearing en banc is warranted to resolve the panel's disagreement over whether § 954(d)(2)'s “under regulations” command requires valid regulations to effectuate the statute. The majority's decision enforcing § 954(d)(2) against Whirlpool without considering the terms or validity of the implementing regulations renders the statute's “under regulations” condition superfluous; conflicts with decisions of the Supreme Court and this Court; and, ultimately, subjects taxpayers to a regime never intended by Congress — or advanced by the IRS, ever.2

A. The Majority Improperly Nullified Congress's Command That The Statute Be Effectuated “Under Regulations”

Respectfully, the majority improperly read the “under regulations” condition out of § 954(d)(2). In § 954(d)(2), Congress provided that when certain conditions are met, “under regulations prescribed by the Secretary the income attributable to [branch activities] . . . shall constitute [FBCSI.]” I.R.C. § 954(d)(2) (emphasis added). As Judge Nalbandian explained (at 22), the words “under regulations” ensure that the statute captures only the kind of income Congress was concerned about by expressly “giving Treasury a role in defining when branch transactions generate FBCSI.” Without that limitation, as Judge Nalbandian observed (at 21-22), “any activity could generate FBCSI, no matter if it involves a Related-Person sales transaction, so long as it's 'attributable to' the branch's activities.”

The majority's decision conflicts with the IRS's own interpretation of the “under regulations” condition in § 954(d)(2). As the IRS advised taxpayers decades ago, § 954(d)(2) “gives the Secretary of the Treasury the authority to prescribe regulations to determine when the income attributable to [branch activities] shall constitute [FBCSI].” IRS Tech. Adv. Mem. 85-09004 (Nov. 23, 1984), 1984 WL 269913. It has reiterated that position in this case and in cases involving similar statutes. See 6-App'x-2554-55, 2584-85 (“[S]ection 954(d)(2) authorized the issuance of regulations . . . for purposes of determining whether [branch income is] FBCSI” and allowed Treasury to “narrow[ ] the scope of section 954(d)(2)[.]”); SIH Partners LLLP v. Commissioner, 150 T.C. 28, 37 (2018) (no dispute “that section 956(d) is not self-executing” or that liability “can be determined only by reference to regulations”), aff'd, 923 F.3d 296 (3d Cir. 2019). And the IRS did not back away from that position when questioned about it at oral argument. See Oral-Argument at 33:30-34:42. 3 Nor could the IRS ignore its own regulations, even if it opportunistically wished to do so now. See Billeke-Tolosa v. Ashcroft, 385 F.3d 708, 711 (6th Cir. 2004) (agency was not “free to ignore [its] binding rules”).4

Out of respect for the separation of powers and Congress's constitutionally assigned role to make the laws, courts are wary of agencies overstepping an implied delegation of authority. See, e.g., Averett v. U.S. Dep't of Health & Hum. Servs., 943 F.3d 313, 317-19 (6th Cir. 2019). But the concerns driving those decisions decidedly favor giving effect to Congress's explicit decision, in § 954(d)(2) and similar statutes, to condition statutory consequences on valid regulations.

Of course, as the majority indicated (at 13-14), the § 954(d)(2) regulations cannot exceed statutory limits — i.e., they cannot make income FBCSI that would not be FBCSI under the statute.But that does not mean § 954(d)(2)'s reference to regulations is superfluous. Regulations can narrow statutory commands by explicating the circumstances in which they may apply, as the IRS has conceded is the case as to the regulations here. 6-App'x-2584-85 (regulations can “narrow[ ] the scope of section 954(d)(2)”); see, e.g., Misewicz v. City of Memphis, 771 F.3d 332, 333-34 (6th Cir. 2014) (applying regulatory exception to overtime rules).

The upshot is that, if income is not FBCSI under the § 954(d)(2) regulations (as Judge Nalbandian found) or if those regulations are invalid (as Whirlpool has argued) — the income cannot be FBCSI under § 954(d)(2). Op. 25-29 & n.6 (dissent). For those reasons, the parties focused their arguments on the application and validity of the § 954(d)(2) regulations — and the Tax Court devoted over 20 pages of its opinion to those issues. 6-App'x-3261-81. By holding that this case could be resolved without considering the regulations, the majority rendered both the statute's “under regulations” language and the regulations themselves superfluous. As Judge Nalbandian explained (at 22), that was error.

