Paul L. Caron

Wednesday, August 17, 2022

Shaheen: Whirlpool — Law Or Policy?

Fadi Shaheen (Rutgers; Google Scholar), Whirlpool: Law or Policy?, 176 Tax Notes Fed. 959 (Aug. 8, 2022):

Tax Notes Federal (2022)In this article, Shaheen argues that while two U.S. courts reached the desirable policy result in the Whirlpool case [Whirlpool Financial Corp. v. Commissioner, 154 T.C. 142 (2020), aff’d, No. 13986-17 (6th Cir. 2021)], their conclusion that the foreign base company sales income branch rule applies not only to sales branches but also to manufacturing branches is inconsistent with the statutory text.

All textual indications point to the branch rule not applying to manufacturing branches. Manufacturing branches cannot meet the preconditions for applying the rule without violating the statutory language; and the consequences part of the rule does not work with manufacturing branches without violating the statutory text. The rule works elegantly and harmoniously when read as applying only to sales branches whose income would be FBCSI if they were incorporated.

When Congress enacted the branch rule in 1962, it was not as easy to form hybrid entities as it has been since the 1997 issuance of the check-the-box regulations. Perhaps that could explain why Congress was not concerned with manufacturing branches. Although from a U.S. tax perspective, manufacturing branches do not require hybridity, non-hybrid branch structures may be inadvisable for (nontax) limited liability or jurisdictional reasons. But that explanation is hard to reconcile with the fact that the 1964 branch rule regulations were very much concerned with manufacturing branch situations.

Be that as it may, the statutory text is clear. It applies only to, and can work only with, sales branches whose income would be FBCSI if they were incorporated. If lawmakers do not like that result, Congress — not Treasury or the courts — should fix it. Until then, it is, once again, well established that when the express terms of a statute provide one answer and extratextual considerations suggest another, there is no contest; “only the written word is the law, and all persons are entitled to its benefit.

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