Question

Reg. 1.267(a)-3(b) provides: "Except as provided in paragraph (c) of this section, section 267(a)(3) requires a taxpayer to use the cash method of accounting with respect to the deduction of amounts owed to a related foreign person. An amount that is owed to a related foreign person and that is otherwise deductible under Chapter 1 thus may not be deducted by the taxpayer until such amount is paid to the related foreign person.

F, a French corporation, loaned funds to its US sub. The US sub is on the accrual method and in 2006 it deducted the interest that accrued for the year but not paid until 2007. The IRS says that the reg. disallows the accrual and puts the US sub on the cash basis for this item. F claims that the anti-discrimination article prevents this action by the IRS. Would the anti-discrimination provision apply? See Square D, 118 TC 299.

Answer 1

267(a)-3(b) : In general except as provided in paragraph (c) of this section, section 267(a)(3) requires a taxpayerto use the cash method of accounting with respect to the deduction of amounts owed to a related foreign person. except as provided in paragraph (c) of this section, section 267(a)(3) requires a taxpayer to use the cash method of accounting with respect to the deduction of amounts owed to a related foreign person.

An amount that is owed to a related foreign person and that is otherwise deductible under Chapter 1 thus may not be deducted by the taxpayer until such amount is paid to the related foreign person. Forpurposes of this section, a related foreign person is any person that is not a United States person within the meaning of section 7701(a)(30), and that is related (within the meaning of section 267(b)) to thetaxpayer at the close of the taxable year in which the amount incurred by the taxpayer would otherwise be deductible.

Section 267(f) defines controlled group for purposes of section 267(b) without regard to thelimitations of section 1563(b). An amount is treated as paid for purposes of this section if the amount is considered paid for purposes of section 1441 or section 1442 (including an amount taken into accountpursuant to section 884(f)).

. An amount that is owed to a related foreign person and that is otherwise deductible under Chapter 1 thus may not be deducted by the taxpayer until such amount is paid to the related foreign person.Section 267 does not preclude the deduction of this amount in Year .

As per the organisation- F, a French corporation, loaned funds to its US sub. The US sub is on the accrual method and in 2006 it deducted the interest that accrued for the year but not paid until 2007. The IRS says that the reg. disallows the accrual and puts the US sub on the cash basis for this item. F claims that the anti-discrimination article prevents this action by the IRS. Would the anti-discrimination provision apply? See Square D, 118 TC 299.