Amicus Curiae Brief — Whirlpool Financial Corporation, et al., Petitioners v. Commissioner of Internal Revenue

No. 22-9

In the Supreme Court of the United States

WHIRLPOOL FINANCIAL CORPORATION

& CONSOLIDATED SUBSIDIARIES, ET AL.,

Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Petition For Writ Of Certiorari To The

United States Court Of Appeals For The Sixth

Circuit

AMICUS CURIAE BRIEF OF SILICON VALLEY TAX

DIRECTORS GROUP, NATIONAL FOREIGN TRADE

COUNCIL, INFORMATION TECHNOLOGY

INDUSTRY COUNCIL, AND TECHNET IN

SUPPORT OF PETITIONERS

ANNE R. GORDON

NAT’L FOREIGN TRADE COUNCIL

1225 New York Ave., NW

Washington, DC 20005

Counsel for Nat’l Foreign

Trade Council

JOHN S. MILLER

INFO. TECH. INDUSTRY COUNCIL

700 K St., NW, Suite 600

Washington, DC 20001

Counsel for Info. Technology

Industry Council

EBBIE YAZDANI

TECHNET

1420 New York Ave., NW

Washington, DC 20005

Counsel for TechNet

DAVID B. SALMONS

Counsel of Record

JAMES D. NELSON

BRENDAN J. ANDERSON

MORGAN, LEWIS & BOCKIUS LLP

1111 Pennsylvania Ave., NW

Washington, DC 20004

(202) 739-3000

david.salmons@morganlewis.com

RODERICK K. DONNELLY

MORGAN, LEWIS & BOCKIUS LLP

1400 Page Mill Rd.

Palo Alto, CA 94304

Counsel for Silicon Valley Tax

Directors Group

i

QUESTION PRESENTED

Whether the divided Sixth Circuit properly held—in

conflict with precedent of this Court and settled administrative-law principles—that a statute that is conditioned on regulations delineating its reach may be

enforced without regard to those regulations?

ii

TABLE OF CONTENTS

Page

QUESTION PRESENTED .......................................... i

TABLE OF AUTHORITIES ...................................... iv

INTEREST OF AMICI CURIAE ................................ 1

SUMMARY OF ARGUMENT .................................... 2

ARGUMENT ............................................................... 5

I.

The Sixth Circuit’s unprecedented

interpretation of § 954(d)(2) to impose tax

liability with no reference to the binding

Treasury regulations upsets nearly 60

years of taxpayer reliance.............................. 5

A. The decision to ignore Treasury’s

regulations is contrary to the

statutory text and this Court’s case

law. ........................................................... 6

B. The Sixth Circuit’s decision upsets

stability in tax law interpretation and

calls into doubt thousands of

taxpayers’ reliance on the Treasury

regulations. .............................................. 9

C. Upending widespread reliance on the

§ 954(d)(2) implementing

regulations—both old and new—will

have severe economic consequences. .... 11

iii

Page

II. The Sixth Circuit’s decision to isolate

§ 954(d)(2) from the rest of § 954 upsets

established expectations of the similar

treatment of branches and wholly owned

subsidiaries. ................................................. 16

III. The decision below produces considerable

disparity in tax liability between

taxpayers in the Sixth Circuit and those

in the rest of the country. ............................ 19

CONCLUSION ......................................................... 20

iv

TABLE OF AUTHORITIES

Page(s)

Cases

United States ex rel. Accardi v.

