1996 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-24-1996

Tate & Lyle Inc v. Commissioner IRS

Precedential or Non-Precedential:

Docket 95-7253

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1996 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"Tate & Lyle Inc v. Commissioner IRS" (1996). 1996 Decisions. Paper 160.

http://digitalcommons.law.villanova.edu/thirdcircuit_1996/160
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________ 

 

 No. 95-7253 

 ___________ 

 TATE & LYLE INC. AND SUBSIDIARIES 

 v. 

 COMMISSIONER OF INTERNAL REVENUE SERVICE, 

 Appellant 

 ___________ 

 

 Appeal from the United States Tax Court 

 (No. 92-00740) 

 ___________ 

 

 Argued 

 April 25, 1996 

 Before: MANSMANN, ALITO and LEWIS, Circuit Judges. 

 (Filed June 24, 1996) 

 ___________ 

Henry B. Miller, Esquire 

Burt, Maner & Miller 

1300 Eye Street, N.W. 

975 East Tower 

Washington, DC 20005 

 COUNSEL FOR APPELLEE 

Gary R. Allen, Esquire 

Kenneth L. Greene, Esquire 

Thomas J. Clark, Esquire (ARGUED) 

United States Department of Justice 

Tax Division 

P.O. Box 502 

Washington, DC 20044 

 COUNSEL FOR APPELLANT 

Robert H. Aland, Esquire (ARGUED) 

Gregg D. Lemein, Esquire 

Michael A. Pollard, Esquire 

Baker & McKenzie 

One Prudential Plaza 

130 East Randolph Drive 

Chicago, IL 60601-6384 
Jeffrey M. O'Donnell, Esquire 

Baker & McKenzie 

815 Connecticut Avenue, N.W. 

Washington, DC 20006-4078 

 COUNSEL FOR AMICI CURIAE 

 ___________ 

 OPINION OF THE COURT 

 __________ 

MANSMANN, Circuit Judge. 

 In this appeal, the Commissioner has asked us to review 

a ruling which allowed a United States taxpayer to deduct 

interest owed to a related foreign payee when it was accrued 

rather than paid. Specifically, we must determine whether the 

United States Tax Court erred in holding that Treas. Reg. 

1.267(a)-3 is invalid to the extent that it requires accrual 

basis taxpayers to defer deductions for interest owed to a 

related foreign payee until the year the interest is paid. Also 

at issue is whether, assuming Treas. Reg.  1.267(a)-3 is valid, 

retroactive application of the regulation violates the Due 

Process Clause of the Fifth Amendment. 

 Because we find that Treas. Reg.  1.267(a)-3 is a 

valid exercise of the powers delegated to the Secretary under 

I.R.C.  267(a)(3), and that retroactive application of the

regulation to the taxpayer does not violate due process, we will 

reverse the decision of the Tax Court. 

 I. 

 The following facts were stipulated by the parties 

before the United States Tax Court. The taxpayer is an 

affiliated group of corporations of which Tate and Lyle, Inc. 

(TLI) is the common parent, and Refined Sugars, Inc. (RSI), is a 

wholly owned subsidiary. Both TLI and RSI are United States 

corporations and were included on the taxpayer's consolidated 

federal income tax returns for the tax years at issue. Tate and 

Lyle plc (PLC) is a United Kingdom corporation which indirectly 

owns 100% of TLI and RSI. The taxpayer and PLC are members of 

the same controlled group of corporations as defined in I.R.C. 

267(f). 

 PLC made interest-bearing loans to TLI and RSI, the tax 

consequence of which was interest expense to the taxpayer and 

interest income to PLC. The taxpayer and PLC report income and 

deductions using the accrual method of accounting. On its U.S 

income tax returns, the taxpayer deducted interest expense owed 

to PLC by TLI and RSI in the year it accrued. The taxpayer did 

not pay the interest to PLC until the year following the year of 

accrual. 

 The interest income received by PLC was U.S. source 

income not effectively connected with a trade or business in the 

United States. Under I.R.C.  881(a)(1), such income is subject 

to U.S. tax at a rate of 30%. Pursuant to Article 11(1) of the 
United States-United Kingdom Income Tax Convention (treaty), 31 

U.S.T. 5668, which was in effect at all times here, the interest 

income received by PLC was exempt from United States tax. 

