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the performance of * * * long-term contracts, must be allocated
to * * * long-term contracts”. These sentences, in isolation, do
not provide a rule for how indirect costs that directly benefit
or are incurred by reason of both taxpayer-produced property and
long-term contracts should be allocated between the property and
the contracts. To allocate indirect costs between taxpayer-
produced property and long-term contracts when the same costs
benefit both the property and the contracts, the remainder of the
sections must be considered.
Each section goes on to recognize that some indirect costs
may be allocable to activities subject to that section (either
taxpayer-produced property or long-term contracts) and to the
taxpayer’s other activities. In pertinent part, section 1.263A-
1(e)(3)(i), Income Tax Regs., provides:
Indirect costs may be allocable to both production and
resale activities, as well as to other activities that
are not subject to section 263A. Taxpayers subject to
section 263A must make a reasonable allocation of
indirect costs between production, resale, and other
activities. [Emphasis added.]
Similarly, section 1.451-3(d)(6)(ii), Income Tax Regs., provides:
Certain types of costs may directly benefit, or be
incurred by reason of the performance of * * * long-
term contracts of the taxpayer even though the same
type of costs also benefits other activities of the
taxpayer. Accordingly, such costs require a reasonable
allocation between the portion of such costs that are
attributable to * * * long-term contracts and the
portion attributable to the other activities of the
taxpayer. [Emphasis added.]
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Last modified: May 25, 2011