Shaughnessy,

347 U.S. 260 (1954) ........................................... 19

Corley v. United States,

556 U.S. 303 (2009) ............................................. 7

Cottage Savings Ass’n v. Commissioner,

499 U.S. 554 (1991) ............................................. 8

Dobson v. Comm’r of Internal Revenue,

320 U.S. 489 (1943) ........................................... 19

Dunlap v. United States,

173 U.S. 65 (1899) ............................................... 7

United States v. Byrum,

408 U.S. 125 (1972) ............................. 2, 9, 15, 18

United States v. Caceres,

440 U.S. 741 (1979) ............................................. 8

United States v. Mead Corp.,

533 U.S. 218 (2001) ............................................. 8

United States v. Pelzer,

312 U.S. 399 (1941) ........................................... 19

v

TABLE OF AUTHORITIES—continued

Page

United States v. Supplee-Biddle Hardware

Co.,

265 U.S. 189 (1924) ........................................... 15

Whirlpool Fin. Corp. v. Comm’r of Internal

Revenue,

19 F.4th 944 (6th Cir. 2021) ......................passim

Statutes

26 U.S.C. § 954(d)(1) .......................................passim

26 U.S.C. § 954(d)(2) .......................................passim

Tax Reform Act of 1986. Pub. L. No. 99-514,

100 Stat. 2085 (1986) .......................................... 8

Regulations

26 C.F.R. § 1.954-3(a)(4) .................................. 13, 15

26 C.F.R. § 1.954-3(b) ............................................. 14

26 C.F.R. § 1.954-3(b)(i)(b) ..................................... 11

26 C.F.R. § 1.954-3(b)(2)(ii)(e) ................................ 17

26 C.F.R. § 1.954-3(b)(2)(ii)(f) ................................ 15

73 Fed. Reg. 10716 (Feb. 28, 2008) .................passim

73 Fed. Reg. 79334 (Dec. 29, 2008) ........................ 13

vi

TABLE OF AUTHORITIES—continued

Page

76 Fed. Reg 78545 (Dec. 19, 2011) ......................... 13

Other Authorities

Andy Grewal, The Sixth Circuit Conjures

Phantom Regulations, Yale J. on Reg.:

Notice & Comment (Feb. 21, 2022) .................. 10

Bittker & Eustice, Federal Income Taxation

of Corporations and Shareholders, ¶

17.31 (3rd ed. 1971)............................................. 9

J. Isenbergh, International Taxation, ¶ 70.9

(6th ed. 2021)....................................................... 9

Mary F. Voce, Foreign Base Company Sales

Income: A Primer and An Update, 53

Tax Lawyer 327 (2000) ..................................... 16

Mindy Herzfeld, The Sixth Circuit Knows

Subpart F Income When It Sees It—Or

Does It?, 174 Tax Notes Fed. 316 (Jan.

17, 2022) ............................................................ 15

Robert Goulder, Whirlpool: Have We Reinvented The Branch Rule?, 106 Tax Notes

Int’l 155 (Apr. 4, 2022) ........................................ 9

vii

TABLE OF AUTHORITIES—continued

Page

S.R. Fimberg, The Foreign Base Company

Engaged in Selling Activities: A

Reappraisal of the Conduct of Foreign

Business, 17 U.S.C. Tax Institute 237

(1965) ................................................................ 10

1

INTEREST OF AMICI CURIAE1

Amici members include thousands of corporations

primarily based in the United States with an aggregate market capitalization of over $10 trillion. Among

them are many Fortune 500 companies and together

amici members form a large portion of the U.S. economy. As multinational corporations, amici members

have numerous international subsidiaries and in the

regular course of business annually conduct billions of

dollars of inter-company and third-party sales transactions potentially subject to 26 U.S.C. § 954(d)(2).

Because of their large international presence and

their regular participation in these transactions,

amici members have relied on Treasury’s detailed regulations implementing § 954(d)(2) for almost 60 years.

Based on these comprehensive regulations, amici

members have chosen where and how to conduct their

foreign supply chain operations. Amici member companies have also spent significant amounts of money

and time conforming their manufacturing supply

chains with new implementing regulations from 2008.

The Sixth Circuit majority’s surprising decision to

ignore those regulations in its opinion could have se-

1 Pursuant to Rule 37.2, counsel of record for Petitioners and

Respondent were timely notified of amici’s intent to file this

brief. Counsel for Petitioners and Respondent provided amici

with written consent. Pursuant to Rule 37.6, counsel for amici

affirm that no counsel for a party authored this brief in whole or

in part, that no such counsel or party made a monetary contribution intended to fund the preparation or submission of this brief

and that no person other than amici and their counsel made such

a monetary contribution.

2

vere adverse consequences for amici members and result in billions of dollars of unexpected tax liability.

Despite their relevance to the dispute, the Sixth Circuit here chose to ignore the Treasury regulations implementing § 954(d)(2) and decide Whirlpool’s tax liability based on the statutory provision alone—as if it

did not explicitly incorporate Treasury’s implementing regulations. The Sixth Circuit’s decision to ignore

the regulations upsets amici members’ settled expectations and calls into question the extensive resources

they have used to plan their operations in compliance

with the regulations. Amici respectfully ask this

Court to grant certiorari and reverse the erroneous

decision of the Sixth Circuit.

