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entitled to deduct, during taxable years 1991 and 1992, interest
accrued on the 1991 and 1992 Subordinated Loans.3
3. Tate & Lyle
In Tate & Lyle I we held that section 1.267(a)-3, Income Tax
Regs., insofar as it required an accrual basis taxpayer to use
the cash method with respect to interest owed to a foreign person
that was exempt from U.S. tax pursuant to treaty, was invalid
because it was manifestly contrary to the statute.4 We reasoned
that the “matching principle” of section 267(a)(2) was as
follows: “An accrual basis taxpayer is not entitled to deduct
any amount if it is payable to a related person and, because of
the payee’s method of accounting, the item is not currently
includible in the payee’s gross income.” Tate & Lyle I at 667.
Further, we found the mandate in section 267(a)(3) that the
Secretary apply this matching principle to be “absolutely clear”
on its face, thus confining the ambit of the regulations to those
situations where the failure of the payor’s deduction to “match”
the payee’s income inclusion was attributable to the payee’s
method of accounting. Because section 1.267(a)-3’s restriction
3 In light of these stipulations, we do not consider the
impact, if any, of the fact that the interest on the 1991
Subordinated Loan was owed to SNC rather than the Schneider
Lenders.
4 We also held in the alternative that the regulation was
invalid because its retroactive application violated the Due
Process Clause of the Constitution. The due process issue is not
present in the instant case.
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