Court Opinion

ID: 2998767
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:47:02.513557+00
Date Added: 2024-06-11T11:24:56.569482
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                       ____________

No. 04-4302
SQUARE D COMPANY AND SUBSIDIARIES,
                                           Petitioner-Appellant,
                              v.

COMMISSIONER OF THE INTERNAL REVENUE SERVICE,
                                          Respondent-Appellee.
                       ____________
                  Appeal from an Order of the
                   United States Tax Court.
                          No. 6067-97
                       ____________
   ARGUED OCTOBER 25, 2005—DECIDED FEBRUARY 13, 2006
                       ____________

  Before COFFEY, MANION, and KANNE, Circuit Judges.
  MANION, Circuit Judge. Square D Company attempted
to take deductions for certain interest payments to its French
parent that accrued in 1991 and 1992. Relying on Treasury
Regulation § 1.267(a)-3, the Commissioner of the Internal
Revenue Service adopted the position that any such deduc-
tions had to be taken when the interest payments were
actually made, not when they accrued. Square D challenged
this regulation and the Commissioner’s actions before the
Tax Court. The Tax Court sided with the Commissioner,
and we affirm.
2                                                 No. 04-4302

                               I.
  Square D Company (“Square D”) and the Commissioner
of the Internal Revenue Service (the “Commissioner”) agree
on nearly all of the pertinent facts and stipulated to them in
the Tax Court. Before diving into the particulars, however,
we will sketch the relevant tax code sections and
regulations1 because these provisions supply not only the
frame, but also the subject of the disagreement between the
parties.
  The Internal Revenue Code (the “Code”) allows a tax-
payer to take a deduction on all interest paid or accrued
within a taxable year on indebtedness. IRC § 163(a). Other
provisions of the Code determine which of these two
alternatives—a deduction in the year of accrual or pay-
ment—applies. Generally, corporations with gross receipts
of more than $5 million are accrual-basis taxpayers that
must use the accrual method of accounting. IRC § 448(a),
(b)(3). Under the accrual method, a taxpayer must include
income and deductions in the taxable year in which the
income or liability is fixed and can be determined with
“reasonable accuracy.” Treas. Reg. § 1.446-1(c)(ii). This
compares to the other primary accounting method, the cash
method, under which a taxpayer must include all income
and deductions in the taxable year in which they are
actually received or paid. IRC § 446(c)(1), (2); Treas. Reg.
§ 1.446-1(c)(i).

1
  As all of the citations to statutory material in this case in-
volve sections of the Internal Revenue Code, found at 26 U.S.C.
§ 1 et seq., we will refer to the pertinent provisions using the
abbreviation “IRC.” Likewise, for the significant regulations
we will substitute “Treas. Reg.” for “26 C.F.R.”
No. 04-4302                                                3

  Special rules govern if a taxpayer attempts to take
a deduction based on a transaction with a related person
or corporation. IRC § 267. As a general matter, a taxpayer
cannot take a deduction for a loss from a sale or exchange of
property with a related person. IRC § 267(a)(1). A taxpayer
can, however, claim a deduction for other types of payments
to a related person. IRC § 267(a)(2). However, if the parties
employ different systems of accounting, the taxpayer can
obtain this deduction only in the taxable year in which the
related payee claims the income. Id. (“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.”). The determination of when a taxpayer
can claim this deduction, therefore, depends on which
method of accounting the related payee employs. If the
related payee is on the accrual method, the taxpayer will
claim the deduction when it accrued, even if the taxpayer is
on the cash method. Likewise, if the related payee is on the
cash method, the taxpayer will claim the deduction when it
pays the money, even if it reports on the accrual basis.
  The Code treats payments to a foreign related party
separately, granting the Secretary of the Treasury (the
“Secretary”) power to enact regulations in this sphere.
Specifically, IRC § 267(a)(3) provides that the “Secretary
shall by regulations apply the matching principle of [§ 267
(a)(2)] in cases in which the person to whom the pay-
ment is to be made is not a United States person.” In
response to this directive, the Secretary promulgated
Treasury Regulation § 1.267(a)-3. In general, this regula-
tion provides for the cash method of accounting when
claiming deductions for payments to a related foreign
person. Treas. Reg. § 1.267(a)-3(b). The regulations, how-
ever, proceed to exempt certain types of payment to a
4                                                  No. 04-4302

