- 4 -
Sprint and petitioner shall be deemed to include petitioner's
subsidiaries.
A. The Digital Switch Issue
The equipment that provides the switching function that
enables one telephone subscriber to connect to another has
undergone an evolution from its earliest form, when the switching
function was performed by human operators sitting at manual
switchboards. Manual switching was automated with the advent of
electromagnetic relay switches. Since 1980, switching in the
United States has increasingly been done by digital switches
consisting of a number of integrated circuits, clocks,
processors, and central processing units (hardware). Digital
switches operate in accordance with programmed instructions
initially encoded on magnetic tape (software). The central
processing units are specially designed computers that are used,
and can only be used, to control the switch function.
During the years in issue, petitioner purchased from
different vendors several digital switches (hardware and
software) for use in its telephone business, generally to replace
existing electromechanical switches. Investment tax credits and
depreciation deductions under the ACRS were claimed with respect
to the total cost of each switch. In the notice of deficiency,
respondent disallowed that portion of the claimed investment tax
credits and accelerated depreciation deductions relating to the
costs of the software.
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