6TH Cir Tells Whirlpool That its $50M Foreign Income Is Taxable In US

The U.S. Tax Court correctly found that Whirlpool generated almost $50 million in additional taxable income through a Luxembourg affiliate's sales and it should have to pay tax on the amount, the Sixth Circuit said on January 22, 2001.

According to Law360, Whirlpool's Luxembourg subsidiary generated foreign base company sales income, or FBCSI, taxable by the U.S. because that sales income was not taxed in any jurisdiction outside the affiliate's country, attorneys representing the Internal Revenue Service said in a brief.

"Whirlpool Arranged Its Corporate Structure To Accumulate Profits In A Tax Haven In Order To Exploit How Multiple Foreign Tax Systems Treated The Sales Income From That Arrangement," The U.S. Said.

The government asked the appeals court to affirm the Tax Court's ruling, according to the brief. If the Sixth Circuit were to find the Tax Court's ruling flawed, it should remand the case for further proceedings to determine whether the Luxembourg affiliate's sale income constituted FBCSI under another part of the Internal Revenue Code, the U.S. said.

The Tax Court Ruled In May That Whirlpool Owes Taxes On Its Offshore Earnings Derived From Appliance Sales Between The Two Foreign Affiliates And Found The Profits Count As Global Sales Income Taxable In The U.S.

The Luxembourg controlled foreign corporation's sales income was taxable under Subpart F because the earnings constituted FBCSI, according to the Tax Court opinion. Under Internal Revenue Code Section 954(d)(2) , FBCSI includes income that a controlled foreign corporation earns through activities carried out "through a branch or similar establishment" in a different country that has "substantially the same effect" as if the branch were a wholly owned subsidiary of the CFC. Whirlpool appealed the Tax Court's decision in September, according to court documents.

In November, Whirlpool told the appeals court that its offshore income shouldn't be considered taxable by the U.S. because it was generated by two foreign affiliates manufacturing different products. The U.S. Tax Court incorrectly characterized Whirlpool's $50 million in offshore earnings as FBCSI, according to the company's brief.

The company contested on appeal that its foreign affiliate income shouldn't be considered FBCSI under Section 954(d)(2), arguing that the income is nontaxable because the operations in the Mexico subsidiary were contractually controlled by the Luxembourg affiliate and the rights to sell finished products were transferred to separate branches within Whirlpool, according to the company's brief.

But the government said that the Tax Court was correct to reject Whirlpool's argument that the U.S. Department of Treasury's so-called manufacturing branch rule would allow the company's Luxembourg subsidiary to avoid paying U.S. tax. The Tax Court correctly applied Treasury rules to determine that the Luxembourg affiliate generated FBSCI when it used a third-country branch to conduct its manufacturing, the U.S. said in its brief.

"Because Both Branch-Rule Preconditions Are Met, MexicanBranch/WIN Is Properly Treated As A Wholly-Owned Subsidiary Of Whirlpool-LUX For Purposes Of Determining Whirlpool-LUX's FBCSI," The U.S. Said.

Under Section 954(d)(1), a CFC's income constitutes FBCSI when the earnings involve transactions with a "related person" if the property is manufactured outside the country in which the CFC is organized and sold for consumption or use outside that jurisdiction.

Pushing back, the IRS argued that genuine disputes of material fact existed as to whether the Luxembourg CFC actually manufactured the products, according to court papers.

The case is Whirlpool Financial Corporation et al. v. Commissioner of Internal Revenue, case numbers 20-1899 and 20-1900, in the U.S. Court of Appeals for the Sixth Circuit.

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