*

SUMMARY OF ARGUMENT

The Sixth Circuit’s radical interpretation of

§ 954(d)(2) to render superfluous its incorporation of

implementing regulations is contrary to this Court’s

precedent and the text of the provision, as explained

in the Petition. The decision also upsets settled expectations in an area of great domestic and international importance involving an especially complicated

and consequential portion of the U.S. tax code.

This Court has recognized the need for stability in

judicial interpretations of tax law, admonishing

courts not to “depart from an interpretation of tax law

which has been generally accepted when the departure could have potentially far-reaching consequences.” United States v. Byrum, 408 U.S. 125, 135

(1972). This case proves the need for this rule. U.S.

multination corporations like amici members conduct

3

billions of dollars of business through international

corporate operations structured over many years in

reliance on the § 954(d)(2) implementing regulations.

The Sixth Circuit decision casts into doubt decades of

corporate planning, including hundreds of millions of

dollars in investments, and will handicap the ability

of American companies to effectively compete in an increasingly global economy.

Treasury itself has

acknowledged that its updated § 954(d)(2) regulations

were needed to ensure “continued competitiveness of

U.S. businesses operating abroad.” 73 Fed. Reg.

10716, 10718 (Feb. 28, 2008).

Indeed, the Sixth Circuit’s decision creates significant uncertainty about the future applicability of the

Treasury regulations, which include exceptions like

the manufacturing exception—making clear that profits from manufacturing are not taxable as foreign

sales income—and protections against double taxation. Because of the decision below, taxpayers can no

longer rely on these nearly 60-year-old regulatory

safeguards and risk crippling tax liability if they do.

Similarly, Treasury and the IRS implemented new

regulations under § 954(d)(2) in 2008 and 2011 to

broaden the definition of manufacturing to better fit

the modern economic landscape. U.S. multinationals

have spent hundreds of millions of dollars structuring

their foreign manufacturing supply chain operations

in response to these regulations. The Sixth Circuit’s

opinion also upsets reliance on these new 2008/2011

regulations, and it creates uncertainty about whether

the agency has any ability to continue to refine regulations in this area going forward.

4

Taxpayers have also long relied on clear statutory

and regulatory indications that foreign branches

would be treated no worse under § 954(d)(2) than

wholly owned foreign subsidiaries are treated under

§ 954(d)(1). Yet the Sixth Circuit’s isolationist interpretation of § 954(d)(2) suddenly risks creating significantly more tax liability for branch activity than subsidiary activity. That change, likewise, will upset settled expectations and require massive overhauls to

multinational corporate structures.

Finally, if left in place, the Sixth Circuit decision

creates two different tax regimes governing foreign

sales income—one in that circuit and one outside it.

That result only compounds the uncertainty for U.S.

taxpayers, further crippling their ability to compete

on a global stage. The discrepancy also violates a fundamental principle recognized by this Court that uniform application of a nationwide taxation scheme is

crucial to the proper functioning of the U.S. economy.

In sum, this Court’s review and reversal of the

Sixth Circuit’s ruling is needed to protect U.S. multinational corporations’ reliance interests on longstanding Treasury regulations and to avoid tax liability upheaval that will hamper the ability of American companies to effectively compete on a global scale. Congress explicitly called for implementing regulations in

§ 954(d)(2); Treasury almost immediately enacted

those regulations; and the expert agency has continued to update those regulations with the changing

economy. Companies have spent hundreds of millions

of dollars restructuring their business in compliance

5

with these regulations. This Court’s review is necessary to vindicate those reliance interests and preserve

uniformity within the U.S. tax code.

*

ARGUMENT

I.

The Sixth Circuit’s unprecedented interpretation of § 954(d)(2) to impose tax liability

with no reference to the binding Treasury

regulations upsets nearly 60 years of taxpayer reliance.

Section 954(d)(2) of the Internal Revenue Code—

also known as “the branch rule”—is a complex tax provision that explicitly delegates regulatory authority to

the Secretary of the Treasury. It is broadly designed

to provide, as limited by Treasury regulations, that

certain transactions involving a Controlled Foreign

Corporation (CFC) and its branches generate taxable

Foreign Base Company Sales Income (FBCSI). Section 954(d)(2) contains two general conditions and two

consequences that flow from these conditions. The

first condition is that a branch must be “carrying on

* * * activities outside of the country of incorporation

of [a CFC].” This “carrying on” must also have “substantially the same effect as if such branch or similar

establishment were a wholly owned subsidiary corporation deriving such income”—the second condition.

