On 5 May 2020, the US tax court made a decision in favor of the IRS a case involving the Whirlpool Financial Corp. and related foreign affiliate corporations. The Court upheld the Internal Revenue Service’s (IRS) application of the Subpart F “branch rule” to impose U.S. federal income tax on Whirlpool on approximately $50 million of profits generated by certain controlled foreign corporations of Whirlpool.

The case concerned an arrangement between Whirlpool and two foreign subsidiaries that qualified as controlled foreign corporations pursuant to Section 957 (a) where US shareholders owned a majority of the value of the foreign company’s shares or a majority of their voting rights at least one day in the foreign company’s tax year.

The income from sales of appliances had been allocated to Whirlpool Luxembourg through a manufacturing and distribution arrangement under which it was the nominal manufacturer of household appliances made in Mexico, that were then sold to Whirlpool US and to Whirlpool Mexico. According to the arrangement, the income allocated to Luxembourg was not taxable in Mexico nor in Luxembourg.

The Internal Revenue Service (IRS) determined that LUX’s sales income was Foreign Base Company Sales Income (FBCSI) taxable to Whirlpool. Whirlpool challenged IRS’s assessment and brought the case to the US Tax Court. 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.

The tax court ruled in favor of the IRS that the sales income of the Luxembourg CFC constituted FBCSI by virtue of the branch rule contained in IRC Section 954(d)(2).