“The total exclusion of an item from the recipient’s gross income is a question of characterization that is unrelated to the taxpayer’s method of accounting.”
How later courts described this case
- “The total exclusion of an item from the recipient’s gross income is a question of characterization that is unrelated to the taxpayer’s method of accounting.”
- addressing a “total exclusion” from gross income
Written by the judges who cited it.
The opinion
Swift, J., dissenting: At the risk of oversimplifying what the majority opinion and the parties in this case apparently view as a complicated question of statutory interpretation, I offer the following comments.
As I read and understand the relevant statutory scheme, I believe the majority opinion reads or defines the “matching principle” of section 267(a)(2) too narrowly. Also, in interpreting the reference in section 267(a)(3) to the “matching principle” of section 267(a)(2), the majority confuses the “matching principle” with the specified reason or cause for a mismatch that, under section 267(a)(2), triggers the correction contemplated by section 267.
The general matching principle of section 267 may be simply stated: mismatches in the Federal income tax reporting and treatment of associated items of income and expense between related parties are generally to be avoided. Under section 267(a)(2), which applies generally where both parties are domestic taxpayers, the matching principle will be triggered and section 267 will correct a mismatch only where the “reason” (see the express language of section 267(a)(2)(A)) or the cause for the mismatch is a difference in the “accounting method” used by the related parties. That specified reason or cause for a mismatch (namely, a difference in accounting method) that triggers corrections under section 267(a)(2)(A) is not part of the “matching principle” itself. Rather, it is only the “trigger” — the specified reason or cause — for section 267 corrections where related domestic taxpayers are involved.
In 1986, Congress added section 267(a)(3) in recognition of the fact that (where a domestic taxpayer and a related foreign party are involved) the reason or cause for a mismatch may well be something other than a difference in an accounting method (e.g., a treaty provision). Section 267(a)(3) clarifies and expands the scope and reach of the matching principle of section 267 to include other situations where the matching principle is violated (i.e., other reasons and causes for mismatches) as between domestic taxpayers and related foreign parties. Rather than attempt to anticipate and to specify in section 267 other reasons and causes for mismatches as between domestic taxpayers and related foreign parties, Congress provided in section 267(a)(3) that respondent by legislative regulations is to provide the other reasons and causes for mismatches between domestic taxpayers and related foreign parties that appropriately trigger corrections under section 267.
Respectfully, in my opinion, it is apparent that a treaty may represent the reason and cause for a mismatch in the tax reporting and treatment of items of income and expense as between domestic taxpayers and related foreign parties, and the conclusion is compelling that respondent has been delegated regulatory authority under section 267(a)(3) to provide that such a reason and cause for a mismatch will trigger the correction contemplated by section 267.
The fact that a treaty constitutes the reason and cause for the mismatch at issue in this case, rather than a method of accounting, neither alters the fact of the mismatch, the significance and effect of the mismatch, the policy of section 267 to correct mismatches between related parties, nor the appropriateness of the correction respondent seeks to make in this case. Both reasons for a mismatch are covered by section 267. A mismatch caused by reason of a difference in a method of accounting is covered by section 267(a)(2). A mismatch caused by reason of a treaty is covered by the legislative regulations promulgated under section 267(a)(3).
Alternatively, if the majority is correct and if the “accounting method” is part of the “matching principle” itself (and not just the specifically stated reason for the type of mismatch that is corrected under section 267(a)(2)), I would then conclude that the treaty provision at issue in this case constitutes a “treaty-mandated” method of accounting, and I would sustain respondent’s adjustment on the ground that the mismatch in question was caused “by reason of” a difference in the method of accounting for the interest income. Under this alternative approach, the correction respondent has made in this case under section 267 would also be sustained.
Parr, J., agrees with this dissent.