If those conditions are met, the consequences are that

“the income attributable to the carrying on of such activities of such branch or similar establishment shall

be treated as income derived by a wholly owned subsidiary of the [CFC]” and that the income “shall constitute [FBCSI] of the [CFC].” 26 U.S.C. § 954(d)(2).

6

Importantly, both consequences are preceded by,

and depend upon, the phrase “under regulations prescribed by the Secretary.” Ibid. So, the relevant

branch income shall be treated the same as income of

a deemed CFC subsidiary and shall constitute FBCSI

if, and only if, the Treasury regulations indicate as

much. Consistent with the statutory command,

Treasury has issued three lengthy sets of complex and

carefully crafted regulations over the last 57 years to

implement § 954(d)(2) and to aid U.S. businesses as

they compete abroad. Countless corporations have for

decades relied on Treasury’s precise regulatory guidance to determine how to structure their international

businesses and inter-company transactions.

A. The decision to ignore Treasury’s regulations is contrary to the statutory text and

this Court’s case law.

The decision below upsets those settled expectations by imposing tax liability directly under a flawed

reading of the statute without regard to the Secretary’s limiting regulations. As the Petition makes

clear, see Pet. at 21–23, the Sixth Circuit’s interpretation of § 954(d)(2) is contrary to the statute’s text and

this Court’s precedent. Despite Congress’s explicit

delegation of regulatory authority and Treasury’s decades of implementing it, the Sixth Circuit viewed the

statute as self-executing, stating without regard to

any regulation that “the relevant command here—

that Lux’s sales income ‘shall constitute foreign base

company sales income of’ Lux—could hardly be

clearer.” Whirlpool Fin. Corp. v. Comm’r of Internal

Revenue, 19 F.4th 944, 953 (6th Cir. 2021); id. at 952–

53 (refusing even to consider arguments regarding the

7

applicability of Treasury’s regulations to Whirlpool’s

conduct).

That holding violates this Court’s longstanding

case law (and amici member companies’ justified reliance on that case law). This Court has held for over a

century that where, as here, Congress explicitly conditions the operation of a statutory provision on delegation to an agency, the provision is not self-executing

and the agency’s regulations are vital to implementing the provision. See Dunlap v. United States, 173

U.S. 65, 76 (1899) (“We think * * * it demonstrates the

intention of congress to leave the entire matter to the

treasury department, to ascertain what would be

needed in order to carry the section into effect.”). By

reaching a decision contrary to this established precedent—in a manner that makes the phrase “under regulations prescribed by the secretary” superfluous in

violation of other Supreme Court precedents, see Corley v. United States, 556 U.S. 303, 314 (2009)—the

Sixth Circuit not only calls into question the interpretation of § 954(d)(2) but that of many other provisions

in the Internal Revenue Code and outside it that similarly condition their application on an agency promulgating regulations. See Pet. at 32. Yet amici members and other corporations have long accepted this

Supreme Court case law, and consequently have depended upon the Secretary’s regulations as binding

for many decades.

This reliance was well founded. The Secretary

properly promulgated the regulations consistently

with § 954(d)(2)’s clear instruction and this Court consistently recognizes that properly promulgated regulations have the force of law until they are invalidated

8

by a court or properly rescinded by the administrative

agency. United States v. Mead Corp., 533 U.S. 218,

226–27 (2001). Regulations with the force of law not

only bind the regulated parties, but also the agency

that issues them. United States v. Caceres, 440 U.S.

741, 751 n.14 (1979).

And despite the longstanding regulations, Congress has made no material changes to § 954(d)(2)

since its 1962 enactment and has expressed no legislative dissatisfaction with the way that the Treasury

has implemented the provision for decades. Indeed,

Section 954(d)(2) was reenacted without change as

part of the Tax Reform Act of 1986. Pub. L. No. 99514, 100 Stat. 2085 (1986). “Treasury regulations and

interpretations long continued without substantial

change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.” Cottage

Savings Ass’n v. Commissioner, 499 U.S. 554, 561

(1991).

So, prior to the Sixth Circuit’s ruling, not only were

parties entitled to rely on the regulations because it

was assumed that they properly delineated

§ 954(d)(2)’s scope, but a taxpayer could also expect

the agency to apply the regulations in any administrative proceedings.

9

B. The Sixth Circuit’s decision upsets stability in tax law interpretation and calls into

doubt thousands of taxpayers’ reliance on

the Treasury regulations.

