dissenting: I respectfully dissent; we should uphold the regulation as a reasonable implementation of the matching principle in this case. In addition, we haven’t received enough information or argument to tell whether retroactive application of the regulation to this case would be unconstitutional.
I.
As the majority opinion points out, we must determine whether section 1.267(a)-3, Income Tax Regs., is a valid exercise of the broad authority granted to the Secretary by section 267(a)(3). Majority op. p. 666. If Congress has authorized the Secretary to fill a gap in the statute, we give controlling weight to the Secretary’s regulations, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984); United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982); Rowan Cos. v. United States, 452 U.S. 247, 253 (1981), unless they are arbitrary, capricious or manifestly contrary to the congressional mandate, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., supra at 843-844; United States v. Vogel Fertilizer Co., supra at 24; National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, 488 (1979).
What may be the Secretary’s less-than-perfect (or even second-best) implementation of the statutory mandate is. sufficiently reasonable to prevent the regulation from being “arbitrary, capricious, or manifestly contrary to the statute.” Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., supra at 844; National Muffler Dealers Association, Inc. v. United States, supra at 488 (“The choice among reasonable interpretations is for the Commissioner, not the courts.”). I don’t believe the regulation is so obviously contrary to the statutory mandate as to be invalid when three other Judges and their adherents (all presumably having the faculty of reason) conclude that section 267(a)(3) expands the scope and reach of the matching principle of section 267 (Swift, J., dissenting op. p. 680), that the regulation implements the statute in reasonable fashion (Halpern, J., dissenting op. p. 695), and that the regulation is entirely consistent with the statutory mandate (Gerber, J., dissenting op. p. 688).
I would uphold the regulation by reading together the statute’s invocation of the matching principle and Article 24(3) of the U.S.-U.K. Income Tax Treaty1 as integrated parts of an overall scheme to prevent double taxation. Both the full title of the treaty and its preamble make clear that preventing double taxation is one of the treaty’s primary purposes. The treaty and our domestic law should be interpreted so as to accomplish that purpose. Maximov v. United States, 373 U.S. 49 (1963) (purposes of U.S.-U.K. Income Tax Treaty stated in preamble do not suggest treating trust as separate taxable entity); United States v. Vetco Inc., 644 F.2d 1324 (9th Cir. 1981) (one of purposes of U.S.-Swiss Income Tax Treaty— prevention of fraud — would be ill-served by limiting means of acquiring information to those named in treaty). It is well-settled law that, when possible, statutes should be read so as to be consistent with our treaty obligations. Weinberger v. Rossi, 456 U.S. 25, 33 (1982); Clark v. Allen, 331 U.S. 503, 508-511 (1947); Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804); United States v. Palestine Liberation Org., 695 F. Supp. 1456, 1465 (S.D.N.Y. 1988).
The versions of sections 894(a) and 7852(d) in effect before their amendment in 1988 already suggested that we should consider tax treaties when interpreting tax statutes. The language of the new version of section 894(a) supports the need to do so even more strongly: “The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer.” (Emphasis added.) If the majority opinion correctly asserts (p. 664 note 8) that the changes in sections 894 and 7852(d) were made only for the purpose of clarifying the interaction between statutes and treaties,2 then the new texts imply that the 100th Congress believed that the old versions of the two sections already meant that “due regard” was to be paid to tax treaties in the application of the Internal Revenue Code. However, regardless of whether the majority are correct on this point, the Internal Revenue Code and the treaty should be interpreted harmoniously.
Article 24(3) of the treaty, 31 U.S.T. at 5687, as of the time the treaty was adopted, displays the assumption that the “other Contracting State” — here the United Kingdom — would tax the recipient of U.S.-source income when the recipient received the payment. Indeed, during the years in question, the United Kingdom did tax the payments in question on a cash basis. In these circumstances, I believe that the regulation reasonably implemented the matching principle by delaying the deduction of interest expense for U.S. income tax purposes until petitioner’s U.K. parent recognized the interest income in issue for U.K. income tax purposes.3
II.
If the retroactive application of a regulation is unconstitutional, there has been an abuse of discretion. Pacific First Fed. Sav. Bank v. Commissioner, 101 T.C. 117, 121 (1993). A taxpayer attempting to demonstrate an abuse of discretion, in the area of retroactivity as elsewhere, carries a heavy burden of proof and persuasion. Id. The parties did not raise the constitutional question at trial or on brief, and respondent has not had the opportunity to bring to our attention the considerations that may support the retroactive application of the regulation. It would therefore amount to an arrogation of power by this Court to hold the regulation invalid on constitutional grounds without putting petitioner to its proof and without the benefit of respondent’s views on the matter.
Gerber, J., agrees with this dissent.The first sentence of par. (3) of Art. 24, Nondiscrimination, reads as follows:
(3) Subject to the provisions of paragraph (4) of this Article, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, if reasonable in amount, be deductible for the purpose of determining the taxable profits of such enterprise under the same conditions as if they had been paid to a resident of the first-mentioned State. * * *
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, Dec. 31, 1975, U.S.-U.K., Art. 24(3), 31 U.S.T. 5668, 5687.
The majority assert, majority op. p. 664 note 8, citing the legislative history of the 1988 changes and IRS Pub. 515, that income exempt by treaty from U.S. income taxation continues to be excluded from gross income. Because, however, there is evidence strongly suggesting that such income should be included in gross income under the 1988 amendments, H. Conf. Rept. 100-1104, at 5, 12 (1988), 1988-3 C.B. 473, 495, 502, and because those amendments do not apply to the tax years in this case, we should reserve for a later decision the question of what effect those amendments have on treaty-exempt income accrued or paid in later years.
The majority opinion indicates, majority op. p. 658, that, in 1993, the income tax. laws of the United Kingdom were changed to provide that interest income received from foreign sources would be subject to tax when the interest accrues rather than when it is received. However, now is not the time to consider what our view of the regulation should be if petitioner’s U.K parent were taxed on such interest payments on an accrual basis.