related foreign person from the cash method of Treasury
Regulation § 1.267(a)-3(b) and IRC § 267 (a)(2). Treas. Reg.
§ 1.267 (a)-3(c)(2). This exemption applies “to any amount
that is income of a related foreign person with respect
to which the related foreign person is exempt from United
States taxation on the amount owed pursuant to a treaty
obligation of the United States,” except for interest. Id. In the
case of interest that is not effectively connected income of
the related foreign person,2 the cash method of Treas. Reg.
§ 1.267 (a)-3(b) continues to govern. Id.
  Having swallowed this preliminary dose of the Code
and its regulations, we proceed to the relevant facts of the
present case. Square D is an accrual basis taxpayer with its
principal place of business in Illinois. Schneider S.A.
(“Schneider”), a French corporation, acquired Square D on
May 30, 1991. While the precise mechanics of the deal are
not particularly important for our purposes, basically
Schneider created an acquisition subsidiary through
which it financed the purchase of Square D’s stock in the
amount of $2.25 billion. As part of this arrangement, the
acquisition subsidiary obtained loans in the amount of $328
million from Schneider and two of its affiliates. After the
purchase of Square D, Schneider then merged the acquisi-
tion subsidiary (and its massive loans) into Square D,
thus passing the responsibility for repaying the loans to

2
  We will spare the readers from a long discussion of what is
or is not effectively connected income of a foreign company.
The parties have stipulated that the interest accrued and paid
was: (1) not includible in the gross income of Schneider or its
affiliates for United States federal income tax purposes; (2)
derived from sources within the United States for United States
federal income tax purposes; and (3) not effectively con-
nected with the conduct of a United States trade or business.
No. 04-4302                                                   5

Square D. In 1992, Square D obtained a direct loan from
Schneider in the amount of $80 million. Square D accrued
$21,075,101 in interest on these loans in 1991 and
$38,541,695 in 1992, but did not attempt to deduct these
amounts in its tax returns for those years. Square D then
paid off the interest on these loans in 1995 and 1996. As
Schneider and its affiliates (excluding Square D) were
bona fide residents of France, they were exempt from
United States taxes on the interest payments because of
treaties.
  As part of a 1996 audit, the IRS determined that Square D
had a tax deficiency in 1991 and 1992. Square D challenged
this determination before the Tax Court in part by arguing
that it should be allowed to deduct the loan interest
amounts in the years in which they accrued, 1991 and 1992.3
More specifically, Square D contended that Treasury
Regulation § 1.267(a)-3 constituted a flawed interpretation
of the statutory mandate contained in IRC § 267(a)(3) and
was invalid. Square D argued in the alternative that, if it
were valid, Treasury Regulation § 1.267(a)-3 violated the
nondiscrimination clause contained in the Convention
Between the United States of America and the French
Republic with Respect to Taxes on Income and Property,
signed on July 28, 1967 (the “Treaty”).
  The Tax Court sided with the Commissioner. This was not
the first time the Tax Court had considered this issue.
Previously, the Tax Court had concluded Treasury Reg-

3
  While Square D raised a number of issues before the Tax
Court regarding various IRS rulings, the only question remaining
in play is when Square D can properly deduct the interest on the
loans.
6                                                No. 04-4302

ulation § 1.267(a)-3 was invalid. See Tate & Lyle, Inc. v.
Comm’r of Internal Revenue, 103 T.C. 656 (1994). However,
the Third Circuit reversed the Tax Court, concluding, after a
Chevron analysis and an examination of the legislative
history, that Treasury Regulation § 1.267(a)-3 was
not manifestly contrary to the congressional intent ex-
pressed in IRC § 267(a)(3). See Tate & Lyle, Inc. v. Comm’r of
Internal Revenue Serv., 87 F.3d 99, 106 (3d Cir. 1996). Now,
the Tax Court has abandoned its prior view of this reg-
ulation (by a 10-6 vote) in light of the Third Circuit’s
opinion. The Tax Court also found that this regulation
did not impose any obligations on Square D that offended
the Treaty. Square D appeals.

