## Facts

- Whirlpool operated a multinational appliance business through U.S. and foreign subsidiaries, including a Luxembourg controlled foreign corporation (CFC).
- The Luxembourg CFC had minimal Luxembourg operations and owned a Mexican disregarded entity treated as a branch for U.S. tax purposes.
- The Mexican branch performed the manufacturing activities in Mexico under a maquiladora/toll-manufacturing arrangement, using workers seconded from another Mexican affiliate.
- The Luxembourg CFC owned the raw materials, work-in-process, finished goods, and manufacturing equipment located in Mexico.
- The structure resulted in little or no income taxation in either Mexico or Luxembourg on the principal manufacturing/sales income (Mexico generally taxed a limited service return; Luxembourg taxed only a small amount of administrative income).
- The Luxembourg CFC sold Mexican-manufactured appliances to Whirlpool and other related entities for resale.
- Whirlpool’s consolidated U.S. returns did not treat the CFC’s sales income as foreign base company sales income (FBCSI) under Subpart F.
- The IRS determined a deficiency, asserting the income was FBCSI under the manufacturing branch rule in Treas. Reg. § 1.954-3(b), requiring current inclusion under Subpart F.
- The Tax Court granted summary judgment for the Commissioner; Whirlpool appealed.

## Issues

1. Whether the Luxembourg CFC’s related-party sales income from goods manufactured by its Mexican branch constitutes FBCSI under I.R.C. § 954(d) and applicable regulations.
2. Whether Treas. Reg. § 1.954-3(b)’s manufacturing branch rule is a valid exercise of regulatory authority under I.R.C. § 954(d)(2).

## Decision

- The Sixth Circuit affirmed the Tax Court’s summary judgment for the Commissioner.
- The court held the Luxembourg CFC’s related-party sales income was FBCSI when the manufacturing branch rule applied.
- The court upheld the manufacturing branch rule as consistent with and reasonably implementing § 954(d)(2)’s anti-deferral purpose.
- Applying the rule, the court treated the Mexican branch and the Luxembourg remainder as separate entities for § 954(d) analysis, yielding FBCSI for the Luxembourg CFC’s sales income.
- A dissent would have limited § 954(d)(2) to purchasing and selling branches and found Treasury’s manufacturing-branch extension unauthorized.

## Legal Principles

- Subpart F targets deferral achieved by shifting income into low-tax foreign structures; FBCSI is a principal category aimed at related-party cross-border sales income.
- Under § 954(d)(2), when a CFC conducts activities through a branch outside its country of incorporation and the arrangement has substantially the same effect as using a subsidiary (including through tax-rate disparities), Treasury may treat the branch and remainder as separate corporations to reapply FBCSI rules.
- Treasury may, by regulation, extend the branch-rule construct to manufacturing branches where the branch configuration and tax effects function like a subsidiary arrangement that would otherwise trigger FBCSI.
- When the manufacturing branch rule applies, sales income can be characterized as FBCSI through the branch/remainder separation mechanism, even if the underlying goods are manufactured in the branch jurisdiction.

## Conclusion

The Sixth Circuit held that Whirlpool’s Luxembourg CFC had current Subpart F income because its Mexican manufacturing branch and Luxembourg sales structure triggered the manufacturing branch rule, and the court sustained Treasury’s authority to apply § 954(d)(2) to manufacturing-branch arrangements producing subsidiary-like tax deferral.


Whirlpool Fin. Corp. v. Comm’r, 19 F.4th 944 (6th Cir. 2021)