 The Commissioner disallowed the taxpayer's deduction 

for interest expense in the years accrued and subsequently mailed 

to the taxpayer notices of deficiency for the tax years ended 

September 29, 1985, September 28, 1986, and September 26, 1987. 

In response to the notices of deficiency, the taxpayer filed a 

petition in the United States Tax Court challenging the 

Commissioner's determination. 

 The following facts, not part of the stipulation, are 

evident from the record. The Commissioner asserted before the 

Tax Court that I.R.C.  267(a)(2) and (a)(3) and Treas. Reg. 

 1.267(a)-3 allow payor a deduction for interest only in the tax 

year when the related payee would normally report the interest as 

income for United States tax purposes. Normally, interest income 

received by a foreign corporation from sources within the United 

States and which is not effectively connected with a trade or 

business in this country, is reported on the cash basis method of 

accounting under I.R.C.  881 and 1442. The Commissioner 

determined that the taxpayer was entitled to deduct interest only 

in the year it paid the interest to PLC. 

 

 The Tax Court held that because the accrued interest 

was not includable in PLC's income because of an exemption under 

the tax treaty rather than as a result of PLC's method of 

accounting, Treas. Reg.  1.267(a)-3 was invalid because it did 

not apply the matching principle of I.R.C.  267(a)(2). A fourjudge plurality determined that even if the provisions of Treas. 

Reg.  1.267(a)-3 were found to be within the broad regulatory 

authority granted by I.R.C.  267(a)(3), the retroactive 

application of the regulation violated the Due Process Clause of 

the Fifth Amendment. Accordingly, the Tax Court found that the 

taxpayer was not required to defer its interest deduction until 

it actually paid the interest. 

 The Commissioner appeals to us from the final decision 

of the Tax Court entered on February 13, 1995. We have 

jurisdiction under I.R.C.  7482(a). See Lerman v. Commissioner, 

939 F.2d 44, 45 (3d Cir.), cert. denied, 502 U.S. 984 (1991). 

 II. 

 We turn first to the issue of whether Treas. Reg. 

 1.267(a)-3 is a valid interpretation of I.R.C.  267(a)(3). 

The validity of a treasury regulation is a question of law over 

which we exercise plenary review. Mazzocchi Bus Co., Inc. v. 

Commissioner, 14 F.3d 923, 927 (3d Cir. 1994). 

 As amended in 1984, I.R.C.  267(a)(2) provides for a 

matching of interest deductions and income where, in the case of 

related persons, the payor is an accrual basis taxpayer and the 

payee is on a cash basis method of accounting. Section 267(a)(2) 

specifically provides: 

 (2) Matching of deduction and payee income 

 item in the case of expenses and interest. 

 -- If -- 
 (A) by reason of the method of 

 accounting of the person to whom the 

 payment is to be made, the amount 

 thereof is not (unless paid) includible 

 in the gross income of such person, and 

 (B) at the close of the taxable year 

 of the taxpayer for which (but for this 

 paragraph) the amount would be 

 deductible under this chapter, both the 

 taxpayer and the person to whom the 

 payment is to be made are persons 

 specified in any of the paragraphs of

 subsection (b), 

 then any deduction allowable under this 

 chapter in respect of such amount shall be

 allowable as of the day as of which such 

 amount is includible in the gross income of 

 the person to whom the payment is made (or, 

 if later, as of the day on which it would be 

 so allowable but for this paragraph). . . . 

Section 267(a)(2), as amended in 1984, applied to interest 

allowable as a deduction for taxable years beginning after 

December 31, 1983. Deficit Reduction Act of 1984, Pub. L. No. 

98-369,  174(c), 98 Stat. 494, 708. 

 The purpose behind the 1984 amendment was to require 

related persons "to use the same accounting method with respect 

to transactions between themselves in order to prevent the 

allowance of a deduction without the corresponding inclusion in 

income." H. Rep. No. 98-432, 98th Cong., 2nd Sess., reprinted in1984 

U.S.C.C.A.N. 697, 1206. The Ways and Means Committee 

further stated that "[t]he failure to use the same accounting 

method with respect to one transaction involves unwarranted tax 

benefits, especially where payments are delayed for a long period 

of time, and in fact may never be paid." Id. Congress thus 

amended section 267(a)(2) to require an accrual basis taxpayer to 

deduct interest owed to a related cash basis taxpayer when 

payment is made. Id. Congress explained that "[i]n other words, 

the deduction by the payor will be allowed no earlier than when 

the corresponding income is recognized by the payee." Id. 

