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a production activity. Sec. 1.263A-1T(b)(2)(ii), Temporary
Income Tax Regs., 52 Fed. Reg. 10062 (Mar. 30, 1987).
Compensation paid to officers attributable to services performed
in connection with particular production activities is an example
of an indirect cost that must be capitalized. Sec. 1.263A-
1T(b)(2)(iii)(N), Temporary Income Tax Regs., 52 Fed. Reg. 10062
(Mar. 30, 1987). Marketing, selling, advertising, and
distribution expenses, including compensation of officers
attributable to services performed in connection with the cost of
selling, are not required to be capitalized under section 263A.
Sec. 1.263A-1T(b)(2)(iii)(N), supra; sec. 1.263A-1T(b)(2)(v)(A),
Temporary Income Tax Regs., 52 Fed. Reg. 10066 (Mar. 30, 1987).
The record is unclear as to Mrs. Penalba's role in the
production aspect of petitioner's operations. However, under
section 263A(g) development of a product is included in the
definition of production. Mrs. Penalba testified that both she
and Mr. Penalba were involved in purchasing raw materials for
petitioner. Mrs. Penalba also testified that she worked a great
deal with Mr. Penalba in product development. This testimony was
somewhat inconsistent with the testimony of Mr. Rubino,
petitioner's production manager during the year at issue, who
testified that he did not work with Mrs. Penalba in production,
and that her role in the company was strictly dealing with
finances. While Mrs. Penalba may have had authority over
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