Academic journal article Journal of Accountancy

Tax Court Rules out Section 267 Regulations

Academic journal article Journal of Accountancy

Tax Court Rules out Section 267 Regulations

Article excerpt

In a recent controversial decision, the U.S. Tax Court ruled, in Tate Lyle Inc. v. Commissioner (103 T.C. 14), that an affiliated group of corporations may deduct interest owed to its foreign parent in the year it is accrued (rather than paid) if the interest is not taxable to the parent by virtue of a tax treaty. In so doing, the court held regulations issued under section 267 of the Internal Revenue Code are partially invalid.

Section 267(a)(2) generally allows a taxpayer to deduct expenses owed to a related person only when they are includable in the income of the payee according to the payee's method of accounting. This is known as the "matching principle." Section 267(a)(3) gave the Internal Revenue Service the authority to issue regulations that would apply the matching principle in the foreign context. The IRS issued regulations in 1992 generally allowing the payor to deduct payments on a cash basis only, because a withholding tax would be assessed on the payee as the payments leave the United States. These regulations were effective retroactively to 1984.

In Tate & Lyle, two U.S. corporations incurred interest expense on amounts borrowed from a parent corporation organized in the United Kingdom. The U.S. corporations deducted the interest the year it was accrued but paid it the following year. The IRS disallowed the accrual of the interest deduction, arguing that pursuant to section 267(a)(3) regulations, the interest should only be deductible in the year it is paid. …

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