 In 1986, Congress again amended section 267, this time 

to add subsection (a)(3) because it felt that the matching 

provision of section 267(a)(2) was "unclear when the related 

payee was a foreign person that does not, for many Code purposes, 

include in gross income foreign source income that is not 

effectively connected with a U.S. trade or business." S. Rep. 

No. 99-313, 99th Cong., 2nd Sess. at 959, reprinted in 1986-3 

C.B. (Vol. 3) 1, 959. Section 267(a)(3) reads as follows: 

 (3) Payments to foreign persons.--The 

 Secretary shall by regulations apply the 

 matching principle of paragraph (2) in cases 
 in which the person to whom the payment is to 

 be made is not a United States person. 

Like section 267(a)(2), section 267(a)(3) was made retroactive to 

taxable years beginning after December 31, 1983. Tax Reform Act 

of 1986, Pub. L. No. 99-514,  1881, 100 Stat. 2085, 2914. 

 

 In accordance with section 267(a)(3), the Secretary 

issued final regulations on December 31, 1992. T.D. 8465, 

1992-2 C.B. 12. Treas. Reg.  1.267(a)-3(b)(1) sets forth the 

following general rule: 

 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. . . . 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 account 

 pursuant to section 884(f)). 

Treas. Reg.  1.267(a)-3(c) provides certain exceptions and 

special rules to paragraph (b) of this section. Paragraph 

(c)(1), which applies to income that is effectively connected 

with the conduct of a United States trade or business of a 

related foreign person, does not apply if the related foreign 

person is exempt from United States income tax on the amount owed 

pursuant to a tax treaty. Paragraph (c)(2) addresses the 

treatment of items exempt from tax because of a tax treaty. 

Specifically, paragraph (c)(2) requires that: 

 Interest that is not effectively connected

 income of the related foreign person is an

 amount covered by paragraph (b) of this 

 section, regardless of whether the related

 foreign person is exempt from United States 

 taxation on the amount owed pursuant to a 

 treaty obligation of the United States. 

Thus, under the regulation, a taxpayer who owes interest to a 

related foreign person, where the related foreign payee is exempt 

from taxation on the interest received from U.S. sources not 

effectively connected with a U.S. trade or business of the 

foreign payee due to a tax treaty, may not deduct the interest 

owed to the related foreign person until the taxpayer actually 

pays the interest to the related foreign person. Treas. Reg. 

 1.267(a)-3 is effective with respect to interest deductions 

allowable in tax years beginning after December 31, 1983. 

Treas. Reg.  1.267(a)-3(d). 

 The parties to this appeal agree that Treas. Reg. 

 1.267(a)-3 is a legislative regulation which was issued 
pursuant to a clear congressional delegation of rule making 

authority. In reviewing an agency's construction of a statute 

which it administers, we take our lead from the Supreme Court's 

opinion in Chevron U.S.A., Inc. v. Natural Resources Defense 

Council, Inc., 467 U.S. 837, reh'g. denied, 468 U.S. 1227 (1984). 

Under Chevron, we must first ask "whether Congress has directly 

spoken to the precise question at issue." Id. at 842. If 

Congress' intent is clear from the plain language of the statute, 

then our inquiry ends there. Id. If we conclude, however, that 

Congress has not directly addressed the precise question at issue 

or that the statute is silent or ambiguous regarding the issue, 

then we must determine whether the agency's interpretation "is 

based on a permissible construction of the statute." Id. at 843. 

 Inherent in the powers of an administrative agency is 

the authority to formulate policies and to promulgate rules to 

fill any gaps left, either implicitly or explicitly, by Congress. 

Id. (citing Morton v. Ruiz, 415 U.S. 199, 231 (1974)). Where 

Congress has expressly delegated to an agency the power to 

"elucidate a specific provision of the statute by regulation . . 

. . [s]uch legislative regulations are given controlling weight 

unless they are arbitrary, capricious, or manifestly contrary to 

the statute." Id. at 844 (footnote omitted). 

 Applying the Chevron test, we find initially that 

Congress' intent is not clear from the plain language of I.R.C. 