B. The Majority's Reading Of The Statute Directly Conflicts With Decisions From The Supreme Court And This Court

The majority's ruling that the express “under regulations” condition Congress imposed in § 954(d)(2) is surplusage conflicts with longstanding precedent of the Supreme Court and this Court involving structurally identical laws.

Dunlap v. United States, 173 U.S. 65 (1899), for example, involved a statute that allowed manufacturers “to use alcohol in the arts, or in any medicinal or other like compound . . . under regulations to be prescribed by the Secretary of the Treasury” and provided that manufacturers “shall be entitled” to a refund of stamp taxes paid on such alcohol. Id. at 70 (citation omitted). But the Secretary never issued regulations, and a manufacturer sought a stamp-tax refund under the statute alone. Id. at 66, 71. The Court held that the manufacturer could not. “Congress had left it to the Secretary to determine whether any [regulations] which he could prescribe and enforce would adequately protect the revenue and the manufacturers.” Id. Thus, the refund right “was conditioned on use in compliance with regulations to be prescribed, in the absence of which the right could not vest[.]” Id. at 76.

Likewise, in considering a statute providing that affiliated corporations “'shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income,'” both the Supreme Court and this Court recognized that regulations were necessary to “give[ ] effect” to the statute. Handy & Harman v. Burnet, 284 U.S. 136, 138, 140 (1931) (citation omitted); see Commissioner v. Krein Chain Co., 72 F.2d 424, 425 (6th Cir. 1934) (“[T]he promulgation of the regulations . . . was necessary to place the taxpayer under the duty of filing a consolidated return.”). And outside the tax context, the Federal Circuit recently held that a statute providing that certain monies “'shall be paid under regulations prescribed by the President'” “indicates that [those monies] will be paid only if the regulations require it.” Roberts v. United States, 745 F.3d 1158, 1162, 1164 (Fed. Cir. 2014) (citation omitted).

Because the majority decided this case on a ground not raised by the IRS or briefed by the parties, the panel did not have these cases before it. But the majority's decision to uphold the IRS's enforcement of § 954(d)(2) against Whirlpool without considering the limitations in — or validity of — the regulations directly conflicts with these decisions. And that conflict alone warrants rehearing.

C. The Exceptional Importance Of This Case Underscores The Need For En Banc Review

The tax consequences of this closely followed case were always exceptionally important to U.S. corporations with foreign subsidiaries. But the panel's decision greatly magnifies its importance. Congress has enacted hundreds of laws that are effectuated only “under regulations” promulgated by an agency. The majority's decision renders such “under regulations” language superfluous, vitiates the role that Congress expressly assigned to agencies to implement statutory commands, and undermines regulated parties' ability to rely on regulations in ordering their affairs.

In the context of § 954(d)(2) in particular, this will have profound consequences. For over 50 years, “US-multinationals that operate across different industries, countries, and business models” have made substantial investments abroad in reliance on the § 954(d)(2) regulations. PricewaterhouseCoopers, IRS Wins Subpart F Case with Wide-Ranging Impact, But Questions Remain 9 (Aug. 27, 2020).5 The majority's decision renders those regulations nugatory, jeopardizes investment decisions made in reliance on them, and will result in hundreds of millions of dollars of unexpected and unjustified tax liability — a stunning development. See Lowell D. Yoder et al., Implications of the Sixth Circuit's Whirlpool Opinion (Dec. 21, 2021) (stating that the majority's “interpretation of Section 954(d)(2) is inconsistent with the uniform interpretation of that provision” for over 50 years, and that the authors were “unaware of a court ever denying a taxpayer the ability to rely on final Treasury regulations”).6

The majority's decision applies to “many” maquiladora structures and other structures that have become “ubiquitous.” Herzfeld, supra note 4, at 316-17. And the IRS almost certainly will seek to capitalize on the majority's ruling, making it all the more important for this Court to rehear this case.

II. AT A MINIMUM, PANEL REHEARING IS WARRANTED

At a minimum, panel rehearing is warranted to address unresolved issues in this case surrounding the extent of FBCSI. The majority cabined (at 14) its interpretation of § 954(d)(2) by clarifying that only “income from sales” can be FBCSI. Yet, the majority did not address the parties' disputes over the extent to which the income at issue actually stemmed from sales as opposed to manufacturing. Especially if the majority's interpretation of § 954(d)(2) is allowed to stand, the resolution of such disputes is critical to ensuring that the IRS does not upset the balance that Congress set when it comes to income earned abroad.

