IRS wins Subpart F case with wide-ranging impact, but questions remain

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August 2020


In a 62-page opinion published May 5, 2020, the US Tax Court in Whirlpool v. Commissioner held that nearly $50 million in income earned by a CFC from supplying products manufactured by its manufacturing branch operations was foreign base company sales income (FBCSI), a type of subpart F income.1  In so doing, the Tax Court interpreted, for the first time, certain fundamental aspects of the subpart F rules. The Tax Court’s reasoning raises several questions, which we discuss in more detail below. Whirlpool has publicly announced that it intends to appeal the decision to the Court of Appeals for the Sixth Circuit. 

While the facts of Whirlpool relate to a specific type of manufacturing operation conducted in Mexico, the court’s reasoning (and the issues considered) are not necessarily limited by industry or geography.  Accordingly, the court’s analysis in Whirlpool could be relevant to other structures, whether or not involving Mexico.  

In addition, the IRS has been conducting a Large Business and International (LB&I) Active Campaign on various issues including the ‘branch rule’ issue litigated in Whirlpool. 

Companies should consider evaluating the potential impact that Whirlpool may have on their structures, as well as anticipating and proactively addressing potential issues that the IRS might raise upon examination.  In particular, companies could benefit from reviewing and, where appropriate, updating technical positions in light of the decision.  On a longer-term basis, companies may wish to consider updating existing supply chain flows, procedures, and practices to strengthen and clarify the application of the relevant subpart F rules to these structures.

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Ken Kuykendall

Ken Kuykendall

Tax Managing Partner, PwC US

Shawn Panson

Shawn Panson

Private Company Services Leader, PwC US

Kelley  McLaughlin

Kelley McLaughlin

US Tax Marketing Leader, PwC US

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