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Thus, in the first step of a Chevron analysis we must
ascertain whether the statute is clear and unambiguous, and in
the second step we consider whether, given ambiguities in the
statute, the regulation is based on a permissible construction of
the statute. The agency’s choice among permissible constructions
is entitled to deference. Holly Farms Corp. v. NLRB, 517 U.S.
392, 398-399 (1996). Indeed, where as here the regulation is
legislative in character, it must be upheld unless “arbitrary,
capricious, or manifestly contrary to the statute”. Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., supra at 844;
N.Y. Football Giants, Inc. v. Commissioner, 117 T.C. 152, 156
(2001); Peterson Marital Trust v. Commissioner, 102 T.C. 790,
797-798 (1994), affd. 78 F.3d 795 (2d Cir. 1996).
5. Analysis
a. Chevron, First Step
In Tate & Lyle I, we concluded that the statutory language
of section 267(a)(3) is clear; namely, that it authorizes
regulations to limit deductions only where a mismatch of a
deduction and corresponding income inclusion results from the
payee’s method of accounting because, we reasoned, “the matching
principle of paragraph (2)” covers only mismatches attributable
to that cause.
The Supreme Court recently provided additional guidance for
administering the first step of the Chevron test in FDA v. Brown
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