267(a)(3). Congress specifically directed the Secretary to adopt 

regulations applying the "matching principle of paragraph (2)" to 

foreign related persons. If, as the Tax Court found and amici 

suggest, the plain meaning of section 267(a)(3) requires the 

Secretary to apply exactly the same matching principle of section 

267(a)(2) to foreign persons, then the language of section 

267(a)(3) is redundant. The Commissioner argues, moreover, 

that if the matching principle of section 267(a)(2) was strictly 

applied here, the U.S. payor would never be entitled to an 

interest deduction because the related foreign payee would never 

have to include interest in taxable income under a tax treaty 

with the United States. This unduly harsh result is one of the 

inequities Congress was attempting to rectify when it enacted 

I.R.C.  267(a)(2) in 1984. 

 The rules of statutory construction mandate that: 

 . . . a statute is to be read as a whole, see 

 Massachusetts v. Morash, 490 U.S. 107, 115

 (1989), since the meaning of statutory 

 language, plain or not, depends on context. 

 See, e.g., Shell Oil Co. v. Iowa Dept. of 

 Revenue, 488 U.S. 19, 26 (1988). "Words are 

 not pebbles in alien juxtaposition; they have 

 only a communal existence; and not only does 

 the meaning of each interpenetrate the other, 

 but all in their aggregate take their purport 

 from the setting in which they are used. . . 

 ." NLRB v. Federbush Co., 121 F.2d 954, 957 

 (CA2 1941) (L. Hand, J.) (quoted in Shell 

 Oil, supra, at 25, n.6).10 

 _______________ 
 10 See also United States v. Hartwell, 6

 Wall. 385, 396 (1868) (in construing statute 

 court should adopt that sense of words which 

 best harmonizes with context and promotes 

 policy and objectives of legislature). . . 

King v. St. Vincent's Hospital, 502 U.S. 215, 221 (1991). We do 

not believe that Congress would have enacted section 267(a)(3) if 

it intended to apply the same matching principle of section 

267(a)(2) to foreign persons. Thus, we find that it is unclear 

from the plain meaning of section 267(a)(3) how Congress intended 

the matching principle of section 267(a)(2) to apply to foreign 

related persons. 

 We turn to our second inquiry under Chevron -- whether 

the Secretary's interpretation as promulgated in Treas. Reg. 

 1.267(a)-3 is based on a permissible construction of section 

267(a)(3). The legislative history of section 267(a)(3) reveals 

that Congress anticipated other reasons for the mismatch of 

interest expense and income between related persons, which would 

defer the deduction of interest expense until actually paid. In 

the Committee Reports, Congress explained the need for section 

267(a)(3), stating that section 267(a)(2), as enacted in 1984, 

was unclear when the related payee was a foreign person, which 

did not, "for many Code purposes," include foreign source income 

that is not effectively connected with a U.S. trade or business 

in gross income for U.S. tax purposes. S. Rep. No. 99-313, 99th 

Cong., 2nd Sess. 959; reprinted in 1986-3 C.B. (Vol. 3) at 959; 

H. Rep. No. 99-426, 99th Cong., 2nd Sess. 939, reprinted in 1986- 

3 C.B. (Vol. 2) at 939. 

 By way of example, the Committee described a situation 

where a foreign corporation, which was not engaged in a U.S. 

trade or business, performed services outside the United States 

for the benefit of a wholly owned U.S. subsidiary. As a result 

of performing these services, the related foreign payee had 

foreign source income which was not effectively connected with a 

U.S. trade or business and, therefore, was not subject to U.S. 

tax. In this situation, the Committee explained that the U.S. 

subsidiary could be required to use the cash method of accounting 

for the deduction of amounts owed to the foreign parent for the 

services rendered. Id. Although in this example the facts are 

slightly different than those presented in the case before us, it 

is clear that Congress anticipated a situation where the required 

use of the cash method of accounting by the U.S. payor is not 

based on the foreign payee's accounting method since, in the 

example, the foreign payee was not subject to U.S. tax on the 

income received from the related U.S. payor. 

 In promulgating Treasury Reg.  1.267(a)-3, the 

Secretary followed the directives of the House and Senate 

reports. Both reports clearly indicate that Congress 

contemplated that section 267(a)(3) could be applied to 

situations where the foreign related payee was not ultimately 

subject to tax on the amount received, and that the regulations 

could require the U.S. subsidiary to use the cash method of 

accounting for the deduction of interest owed to its foreign 
parent. We find that the rule adopted by the Secretary, 

requiring a U.S. taxpayer to use the cash method of accounting 

with respect to the deduction of interest owed to a related 

foreign person, is a permissible construction of section 

267(a)(3). 