                             II.
  As before the Tax Court, Square D presents two chal-
lenges to the validity of Treasury Regulation § 1.267(a)-3,
which the Commissioner relied on when denying the
requested 1991 and 1992 deductions. First, Square D argues
that IRC § 267(a)(3) simply directs the Commissioner to
implement the matching principle of IRC § 267(a)(2) in the
foreign context with no additions or subtractions. Square D
contends that Treasury Regulation § 1.267(a)-3 did not
follow the congressional imperative contained in IRC
§ 267(a)(3) and, therefore, did not constitute a reasonable
interpretation of the enabling legislation. Square D wants a
strict implementation of IRC § 267(a)(2) in the foreign
context because of its reading of the matching principle.
Square D asserts that because Schneider, a French corpora-
tion, cannot be taxed on interest payments, Square D has
nothing to “match” against. Therefore, Square D believes
that it would be outside the ambit of IRC § 267(a)(2) and
could simply take its normal accrual deduction. Square D’s
No. 04-4302                                                    7

alternative line of attack focuses on the nondiscrimina-
tion clause contained in the Treaty and argues that Treasury
Regulation § 1.267(a)-3 runs afoul of this provision
by imposing burdens on foreign owners of American
companies that do not exist for their American counterparts.
  When reviewing decisions of the Tax Court, we review “in
the same manner and to the same extent as decisions of the
district courts in civil actions tried without a jury.” IRC
§ 7482(a)(1). We therefore examine questions of law de novo
and factual determinations and the application of legal
principles to the factual determinations for clear error. See
Baker v. Comm’r of Internal Revenue, 338 F.3d 789, 792 (7th
Cir. 2003); Kikalos v. Comm’r of Internal Revenue, 190 F.3d 791,
793 (7th Cir. 1999) (plenary review of validity of Treasury
regulations); Fruit of the Loom, Inc. v. Comm’r of Internal
Revenue, 72 F.3d 1338, 1343 (7th Cir. 1996). We view the
evidence in the light most favorable to the tax court finding.
See Toushin v. Comm’r of Internal Revenue, 223 F.3d 642, 646
(7th Cir. 2000).

                               A.
  We begin our analysis by considering whether Treasury
Regulation § 1.267(a)-3 is a valid regulation pursuant to
Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837 (1984). This is a matter of first impression in
this circuit. We recognize that the Third Circuit specifically
dealt with this question in its Tate & Lyle decision, eventu-
ally concluding that Treas. Reg. § 1.267(a)-3 was valid. 87
F.3d at 106. As a general matter, “[r]espect for the decisions
of other circuits is especially important in tax cases because
of the importance of uniformity, and the decision of the
Court of Appeals of another circuit should be followed
8                                                  No. 04-4302

unless it is shown to be incorrect.” Bell Fed. Savs. & Loan
Ass’n v. Comm’r of Internal Revenue, 40 F.3d 224, 226-27 (7th
Cir. 1994) (quoting Fed. Life Ins. Co. v. United States, 527 F.2d
1096, 1098-99 (7th Cir. 1975)); see also 330 W. Hubbard St.
Rest. Corp. v. United States, 203 F.3d 990, 994 (7th Cir. 2000)
(“Although we are not bound by them, we ‘carefully and
respectfully consider’ the opinions of our sister circuits.”).
   The Chevron inquiry involves two well-trod analytical
steps. First, we must determine whether the plain mean-
ing of the relevant Code provisions either supports or
opposes the regulation. See Bankers Life & Cas. Co. v. United
States, 142 F.3d 973, 983 (7th Cir. 1998); see also Chevron, 467
U.S. at 842-43; Kikalos, 190 F.3d at 796. If the plain mean-
ing is either silent or unclear as to the regulation’s valid-
ity, we proceed to the second step and evaluate the rea-
sonableness of the Commissioner’s interpretation. See
Chevron, 467 U.S. at 843; Kikalos, 190 F.3d at 796; Bankers Life,
142 F.3d at 983. “In the second step, the court determines
whether the regulation harmonizes with the language,
origins, and purpose of the statute.” Bankers Life, 142 F.3d at
983; see also Bell Fed., 40 F.3d at 227. As long as a regulation
is a reasonable reading of the statute, we give deference to
the Commissioner’s interpretation. See Kikalos, 190 F.3d at
796; Bankers Life, 142 F.3d at 987 (“[T]he issue before us is
not how we might resolve the statutory ambiguity in the
first instance, but whether there is any reasonable basis for
the resolution embodied in the Commissioner’s Regula-
tion.”) (quoting Fulman v. United States, 434 U.S. 528, 536
(1978)).

