According to Law360, the Sixth Circuit affirmed in a split decision Monday that Whirlpool owes the Internal Revenue Service taxes on more than $45 million in income generated by a Luxembourg affiliate's sales to a Mexican subsidiary.
Income that a Whirlpool Corp. subsidiary in Luxembourgreceived from appliance sales to Whirlpool-US and Whirlpool Mexico in 2009 constituted foreign base company sales income under Internal Revenue Code Section 954(d)(2) and should have been included in Whirlpool's income for that year, the court majority said in the 2-1 decision.
The court majority said the income plainly met a two-part test laid out in the statute to be considered foreign base company sales income, or FBCSI. The first condition required Whirlpool's Luxembourg subsidiary conducting activities through a branch or similar establishment outside the company where it was incorporated. The second condition was that the purpose of the arrangement was to defer U.S. tax, the court said, upholdingby the U.S. Tax Court.
"We therefore agree with the Tax Court that, under the text of the statute alone, '[Lux's] sales income is FBCSI that must be included in petitioners' income under subpart F,'" U.S. Circuit Judge Raymond Kethledge said in the majority opinion.
Whirlpool Corp. told Law360 in a statement that it follows all tax laws where it operates and pays its fair share of taxes.
"We are disappointed in the Sixth Circuit's decision, but we are reviewing the ruling in detail to determine our legal options going forward," the company said.
The decision affirmed a May 2020 ruling by U.S. Tax Court Judge Albert Lauber, who $45 million of profits connected to appliance manufacturing in Mexico fell under the Subpart F regime that immediately taxes some earnings from U.S. companies' foreign affiliates.
Whirlpool lawyers argued before the Sixth Circuit that the income in question came from a Mexican branch's manufacturing operations and isn't taxable as FBCSI, while the government argued that the company's Luxembourg affiliate effectively earned the income and it should be deemed FBCSI.
In a dissenting opinion, Circuit Judge John Nalbandian said the Tax Court incorrectly granted summary judgment to the IRS. The statute provides for an exception that wasn't adequately considered by the court majority, he said.
"In my view, Lux didn't generate taxable foreign base company sales income because it 'manufactured' the property it bought and sold," Judge Nalbandian said.