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RUWE, J., dissenting: Section 267(a)(2) prevents an accrual
basis taxpayer from currently deducting any amount payable to a
related person if the amount is not currently includable in the
payee’s gross income because of the payee’s method of accounting.
Section 267(a)(3) authorizes regulations to apply the matching
principle of section 267(a)(2) in cases where the payee is a
foreign person. As explained in the Commissioner’s Notice 89-84:
Section 267(a)(2) of the Code provides generally
that a taxpayer may not deduct any amount owed to a
related party (as defined in section 267(b)) until it is
includible in the payee’s gross income if the mismatching
arises because the parties use different methods of
accounting. Section 267(a)(3) authorizes the Secretary
to issue regulations applying this principle to payments
to related foreign persons. * * * [Notice 89-84, 1989-2
C.B. 402; emphasis added.]
Nevertheless, section 1.267(a)-3, Income Tax Regs., puts accrual
method taxpayers, who could otherwise deduct interest payable to
a related foreign person, on the cash method of accounting, even
though, pursuant to a treaty, the interest is not, and never will
be, includable in the payee’s gross income. The regulation would
disallow the deduction for accrued interest regardless of the
fact that the exclusion from the payee’s gross income has nothing
to do with payee’s method of accounting. As more fully set forth
in our plurality opinion in Tate & Lyle, Inc. & Subs. v.
Commissioner, 103 T.C. 656 (1994), the regulation goes beyond the
scope of the regulatory authority specifically granted in section
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