                               1.
 Advancing to the first stage of the Chevron analysis,
we consider whether the plain meaning of the Code
No. 04-4302                                                   9

either clearly supports or opposes Treasury Regulation
§ 1.267(a)-3. Like the Third Circuit and the Tax Court,
we conclude that it does not. See Tate & Lyle, 87 F.3d at
104-05; Square D v. Comm’r of Internal Revenue, 118 T.C. 299,
307-09 (2002). Square D argues that the Code unambigu-
ously opposes this regulation, grounding its argument on
IRC § 267(a)(3), which empowers the Commissioner to enact
regulations to implement the matching principle of IRC
§ 267(a)(2) in the foreign context. Square D takes this
language to mean that the Commissioner can do nothing
more than just mechanically import the matching prin-
ciple to issues regarding foreign companies without devia-
tion. By the act of creating regulations that vary from the
matching principle, including Treasury Regulation
§ 1.267(a)-3(c)(2), the Commissioner has violated the
plain language of the Code according to Square D.
  We disagree. We consider the statutory scheme as a whole
when evaluating whether the plain meaning unambigu-
ously opposes or sanctions a particular regulation. See, e.g.,
Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529
U.S. 120, 132-33 (2000); K Mart Corp. v. Cartier, Inc., 486 U.S.
281, 291 (1988) (“[I]n ascertaining the plain meaning of the
statute, the court must look to the particular statutory
language at issue, as well as the language and design of the
statute as a whole.”) (internal citations omitted). Square D’s
reading, that IRC § 267(a)(3) merely authorized the direct
implementation of the matching principle to foreign persons
without any possible changes, would make that provision
redundant. The language of IRC § 267(a)(2) never distin-
guishes between the foreign and domestic and naturally
applies to both, which would seem to make IRC § 267(a)(3)
10                                                   No. 04-4302

pure surplusage.4 See Tate & Lyle, 87 F.3d at 104. We read a
statute to avoid such redundancy. See Alaska Dep’t of Envtl.
Conservation v. EPA, 540 U.S. 461, 489 n. 13 (2004) (“It is,
moreover, a cardinal principle of statutory construction that
a statute ought, upon the whole, to be so construed that, if
it can be prevented, no clause, sentence, or word shall be
superfluous, void, or insignificant.”) (internal citations
omitted); see also Cole v. U.S. Capital, Inc., 389 F.3d 719, 725
(7th Cir. 2004); United States v. Power Eng’g Co., 303 F.3d
1232, 1238 (10th Cir. 2002). The statutory struc-
ture, therefore, suggests that IRC § 267(a)(3) does not
have the clear meaning that Square D ascribes to it. Since we
conclude that the plain language of the Code is ambiguous,
we proceed to the second step.

4
   Square D attempts to avoid this conclusion by claiming the
provision allows for the clarification of various mechanical issues
particular to the application of IRC § 267(a)(2) in the foreign
context. Square D grounds its argument on legislative history
showing that Congress expressed concerns about how
to implement IRC § 267(a)(2) in the realm of foreign transac-
tions. As an initial matter, we do not share Square D’s enthusiasm
for determining whether relevant provisions have a clear and
plain meaning by wandering outside the actual statutory
language and into the legislative history in the first step of the
Chevron analysis. See Bankers Life, 142 F.3d at 983 (we “lean
toward reserving consideration of legislative history and other
appropriate factors until the second Chevron step.”). Moreover,
Square D fails to link the general congressional concerns with the
actual congressional action. There is no indication that Congress
enacted IRC § 267(a)(3) to authorize the Commissioner to deal
with assorted ministerial matters, but nothing more. The limited
support that the legislative history offers does not convince us
that IRC § 267(a)(2) mandates identical treatment for foreign
persons.
No. 04-4302                                                 11

                              2.
  Arriving at the second step of the analysis, we con-
sider whether Treasury Regulation § 1.267(a)-3 was a
reasonable interpretation of IRC § 267(a)(3). In cases such as
this one in which Congress has made an express delegation
of authority to enact regulations, “[s]uch legislative regula-
tions are given controlling weight unless they are arbitrary,
capricious, or manifestly contrary to the statute.” Chevron,
467 U.S. at 844. We assess the reasonableness of Treasury
Regulation § 1.267(a)-3 in light of Congress’s purpose in
enacting the relevant statutes, which requires us, in this
situation, to review the legislative history. See Bankers Life,
142 F.3d at 983.
  Our examination first leads us to the historical landscape
surrounding § 267(a)(2). Congress has been working to
restrain fraud and abuse from related transactions for nearly
seventy years. At first, Congress concentrated on interest
transactions and applied a rather strict limitation. Revenue
Act of 1937, Pub. L. No. 75-377 § 301(c). Under the 1937 law
(which became IRC § 267(a)(2) in 1954), Congress specifi-
cally disallowed deductions for interest accrued in a related
party transaction between taxpayers with different account-
ing methods unless the accrued interest was paid within
two and a half months after the close of the taxable year. Id.
In other words, Congress refused to allow a deduction
merely for accruing an interest obligation to a related party;
to get the deduction, the taxpayer had to pay the interest
within approximately the same taxable year as accrual. In
the legislative history, Congress expressed concern that
interest payments between related taxpayers with different
accounting methods were particularly subject to abuse. In a
report on this regulation, for example, the House Ways and
Means Committee noted that the government would have
12                                               No. 04-4302