The Sixth Circuit decision upsets settled expectations in a particularly sensitive area of domestic and

international tax law involving an especially complicated and consequential portion of the Internal Revenue Code. Indeed, this Court has recognized the need

for stability in judicial interpretations of tax law, admonishing courts not to “depart from an interpretation of tax law which has been generally accepted

when the departure could have potentially far-reaching consequences.” Byrum, 408 U.S. at 135. That rule

applies here: this provision of the tax code “is widely

regarded as one of the most complex and difficult

pieces of legislation in existence.” J. Isenbergh, International Taxation, ¶ 70.9 (6th ed. 2021); see also

Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, ¶ 17.31 at 17-14 (3rd ed.

1971) (“[T]he rules of subpart F reach and never leave

a lofty plateau of complexity[.]”); Robert Goulder,

Whirlpool: Have We Reinvented The Branch Rule?,

106 Tax Notes Int’l 155, 155 (Apr. 4, 2022) (Subpart F

impacts “many” U.S. multinational corporations).

Given the lack of clarity in and wide-sweeping consequences of the statute, Congress’s decision to build in

clarifying regulations—and corporations’ good faith

10

reliance on those regulations—is exceedingly justified.2 It also explains why no one has argued that

§ 954(d)(2) stood on its own and could be applied without the regulations. See Pet. at 24. That is, until the

Sixth Circuit majority held as much (despite no party,

including the Government, arguing for that holding).

Indeed, “[t]he Sixth Circuit’s interpretation of Section 954(d)(2) is inconsistent with the uniform interpretation of that provision by the Treasury, the IRS,

the Tax Court and tax professionals for over 50 years

(as discussed in the dissenting opinion) and is not supported by the legislative history.” Lowell D. Yoder et

al., Implications of the Sixth Circuit’s Whirlpool Opinion (Dec. 21, 2021); see also Andy Grewal, The Sixth

Circuit Conjures Phantom Regulations, Yale J. on

Reg.: Notice & Comment (Feb. 21, 2022) (noting

“Whirlpool [] sows severe confusion into an alreadyconfusing area of tax law” and expressing surprise

that the regulations were ignored).

2 See, e.g., S.R. Fimberg, The Foreign Base Company En-

gaged in Selling Activities: A Reappraisal of the Conduct of Foreign Business, 17 U.S.C. Tax Institute 237, 262 (1965) (“Because

neither the statute nor the Committee Report explain at length

the manner in which the branch rule is intended to operate, the

Regulations are especially important in this regard.”).

11

C. Upending widespread reliance on the

§ 954(d)(2) implementing regulations—

both old and new—will have severe economic consequences.

The decision to ignore the regulations was not only

unjustified and unprecedented; it is also hugely consequential. The question of whether taxpayers can

rely on these regulations (and their regulatory exceptions) is of great importance. In the increasingly

global economy, stability and clarity in tax regimes

are essential for growth and innovation, while instability creates costs and stifles economic output.

The carefully reticulated regulations disregarded

by the Sixth Circuit have been relied upon by thousands of corporations in structuring their international operations. Many of these structures have been

in place for nearly 60 years, in reliance on the regulations issued immediately after § 954(d)(2) called for

them. The regulations provide for a carefully designed, and consequently complex, means of calculating how income from sales transactions should be attributed between the branch and the “remainder” of

the CFC. See 26 C.F.R. § 1.954-3(b)(i)(b). They also

include important exceptions such as the manufacturing exception and rules designed to prevent double

taxation.

The Sixth Circuit’s disregard of the branch rule

regulations upends taxpayers’ well-placed reliance on

these rules and exceptions, which prior to the decision

below were universally understood to have the force of

law. See Goulder, supra, at 155 (noting the Sixth Circuit ignored the manufacturing exception despite it

12

being “preferable to base such a significant decision

on regulations that have been before the public for

many years and are well known to taxpayers”). As the

Sixth Circuit dissent explains, these regulatory exceptions are designed to ensure that the only branch income to be treated as FBCSI is sales income and not

manufacturing income. See Whirlpool Fin. Corp., 19

F.4th at 956 (Nalbandian, J., dissenting). So, the regulations include a “manufacturing exception,” which

generally provides that if a branch of the CFC derives

income from its manufacturing of goods, and not

simply their sale, this income is not FBCSI even if the

other regulatory requirements are met.3 Ibid. Yet

companies can no longer rely with confidence on this

exception, or any other aspects of the branch-rule regulations.

