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After concessions by the parties, the issues remaining for
decision are (1) whether certain expenditures made by petitioner
during the years in issue that are allocable to the cost of
computer software used in central office equipment (COE or
digital switches) qualify for the investment tax credit (ITC) and
depreciation under the accelerated cost recovery system (ACRS)
and (2) the proper classification as recovery property of certain
telecommunications equipment known as “drop and block”. Unless
otherwise noted, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT1
During the taxable years in issue, petitioner and its
subsidiaries were engaged in the business of providing local and
long-distance telephone service. Petitioner generally operated
its business of providing telephone service through separately
incorporated, wholly owned subsidiaries. The local companies are
generally known by names indicating the parent company and their
geographic location (e.g., United of Iowa or UT of Florida) and
will be so referred to herein where reference to a specific
subsidiary is necessary. In all other instances, references to
1 The stipulation of facts and accompanying exhibits are
incorporated herein by this reference. The trial Judge made the
following Findings of Fact, which we adopt.
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