difficulty monitoring when payments were actually made
(and thus could be taxed) if an accrual taxpayer took a
deduction when accrued, while waiting several years before
payment. H.R. Rep. No. 75-1546 (1937), reprinted in 1939-1
C.B. (Pt. 2) 704, 724-25. The Committee indicated this could
lead to phantom deductions for payments that were either
never made or made in a year to minimize the tax burden.
Id.
   In 1984, Congress altered this system somewhat, replacing
it with the present version of IRC § 267(a)(2). Despite the
changes, Congress explained that the general purpose
remained “to prevent the allowance of a deduction with-
out the corresponding inclusion in income.” H.R. Rep.
No. 98-432 (II), 1025, 1578 (1984), reprinted in 1984 (vol.3)
U.S.C.C.A.N. 697, 1205. The new version was not primarily
focused on interest payments, as in the prior system, having
a wider scope to address all payments between related
parties with different accounting methods. As described
previously, Congress mandated that, in the case of account-
ing mismatches, deductions for payments to related persons
could be taken in the taxable year the payee included the
payment.
  Two years later, Congress revisited the subject in light of
questions about payments to foreign related taxpayers,
eventually promulgating IRC § 267(a)(3). As noted earlier,
that statutory provision requires the Secretary to “apply the
matching principle of [IRC § 267(a)(2)] in cases in which the
person to whom the payment is to be made is not a United
States person.” When addressing this issue, Congress did
not limit its consideration to situations involving accounting
mismatches between domestic and foreign related parties.
See Tate & Lyle, 87 F.3d at 105 (“Congress anticipated other
reasons for the mismatch of interest and expense income
No. 04-4302                                                   13

between related persons”). Rather, in the Committee
reports, Congress specifically mentioned a situation in
which there was no match at all (as Square D describes its
circumstance) because the foreign related party was not
subject to American taxes. H.R. Rep. No. 99-426, at 939
(1985), 1986-3 C.B. (Vol. 2) 1, 1939; S. Rep. No. 99-313, at 959
(1986) reprinted in 1986-3 C.B. (Vol. 3) 1, 959. See also Tate &
Lyle, 87 F.3d at 105; Square D, 118 T.C. 310-12. The Commit-
tee included an example of a foreign company that provided
services outside the United States to a related domestic
corporation. See Tate & Lyle, 87 F.3d at 105; Square D, 118
T.C. 311. The reports noted that the foreign parent was “not
subject to U.S. tax,” but nonetheless concluded that “under
the bill, regulations could require the U.S. subsidiary to use
the cash method of accounting with respect to the deduction
of amounts owed to its foreign parent.” H.R. Rep. No. 99-
426, at 939; S. Rep. No. 99-313, at 959. See also Tate & Lyle, 87
F.3d at 105; Square D, 118 T.C. 310-11. “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 payor.” Tate & Lyle, 87
F.3d at 105.
  Having set this legislative history in place, we can now
consider whether the Commissioner acted properly when he
drafted the regulation. Like the Tax Court and the Third
Circuit before us, we conclude that Treasury Regulation
§ 1.267(a)-3, which requires the cash method for interest
payments to a foreign related party, was reasonable. The
legislative history supports the Commissioner’s decision to
craft regulations addressing payments between related
parties even when the foreign related party does not pay
American tax. While this is not strictly a difference in
14                                                   No. 04-4302

accounting method as mentioned in IRC § 267(a)(2), the
Committee notes strongly indicate that Congress had
decided that the implementation of the matching principle
in the foreign context did not require the foreign person to
have something to match against, as Square D argues.5 See
Tate & Lyle, 87 F.3d at 105; Square D, 118 T.C. 311. Congress
considered and sanctioned the use of the cash method as a
way to implement the matching principle to solve the
problem of payments to a foreign related party. See Tate &
Lyle, 87 F.3d at 105. This might seem a bit counter-intuitive,
but it makes sense when considered against the backdrop of
Congress’s consistent purpose in drafting these provi-
sions—to prevent potential fraud and abuse by taxpayers.
There is no suggestion that Congress determined that these
concerns would be alleviated somehow in situations involv-
ing tax exempt foreign related parties. See Square D, 118 T.C.
311-12. The Commissioner acted reasonably when requiring
the cash method to address these types of payments.
  Further, the decision to treat interest differently (by
requiring the cash method) than other types of transactions
between related parties is permissible. The legislative
history demonstrates a particular focus on interest pay-
ments from the very beginnings of the congressional
attempt to regulate this area. The Commissioner tailored the