Consistent with its explicit statutory authority,

the Treasury has also continued to implement new

regulations, including a relatively recent change to

the manufacturing exception in 2008. Treasury (and

the IRS) issued in 2008 proposed regulations under

§§ 954(d)(1) & (d)(2). 73 Fed. Reg. 10716. In the 2008

proposed regulations, the agency acknowledged

3 The dissent in the Sixth Circuit determined that under the

manufacturing exception, Whirlpool’s entities did not generate

FBCSI. See Whirlpool Fin. Corp., 19 F.4th at 954 (Nalbandian

J. dissenting). But what matters to amici is that the statue explicitly required the court to consult the regulations, and the majority’s failure to do so upsets the settled expectations of companies whose activities comply with the regulations and yet may be

liable for crippling tax assessments under the Sixth Circuit majority’s decision. That aspect of the holding below should be reversed as quickly as possible.

13

changes in global manufacturing practices and the resulting need to update the regulations to aid the “competitiveness of U.S. businesses operating abroad.” 73

Fed. Reg. at 10718. This decision to “modernize” the

regulations shows the agency’s continued attention to

how this complex statutory scheme should be implemented in the changing global economy. Ibid. In particular, the new regulations took account of modern

manufacturing processes and provided an additional

way, other than performing “physical manufacturing,” for a CFC’s activities to be considered manufacturing activities (and thus not involving FBCSI)—

through making a “substantial contribution” to the actual manufacture of the relevant product. See, e.g., 26

C.F.R. § 1.954-3(a)(4)(ii). U.S. multinationals spent

hundreds of millions of dollars structuring their foreign “manufacturing” supply chain operations so as

not to fall foul of the complex, new § 954(d)(2) regulations, which went into effect in 2008 and 2011. 73

Fed. Reg. 79334 (Dec. 29, 2008); 76 Fed. Reg 78545

(Dec. 19, 2011). Indeed, Treasury acceded to comments by U.S. multinationals asking for a delayed effective date for the regulations to give enough time “to

implement supply chain and structural changes.” 73

Fed. Reg. at 79343.

Despite these massive structural changes in explicit reliance on the new regulations, the Sixth Circuit’s disregard of Treasury regulations in imposing

tax liability in this case undermines taxpayers’ costly

reliance on the new 2008/2011 regulations and injects

substantial confusion about potentially billions of dollars of tax liability for these companies. The same is

true for any future regulatory revisions the Secretary

14

may make in response to changing economic realities.

The decision below casts considerable doubt on the impact and reliability of any future regulatory changes

the Secretary may see fit to make—despite every indication Congress desires Treasury’s regulations to

control.

The Sixth Circuit’s upending the status quo is detrimental to international investment and will have an

enormous impact on corporate tax planning. Thousands of corporations have chosen where to locate

their international subsidiaries, branches, and plants,

and the form of those international entities, based on

the Treasury’s precise regulatory guidance.4 These

taxpayers have also made decisions about what work

those entities do as well as the nature of the transactions between those entities and other subsidiaries.

Not only are “Mexican maquiladora manufacturing

structures of the type used by Whirlpool * * * common,” but the Sixth Circuit’s refusal to consult the

regulations, including the manufacturing exception,

“could apply to any separation of manufacturing and

sales income when a corporation operates through a

branch”—a structure that is “ubiquitous.” Mindy

4 See 26 C.F.R. § 1.954-3(b) (containing precise, lengthy protocol for determining whether—for a CFC conducting activities

through a branch outside its home country—the use of such

branch has “substantially the same tax effect” as if the branch

were a wholly-owned subsidiary corporation of the CFC). The

panel majority replaced the scalpel-like precision of these regulations with a blunt hatchet—ignoring the detailed regulations

including the “manufacturing branch tax rate disparity test,” 73

Fed. Reg. at 10717, and asking simply whether the CFC’s activities through a foreign branch “had a substantial tax-deferral effect.” Whirlpool Fin. Corp., 19 F.4th at 952.

15

Herzfeld, The Sixth Circuit Knows Subpart F Income

When It Sees It—Or Does It?, 174 Tax Notes Fed. 316,

317 (Jan. 17, 2022). Thus, the holding below certainly

will have “far-reaching consequences.” Byrum, 408

U.S. at 135.

