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owner,10 but a hypothetical U.S.-owned corporation would be
permitted accrual basis deductions for interest amounts owed to
its U.S. owner (as long as that owner used the accrual method).
We are not persuaded by petitioner’s supposed “connection”.
Section 1.267(a)-3, Income Tax Regs., operates independently of
the residence of the owners of the payor corporation; the fact
that payments to a foreign owner might be treated differently
from payments to a U.S. owner is merely incidental. As
respondent argues: “The basis for deferring the interest
deduction [under the challenged regulation] is dependent entirely
on the U.S. tax treatment of the payment in the hands of the
foreign corporation, not the identity or nationality of the owner
of the payor.” This is clear when the operation of section
1.267(a)-3, Income Tax Regs., is examined more closely. For
instance, a U.S. corporation, whether U.S.-owned or foreign-
owned, must in general deduct on the cash method interest
payments to a related foreign person that are not effectively
connected income of that foreign person. Sec. 1.267(a)-3(b)(1)
10 As noted earlier, see supra note 3, none of the interest
with respect to the 1991 Subordinated Loans was owed to
petitioner’s parent, Schneider, because it was all owed to SNC
during the years in issue. Thus, petitioner’s argument would not
apply to the interest on the 1991 Subordinated Loans. However,
the interest on the 1992 Subordinated Loan was owed to Schneider,
making petitioner’s argument relevant to that interest. In any
event, we find that sec. 1.267(a)-3, Income Tax Regs., does not
violate Article 24(3), rendering moot whether the interest at
issue was owed to Schneider or to SNC.
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