5
   As previously described supra pp. 9-10, Square D contends that
the matching principle is inapplicable because Schneider
is exempt from American taxes on the interest payments. Square
D asserts that the matching principle requires that both parties be
subject to American taxes on the payments. Without a corre-
sponding inclusion to pair with a deduction, Square D believes
that the matching principle should not apply.
No. 04-4302                                                15

regulation to address a significantly problematic area, which
is completely appropriate.
  Given the intent of Congress, we find the regulation a
reasonable interpretation of the relevant Code provi-
sions, and thus, defer to it.

                             B.
  Square D also challenges the validity of Treas. Reg.
§ 1.267(a)-3 based on the Treaty. Treaties have the same
legal effect as statutes, see United States v. Emuegbunam, 268
F.3d 377, 389 (6th Cir. 2001), and we conduct de novo
review of the Tax Court’s interpretation. See UnionBanCal
Corp. v. Comm’r of Internal Revenue, 305 F.3d 976, 981 (9th
Cir. 2002).
  In this case, Treasury Regulation § 1.267(a)-3 does not
conflict with Article 24(3) of the Treaty. That section pro-
vides:
    A corporation of a Contracting State, the capital of
    which is wholly or partly owned or controlled, directly
    or indirectly, by one of more residents of the other
    Contracting State, shall not be subjected in the first-
    mentioned Contracting State to any taxation or any
    requirement connected therewith which is other or more
    burdensome than the taxation and connected require-
    ments to which a corporation of that first-mentioned
    Contracting State carrying on the same activities, the
    capital of which is wholly owned by one or more
    residents of the first-mentioned State, is or may be
    subjected.
This provision simply means “an American subsidiary of a
[French] corporation can’t be taxed more heavily than an
16                                              No. 04-4302

American subsidiary of an American corporation.”
UnionBanCal Corp., 305 F.3d at 986 (addressing a similar
nondiscrimination clause in a U.S.-U.K. tax treaty). Square
D asserts that Treasury Regulation § 1.267(a)-3 runs afoul of
this section because it requires a taxpayer owned by a
French corporation to use the cash method for deducting
interest payments to its parent, rather than the more
advantageous accrual method.
   While this argument has some initial appeal, it comes
up short. In order to violate a nondiscrimination clause
in a treaty, the additional burden must be directed at
nationality. See Klaus Vogel, Klaus Vogel on Double Taxa-
tion Conventions 1290 (3d ed. 1997). Put differently, “dis-
crimination against foreign-owned subsidiaries is all that
the nondiscrimination clause at issue protected it against.”
See UnionBanCal Corp., 305 F.3d at 986. Such discrimination
is absent here. The regulation requires that all interest
payments to a foreign related party must use the cash
method of accounting without regard to the nationality
of the owner. The regulation does not impose the cash
method simply because of foreign ownership, which
would be prohibited, but rather for payments to a for-
eign related party. Even if a corporation were owned by
a United States parent, it still appears all interest pay-
ments to one of these foreign related parties would lead
to the use of the cash method. The requirement, therefore,
hinges on the nationality of the related party to whom
the payment goes and does not fluctuate based on na-
tionality of the ultimate owner. It is merely fortuitous
that, in this case, the foreign related party to which the
payment was made also happened to be the owner. The
regulation does not discriminate based on foreign owner-
ship, and thus, does not violate the nondiscrimination
clause.
No. 04-4302                                                17

                             III.
  The Commissioner properly concluded that Square D had
to take deductions for payments to a foreign related party
based on the cash method, rather than the accrual method.
Treasury Regulation § 1.267(a)-3, on which the Commis-
sioner relied, was a reasonable interpretation of ambiguous
statutory provisions. Likewise, the nondiscrimination clause
in the applicable treaties does not prohibit this regulation,
as it does not place additional burdens on French-owned
corporations. The judgment of the Tax Court is AFFIRMED.

A true Copy:
       Teste:

                          _____________________________
                           Clerk of the United States Court of
                             Appeals for the Seventh Circuit

                    USCA-02-C-0072—2-13-06