 Having so found, we must also conclude that the 

regulation is not arbitrary, capricious or manifestly contrary to 

section 267(a)(3). Nothing in the legislative history convinces 

us to the contrary. 

 While the Tax Court recognized that deference must be 

given to legislative regulations, it nonetheless invalidated 

Treas. Reg.  1.267(a)-3 as being "manifestly beyond the mandate

of [section 267(a)(3)]." 103 T.C. 656, 671 (1994). The Tax 

Court based its holding on the fact that the Commissioner 

disallowed the taxpayer's interest deductions for reasons other 

than the method of accounting of PLC. Both the Tax Court and 

amici argued that because the plain meaning of section 267(a)(3) 

was clear, there was no need to look to the legislative history. 

Accordingly, the Tax Court held there was no provision that 

permitted the Secretary to expand the reach of the regulations 

under section 267(a)(3) beyond the matching principle of section 

267(a)(2). We disagree. Recently, we reiterated the general 

rule on deference: 

 In general, unless an issue is governed 

 by an unambiguous statutory provision, courts 

 must defer to an agency's interpretation of a 

 statute it has been entrusted to administer. 

 Thus, the function for the court is not to

 impose its own interpretation of the statute, 

 but simply to determine whether the agency's 

 interpretation "is based on a permissible 

 construction of the statute." INS v. 

 Cardoza-Fonseca, 480 U.S. 421, 445 n.29, 107 

 S. Ct. 1207, 94 L.Ed.2d 434 (1987). The 

 agency's interpretation will be "given 

 controlling weight unless [it is] arbitrary, 

 capricious, or manifestly contrary to the 

 statute." Id. 

Cavert Acquisition Co. v. NLRB, ___ F.3d ___, Nos. 95-3231 and 

95-3293, 1995 WL 854489, at *3 (3d Cir. May 2, 1996). Having 

concluded earlier that the Secretary's interpretation was based 

on a permissible construction of I.R.C.  267(a)(3), we must 

reject the Tax Court's finding that Treas. Reg.  1.267(a)-3 was 

manifestly beyond the mandate of the statute. 

 In the alternative, the amici argue that Treas. Reg. 

 1.267(a)-3 is not supported by the legislative history. Amici 

contend that the Commissioner overlooks the fact that the 

legislative history defines "matching principle" in terms of 

accounting methods. They further contend that because the sole 

example in the Committee reports was absent from the final 

regulation, and because this example did not involve income 

exempt from tax because of a treaty, we should find that the 

Secretary's interpretation is not supported by the legislative 
history. We believe, however, that the amici are ignoring other 

statements contained in the House and Senate Committee reports 

which clearly support the Secretary's interpretation. 

 We agree with the Commissioner that the regulation is 

not manifestly contrary to section 267(a)(3). We believe the Tax 

Court construed the language of section 267(a)(3) too narrowly, 

especially in light of the Supreme Court's holding in Chevron. 

Accordingly, we find that the Tax Court erred in holding that 

Treas. Reg.  1.267(a)-3 is invalid to the extent it requires 

accrual basis taxpayers to defer interest deductions owed to a 

related foreign payee until the year the interest is paid. 

 III. 

 Having found that Treas. Reg.  1.267(a)-3 is a valid 

interpretation of section 267(a)(3), we must now consider whether 

the retroactive application of the regulation violated the Due 

Process Clause of the Fifth Amendment. The four-judge 

plurality found that the period of retroactivity in this case was 

excessive rather than modest, and therefore was unduly harsh and 

oppressive. In reaching this conclusion, the four-judge 

plurality relied on the Supreme Court's decision in United States 

v. Carlton, 114 S. Ct. 2018 (1994). There, the Supreme Court set 

forth a two-part test for determining whether the retroactive 

application of a tax statute violates due process. First, for 

retroactivity to be upheld, it must be shown that the statute has 

a rational legislative purpose and is not arbitrary; and second, 

that the period of retroactivity is moderate, not excessive. Id.at 2022. 

