The Lessons of Whirlpool

Abstract

Focusing on the Whirlpool case, this article first examines a critical aspect of the subpart F branch rule. The rule requires an allocation of a controlled foreign corporation’s income between the income derived by the branch and that derived by “the remainder of the CFC.” This allocation is required whether the branch concerned is a sales or purchase branch (reg. section 1.954-3(b)(1)(i)) or a manufacturing branch (reg. section 1.954- 3(b)(1)(ii)).

Since the regulation provides no clear guidance to making this allocation, the article suggests that taxpayers and the IRS should apply a broad and flexible approach that reflects the actual facts of the taxpayer and the guiding principle behind the branch rule (that is, to prevent the use of branches to artificially achieve avoidance of FBCSI treatment through a separation of sales income from manufacturing activities). The article includes discussion and guidance in applying this approach.

The second issue examined in the article is the lack of significance of the Whirlpool case for similarly situated groups that use branch structures. The Whirlpool case has received considerable attention and controversy. Everyone and their mother, so to speak, have been complaining about the fact that the Sixth Circuit, in affirming the Tax Court’s decision, chose to only analyze the statute and not bother looking at the regulation. I suspect that Sixth Circuit’s majority by that time had reached their level of nausea just considering the statute and simply didn’t want to go further in analyzing the regulation and applying it to the taxpayer’s facts. In any case, all this attention given to this aspect of the Sixth Circuit’s decision has prevented any attention being given to what I believe is the lack of real significance of this case to similarly situated taxpayers. This is because the Whirlpool decision is only relevant for years prior to certain 2009/2010 regulation changes. Other multinationals are (and should be) terrified that the IRS will similarly attack their questionable branch structures in open years that should in virtually all cases be post-regulation change years.

It seems likely that there are many similarly situated taxpayers that have taken an inappropriate factual position, such as Whirlpool took, that 100% of its CFC’s income was allocated to its manufacturing branch. Some may also have been taking aggressive positions regarding how the regulation applies. In any case, the faults in the old regulation that allowed Whirlpool to claim that it was allowed the manufacturing exception (and which convinced the Sixth Circuit’s dissent that Whirlpool should win) were fixed by the regulation changes. As a result, open years of other similarly situated taxpayer groups should in virtually all cases be governed by the current regulations, which closed off any ability to argue as Whirlpool argued for its 2009 tax year. This being the case, virtually no other taxpayers would be able to benefit from a Whirlpool win if its appeal to the Supreme Court is successful and the Sixth Circuit on remand finds in its favor.

The article does not discuss the important administrative law issue that Whirlpool’s writ of certiorari and the Amicus briefs have raised concerning the Sixth Circuit’s approach of basing its decision solely on the statute with no attempt to apply the regulations to Whirlpool’s facts.

Keywords: Subpart F, Branch Rule, Manufacturing Branch Rule, Maquiladoras, International Taxation, Whirlpool, foreign base company sales income, FBCSI

JEL Classification: H21, H25, K34, E62