PMT, INC. - Page 33

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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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