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Whirlpool Loses $50 Million Tax Fight Over Foreign Income

May 5, 2020, 10:07 PM

The IRS correctly increased U.S.-based Whirlpool Financial Corp.'s taxable income by nearly $50 million because the income that Whirlpool’s Swiss subsidiary made selling appliances outside of Switzerland was taxable to the parent company, the U.S. Tax Court ruled.

The case involved an arrangement between Whirlpool and two foreign subsidiaries that qualified as controlled foreign corporations under tax code Section 957(a)—meaning U.S. shareholders owned a majority of the value of the foreign company’s stock or a majority of its voting stock on at least one day in the foreign company’s tax year.

Whirlpool Luxembourg, a Swiss subsidiary, earned the income in 2009 through a manufacturing and distribution arrangement that year: The Swiss company was the nominal manufacturer of household appliances made in Mexico, which the Swiss company sold to Whirlpool and to Whirlpool’s Mexican subsidiary, Whirlpool Mexico.

Whirlpool challenged the IRS’s determination that the income from the sales should be counted as foreign base company sales income (FBCSI) under tax code Section 954(d), which deals with certain sales by a foreign company of personal property created by a related entity of that foreign company.

The Treasury Department issued related regulations—known as the manufacturing branch rule—that treat income as the foreign corporation’s FBCSI if personal property manufactured by a branch of the foreign corporation—one that is outside the country of the foreign corporation—is sold through the foreign corporation. Such income is taxable to the U.S. shareholders under tax code Section 951(a).

After both Whirlpool and the IRS filed partial summary judgment motions on the FBCSI issue, the court concluded that the IRS was right to tax the income.

“If Whirlpool Luxembourg had conducted its manufacturing operations in Mexico through a separate entity, its sales income would plainly have been FBCSI under section 954(d)(1),” Judge Albert G. Lauber said.

Lauber concluded that the income should therefore be treated as FBCSI under the tax code, writing that “Section 954(d)(2) prevents petitioners from avoiding this result by arranging to conduct those operations through a branch.”

The court rejected Whirlpool’s attempt to allocate income to its Luxembourg subsidiary because Whirlpool Luxembourg only had one part-time employee. Lauber reasoned that Whirlpool had already claimed in a different context that Whirlpool Luxembourg’s operations “were substantial” and that the Swiss company needed to be treated “as having sold a manufactured product.”

“Asserting that Whirlpool Luxembourg’s activities were insubstantial for purposes of seeking partial summary judgment under section 954(d)(2) is a classic example of an attempt to have one’s cake and eat it too,” Lauber said.

He also concluded that this application of the manufacturing branch rule, issued under Treas. Reg. § 1.954-3(b)(1)(ii), didn’t exceed the policy making discretion Congress delegated to the Treasury Department.

Baker McKenzie, which represented Whirlpool Financial Corp., didn’t immediately respond to a request for comment. Whirlpool Corp. and the IRS also didn’t immediately respond to requests for comment.

The case is Whirlpool Financial Corp. v. Internal Revenue Service, T.C., No. 13986-17, 5/5/20.

—With assistance from Jeffrey Leon.

To contact the reporter on this story: Aysha Bagchi in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Jeff Harrington at