As Judge Nalbandian explained (at 27), Lux's Mexican branch turns “sheets of metal into functioning household appliances” under specifications provided by other Whirlpool subsidiaries. And the branch earns “a percentage over the costs and expenses [it] incurs in the manufacture of products which . . . give[s] [it] an arms' length return for its services.” 3-App'x-1352 (emphasis added). By definition, that arm's-length return — the $45 million at issue here — is for manufacturing appliances, not for selling them. See, e.g., Kenco Rests., Inc. v. Commissioner, 206 F.3d 588, 595 (6th Cir. 2000) (explaining arm's-length standard); Opening-Br. 47 n.16.

The IRS's position wrongly equates WIN with the Mexican branch and deems WIN the only entity that engages in manufacturing and generates manufacturing income. IRS-Br. 61. WIN is only part of the Mexican branch and provides only labor. The rest of the branch, which Lux operates directly, comprises essentially everything else needed to make the appliances, including hundreds of millions of dollars of raw materials and equipment in Mexico. 2-App'x-873. The income earned on those investments — i.e., the income at issue here — is from manufacturing in Mexico just as much as the income earned on WIN's labor is. The IRS's position is as implausible as saying that a contractor building a house on a cost-plus basis earns construction income from its margin on the crew it hires but sales income from its margin on the materials and equipment it uses to build the house.

As Whirlpool has explained, all $45 million at issue here is from manufacturing, not sales, and thus cannot be FBCSI. Opening-Br. 19-47. But at a minimum, genuine factual disputes about whether and how much income is from manufacturing preclude summary judgment for the IRS. These disputes were extensively argued by the parties and highlighted by the dissent. See, e.g., Op. 29 (dissent); Opening-Br. 48-51; IRS-Br. 59-74; Oral-Argument at 17:40-20:02, 54:25-55:41. And they are now critical. If the majority's unprecedented interpretation of § 954(d)(2) is allowed to stand, the IRS should be required to show that the income at issue is in fact “from sales.” Accordingly, the panel should grant rehearing and resolve these issues — or at least remand this case to the Tax Court to do so. Cf. Mayo Clinic v. United States, 997 F.3d 789, 801-02 (8th Cir. 2021) (remanding for consideration of unresolved factual issues after clarifying the relevant legal principles, where both parties had moved for summary judgment).

CONCLUSION

The petition should be granted.

Dated: January 20, 2022

Respectfully submitted,

Gregory G. Garre
Jean A. Pawlow
Eric J. Konopka
LATHAM & WATKINS LLP
555 Eleventh Street, NW
Suite 1000
Washington, DC 20004
(202) 637-2207
gregory.garre@lw.com

Mark A. Oates
Robert H. Albaral
BAKER & MCKENZIE LLP
300 E. Randolph Dr.
Suite 5000
Chicago, IL 60601
(312) 861-7594

Rodney H. Standage
WHIRLPOOL CORPORATION
325 N. LaSalle Dr.
Chicago, IL 60654
(269) 277-6623

Counsel for Petitioners-Appellants Whirlpool Financial Corporation, et al.

FOOTNOTES

1Indeed, the manufacturing income at issue here was repatriated to the U.S. and subjected to U.S. taxation in later tax years.

2As Judge Nalbandian persuasively explained, the majority misinterpreted § 954(d) in other important respects as well.

3https://www.opn.ca6.uscourts.gov/internet/court_audio/aud2.php?link=audio/06-09-2021%20-%20Wednesday/20-1899%20Whirlpool%20Financial%20Corp%20v%20CIR%20et%20al.mp3&name=20-1899%20Whirlpool%20Financial%20 Corp%20v%20CIR%20et%20al

4As one commentator put it, the majority's decision “reverse[d] decades of the government's own interpretation of the . . . branch rule” by “ignor[ing] regulations that as prescribed by statute are a necessary part of interpreting and implementing the statute.” Mindy Herzfeld, The Sixth Circuit Knows Subpart F Income When It Sees It — Or Does It?, 174 Tax Notes Fed. 316, 316, 320 (2022).

5https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-its-whirpool-sub-f-case.pdf

6https://www.mwe.com/insights/implications-of-the-sixth-circuits-whirlpool-opinion/

END FOOTNOTES

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