The Supreme Court in Carlton upheld the retroactive

application of a tax law amending a statute which had been 

enacted only a year earlier, where the amendment had been 

proposed by Congress within a few months of the statute's 

original enactment. Id. at 2023. 

 Based on the Supreme Court's holding in Carlton, the 

Tax Court found the six year period in this case excessive, and 

thus, violative of the Due Process Clause. We find, however, 

that Carlton is distinguishable: Carlton involved the 

retroactive application of a statute, and here we are dealing 

with the retroactive application of a regulation. 

 The retroactivity of treasury regulations is governed 

by I.R.C.  7805(b), which states: 

 The Secretary may prescribe the extent, if

 any, to which any ruling or regulation, 

 relating to the internal revenue laws, shall 

 be applied without retroactive effect. 

Clearly Congress has determined that treasury regulations are 

presumed to apply retroactively. The extent to which newly 

promulgated regulations shall not apply retroactively is a matter 

of discretion left to the Secretary. Automobile Club of Michigan 

v. Commissioner, 353 U.S. 180, 184-85, reh'g denied, 353 U.S. 989 

(1957). 

 The amici contend that the Secretary abused his 

discretion under section 7805(b) in failing to limit the period 

of retroactivity. In support of this position, the amici cite 
Gehl Co. v. Commissioner, 795 F.2d 1324 (7th Cir. 1986); LeCroy 

Research Sys. Corp. v. Commissioner, 751 F.2d 123 (2d Cir. 1984); 

and CWT Farms, Inc. v. Commissioner, 755 F.2d 790 (11th Cir. 

1985), cert. denied, 477 U.S. 903 (1986). These cases, however, 

are distinguishable from the facts of this case. All of the 

cases cited by the amici involved a prior express representation 

by the Commissioner in a DISC Handbook that the regulations, 

when adopted, would apply prospectively only. In CWT Farms, the 

court of appeals stated that "[a]n abuse of discretion may be 

found where retroactive regulation alters settled prior law or 

policy upon which the taxpayer justifiably relied and if the 

change causes the taxpayer to suffer inordinate harm." 755 F.2d 

at 802. The courts of appeals in these three cases found that 

the Commissioner abused his discretion by applying the 

regulations retroactively on the basis of their finding that the 

promise in the Handbook was binding. 

 Here, there was no such promise by the Commissioner 

regarding Treas. Reg.  1.267(a)-3. Moreover, the taxpayer had 

adequate notice within a reasonable time that regulations would 

be forthcoming which could alter the tax treatment of its 

interest deductions. Section 267(a)(2) was enacted on July 18, 

1984, effective for tax years beginning after December 31, 1983. 

On October 22, 1986, section 267(a)(3) was added, also with the 

same effective date. On July 31, 1989, the Secretary announced 

rules in Notice 89-84, 1989-31 I.R.B. 8, which eventually became 

the proposed regulations, and were released on March 19, 1991. 

Then, on January 5, 1993, the Secretary released the final 

regulations applicable to section 267(a)(3), retroactive to tax 

years beginning after December 31, 1983. Thus, as early as 

October of 1986, the taxpayer had notice that regulations would 

be forthcoming which could alter the tax treatment of its 

interest deductions for tax years 1985, 1986 and 1986. 

 Indeed, the Supreme Court has upheld the retroactive 

application of tax regulations for a similar or longer period of 

retroactivity. See, e.g., National Muffler Dealers Ass'n, 440 

U.S. at 478-82 (upholding the validity of a regulation which was 

issued six years after enactment of the statute and was 

subsequently modified ten years later). In E.I. du Pont de 

Nemours & Co. v. Commissioner, 41 F.3d 130, 139 & n. 37 (3d Cir. 

1994), we upheld the validity of a regulation adopted thirteen 

years after enactment of a statute directing the Secretary to 

promulgate regulations. 

 We find, therefore, that the retroactive application of 

Treas. Reg.  1.267(a)-3 to the tax years in question does not 

violate the Due Process Clause of the Fifth Amendment. Based on 

the applicable legal standards and our earlier review of the 

relevant legislative history, we are unable to conclude that the 

Secretary abused his discretion in failing to limit the period of 

retroactivity for Treas. Reg.  1.267(a)-3. 

 IV. 

 For the reasons set forth above, we will reverse the 

decision of the Tax Court and remand this cause to the Tax Court 
for the entry of a decision upholding the tax deficiencies for 

the years in question.