One illustrative example concerns the potential for

“double taxation.” Let’s say that CFC X, organized in

country A, has branch Y, organized in country B, and

that Y buys personal property and engages in activities that do not rise to the level of “manufacturing”

under the regulatory manufacturing exception. If Y

sells the property to X, which resells it to a related

party for use outside country A, income derived from

X’s related-party sale would potentially be FBCSI under § 954(d)(1) because X does not satisfy the manufacturing exception of § 1.954-3(a)(4). Under the majority’s interpretation of § 954(d)(2), income “attributable” to Y’s activities, which would include X’s sales

income, would—if they are subject to deferral—also be

FBCSI under § 954(d)(2). Put simply: the decision’s

logic would lead to double taxation in this circumstance, despite the strong presumption against double

taxation. See, e.g., United States v. Supplee-Biddle

Hardware Co., 265 U.S. 189, 195–96 (1924). The

Treasury Regulations eliminate this risk by providing

that if income derived by a branch “would be classified

as [FBCSI] * * * under [§ 954(d)(1)],” the branch will

not be treated as a separate corporation with respect

to such income—in other words, that § 954(d)(2) would

not apply. 26 C.F.R. § 1.954-3(b)(2)(ii)(f); see 73 Fed.

Reg. at 10718 (noting the 1964 branch rule regulations “provide special rules to prevent double counting

16

of FBCSI”). But, as with all regulatory safeguards relied on by taxpayers for over fifty years, reliance on

this protection against double taxation is now in doubt

in the wake of the Sixth Circuit’s decision.

*

*

*

In sum, the Sixth Circuit’s decision threatens a

seismic shift in the application of the branch rule. It

is important for this Court to grant review, reverse the

decision below, and reaffirm the preeminent role of

Treasury’s regulations in applying the branch rule as

Congress intended.

II. The Sixth Circuit’s decision to isolate

§ 954(d)(2) from the rest of § 954 upsets established expectations of the similar treatment

of branches and wholly owned subsidiaries.

Beyond ignoring the congressional command to

look to § 954(d)(2)’s implementing regulations, the

Sixth Circuit majority opinion blows up settled expectations surrounding the branch rule in another way.

It upends the foundational understanding that

§ 954(d)(2) is meant simply to treat certain branch income the same as subsidiary income, discussed in

§ 954(d)(1). Put another way, it has long been understood that, under § 954, “the results to a CFC [can] be

no worse off as a result of using a branch than of using

a wholly-owned subsidiary.” Mary F. Voce, Foreign

Base Company Sales Income: A Primer and An Update, 53 Tax Lawyer 327, 349 (2000). Yet the Sixth

Circuit’s interpretation ignored this framework and

creates a disparity between the tax regimes for sub-

17

sidiaries and branches—such that certain branch income may be viewed as FBCSI even if that very same

income would not be viewed as FBCSI if received by a

subsidiary under § 954(d)(1). See Whirlpool Fin.

Corp., 19 F.4th at 956 (Nalbandian, J., dissenting).

Under the Sixth Circuit majority’s reading of

§ 954(d)(2), if the provision’s two conditions are met,

then the income “shall constitute” FBCSI without reference to either the regulations or to any other section

of § 954. By contrast, the dissent properly recognized

that “the statutory structure only makes sense if (d)(2)

transactions filter back through (d)(1)’s framework,

including its Manufacturing Exception.” Whirlpool

Fin. Corp., 19 F.4th at 956 (Nalbandian, J., dissenting); id. at 956–57 (§ 954(d)(2) is meant simply to treat

certain branches as wholly owned subsidiaries, so “a

(d)(2) transaction” does not create FBCSI tax liability

unless there is also “a (d)(1) transaction” and “(d)(1)’s

regulatory exceptions [do not] apply”).

Amici members (and almost certainly many, many

other U.S. multinational corporations) have relied on

§ 954(d)(1)—containing the general definition for

FBCSI applicable to subsidiaries—and its regulatory

exceptions under the exact theory articulated by the

dissent below. But now, in the Sixth Circuit, those

definitions and exceptions do not apply to transactions with branches that meet the two conditions of

§ 954(d)(2) without regard to the explicit statutory directive to consult the Treasury regulations, potentially creating more liability for branches than for

other entities in the same circumstances for the first

time despite the longstanding regulations stating the

opposite. See 26 C.F.R. § 1.954-3(b)(2)(ii)(e) (“Income

18

derived by a branch or similar establishment * * * will

not be [FBCSI] under paragraph (b) of this section if

the income would not be [FBCSI] if it were derived by

a separate controlled foreign corporation under like

circumstances.”). Indeed, the statutory provision itself provides that if its two conditions are met, then

“the income attributable to the carrying on of such activities of such branch or similar establishment shall

be treated as income derived by a wholly owned subsidiary of the [CFC].” 26 U.S.C. § 954(d)(2) (emphasis

added). That language is a clear reference back to the

subsidiary rules in § 954(d)(1), yet it has little import

under the Sixth Circuit’s reading.

