## Facts

- Whirlpool Financial Corporation (U.S. parent) owned Whirlpool International Holdings S.à r.l. (WIH), a Luxembourg controlled foreign corporation (CFC).
- WIH conducted appliance manufacturing in Mexico through a disregarded Mexican entity treated as a branch.
- WIH owned the raw materials, work-in-process, finished goods, and manufacturing equipment located in Mexico; the Mexican operation performed manufacturing services for a fee taxable in Mexico.
- WIH sold Mexican-manufactured appliances to related parties, including the U.S. parent and a Mexican CFC distributor.
- Because of the interaction of Mexican maquiladora rules and Luxembourg’s treaty treatment, WIH’s residual sales income was largely untaxed or lightly taxed in Mexico and only minimally taxed in Luxembourg.
- Whirlpool reported WIH’s sales income as not foreign base company sales income (FBCSI), relying on the regulatory manufacturing exception under § 954(d)(1).
- The IRS issued notices of deficiency for 2009, asserting the income was FBCSI includible by Whirlpool under subpart F and increasing taxable income by about $49,964,080.
- The parties filed cross-motions for partial summary judgment; the court addressed whether § 954(d)(2)’s branch rule applied.

## Issues

1. Whether WIH’s sales income was excluded from FBCSI under the § 954(d)(1) regulatory manufacturing exception because manufacturing occurred through WIH’s Mexican operations.
2. Whether, even assuming the manufacturing exception applied, WIH’s sales income was FBCSI under § 954(d)(2) and the regulations treating a manufacturing branch as a separate corporation.
3. Whether the regulations implementing the § 954(d)(2) manufacturing branch rule were a valid exercise of Treasury’s authority.

## Decision

- The Tax Court granted partial summary judgment for the Commissioner on the § 954(d)(2) branch rule issue.
- The court assumed, without deciding, that the § 954(d)(1) manufacturing exception applied.
- The court held WIH’s sales income was FBCSI under § 954(d)(2) because the Mexican manufacturing branch was treated as a separate corporation under the regulations, making the Luxembourg home office’s related-party sales income fall within FBCSI.
- The court upheld the validity of the manufacturing branch rule regulations as consistent with § 954(d)(2)’s anti-avoidance function.

## Legal Principles

- Section 954(d)(2) authorizes regulations that treat a CFC and its branch as separate corporations when the branch structure produces a tax result comparable to using a separate corporation to avoid FBCSI.
- Under the manufacturing branch rule regulations, a CFC’s home-office sales income can be treated as FBCSI when manufacturing is conducted through a branch in another country and the structure reduces foreign tax in a manner the branch rule targets.
- The § 954(d)(2) branch rule can apply even if the taxpayer would otherwise qualify for the § 954(d)(1) regulatory manufacturing exception; the branch rule operates to prevent avoidance through branch arrangements.
- Treasury’s branch rule regulations are valid where they reasonably implement Congress’s purpose to prevent deferral of income through the use of branches to shift purchasing, selling, or manufacturing activities across jurisdictions.

## Conclusion

The Tax Court held that WIH’s related-party sales income from appliances manufactured through its Mexican branch was FBCSI under § 954(d)(2) and the manufacturing branch rule regulations, notwithstanding an assumed entitlement to the § 954(d)(1) manufacturing exception, resulting in subpart F inclusions to Whirlpool for 2009.


Whirlpool Fin. Corp. v. Comm’r, 154 T.C. 142 (2020)