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C.B. (Vol. 2) 1, 939; S. Rept. 99-313, at 959 (1986), 1986-3 C.B.
(Vol. 3) 1, 959. In this passage, Congress expressed its
uncertainty as to the application of section 267(a)(2) in a
situation where the foreign person has foreign source, non-
effectively connected income that need not, for many Internal
Revenue Code purposes, be included in U.S. gross income. A
characteristic of the foregoing type of income is that the
foreign recipient lacks a U.S. method of accounting for it if the
income need not be included in U.S. gross income.
Both the House and Senate reports provide an example to
illustrate what could be required by the regulations contemplated
under section 267(a)(3):
For example, assume that a foreign corporation, not
engaged in a U.S. trade or business, performs services
outside the United States for use by its wholly owned
U.S. subsidiary in the United States. That income
[i.e., the payment by the U.S. subsidiary to the
foreign parent for the services rendered] is foreign
source income that is not effectively connected with a
U.S. trade or business. It is not subject to U.S. tax
(or, generally includible in the foreign parent’s gross
income). Under the bill, regulations could require the
U.S. subsidiary to use the cash method of accounting
with respect to the deduction of amounts owed to its
foreign parent for these services. * * * [H. Rept. 99-
426, supra at 939, 1986-3 C.B. (Vol. 2) at 939; S.
Rept. 99-313, supra at 959, 1986-3 C.B. (Vol. 3) at
959.]
We believe this example shows that Congress intended to give the
Secretary authority to require the cash method for the deduction
of amounts owed to a related foreign person even where those
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