That isolation of § 954(d)(2) from the rest of the

statute, decoupling branch income from subsidiary income, upsets the fundamental reliance that taxpayers

have placed on this understanding of the statutory

structure and regulations. Corporate taxpayers have

chosen what sorts of entities to form and how to treat

and transact with those entities based on the reliance

that application of the branch rule results in similar

treatment between CFCs’ use of branches and subsidiaries. Creating this disparity in the tax regimes applicable to both types of entities upsets these interests

and creates further uncertainty about the impact of

the Sixth Circuit’s decision.

In sum, both the express intent of Congress and

the long-held understanding of taxpayers has been

that if a branch meets the first two conditions of the

branch rule, then it would be treated no worse than a

subsidiary. Consistent with its approach in Byrum,

408 U.S. at 135, this Court should review and reverse

the Sixth Circuit’s contrary decision.

19

III. The decision below produces considerable

disparity in tax liability between taxpayers

in the Sixth Circuit and those in the rest of

the country.

As the Petition explains, the Sixth Circuit’s decision to not consult Treasury’s carefully calibrated regulations creates two different tax regimes. See Pet. at

33. In the Sixth Circuit, the two statutory conditions

control with no regard to regulatory limitations. Outside of the Sixth Circuit, the assumption has been and

will remain that the regulations are necessary for determining application of § 954(d)(2). The regulations

have not been rescinded by the agency and have not

been invalidated in any court, suggesting the agency

would be bound by them in future proceedings. See,

e.g., United States ex rel. Accardi v. Shaughnessy, 347

U.S. 260, 266–67 (1954).

This disparity creates uncertainty as to taxation

of billions of dollars of sales transactions. Such disparity is particularly pernicious in the tax law field

where this Court has stressed that uniformity of interpretation of the tax code is crucial. See, e.g., Dobson v. Comm’r of Internal Revenue, 320 U.S. 489, 499

(1943) (discussing importance of “uniform” and “expeditious” tax administration); United States v. Pelzer,

312 U.S. 399, 402 (1941) (“[A]s we have often had occasion to point out, the revenue laws are to be construed in the light of their general purpose to establish a nationwide scheme of taxation uniform in its application.”). And the lack of uniformity caused by the

Sixth Circuit’s decision here is based on nothing more

than geography of tax court appeals.

20

This Court should alleviate this disparate treatment among taxpayers—or even the same taxpayer in

different federal courts—by recognizing the importance of the clear statutory command that branch

income ‘‘shall constitute’’ FBCSI only ‘‘under regulations prescribed by the Secretary [of the Treasury].’’

26 U.S.C. § 954(d)(2). Restoring taxpayer reliance on

those regulations is crucial for preserving Congress’s

desired uniform scheme and avoiding the upheaval of

operations of essentially all CFC branches.

*

CONCLUSION

For the forgoing reasons, amici request that this

Court grant the petition for certiorari and reverse the

judgment of the Sixth Circuit.

Respectfully submitted,

DAVID B. SALMONS

Counsel of Record

JAMES D. NELSON

BRENDAN J. ANDERSON

MORGAN, LEWIS & BOCKIUS LLP

1111 Pennsylvania Avenue, NW

Washington, DC 20004

(202) 739-3000

david.salmons@morganlewis.com

21

RODERICK K. DONNELLY

MORGAN, LEWIS & BOCKIUS LLP

1400 Page Mill Rd.

Palo Alto, CA 94304

Counsel for Silicon Valley Tax

Directors Group

ANNE R. GORDON

NATIONAL FOREIGN TRADE

COUNCIL

1225 New York Ave., NW

Washington, DC 20005

Counsel for National Foreign

Trade Council

JOHN S. MILLER

INFORMATION TECHNOLOGY

INDUSTRY COUNCIL

700 K St., NW, Suite 600

Washington, DC 20001

Counsel for Information

Technology Industry Council

EBBIE YAZDANI

TECHNET

1420 New York Ave., NW

Washington, DC 20005

Counsel for TechNet