On December 6, 2021, the U.S. Court of Appeals for the Sixth Circuit (the ‘Sixth Circuit’) in Whirlpool v. Commissioner affirmed the U.S. Tax Court’s May 5, 2020 decision. The Tax Court had held that Whirlpool’s controlled foreign corporation (‘CFC’) in Luxembourg had earned subpart F foreign base company sales income (‘FBCSI’) from supplying appliances manufactured in Mexico.
The Sixth Circuit majority’s interpretation of Section 954(d)(2) (the ‘branch rule’) appears quite broad and suggests views that differ from certain commonly understood interpretive positions. For example, the majority concluded that (i) a CFC’s sales income that is ‘attributable to’ a branch located outside its country of incorporation per se is FBCSI under the statute as long as a ‘substantial tax-deferral effect’ exists (as opposed to the regulatory tax rate disparity test), (ii) FBCSI can arise under the statute without regard to (and perhaps notwithstanding) the branch rule regulations, and (iii) the branch rule operates independently of the general rule of Section 954(d)(1), such that the branch rule alone can treat income of a CFC as FBCSI regardless of whether the income in question would be considered FBCSI if earned by a separate CFC under Section 954(d)(1).
On January 20, 2022, Whirlpool petitioned the Sixth Circuit for a rehearing en banc. A rehearing, if granted, would vacate the previous opinion and judgment of the Sixth Circuit, and all eligible and participating active Sixth Circuit judges would review the case. Whirlpool has 90 days from the date a rehearing request is denied (or the subsequent entry of judgment if a rehearing is granted) to petition for certiorari with the U.S. Supreme Court.
