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Transmission facilities consist of three distinct segments:
(1) the main cable, either buried or aerial, (2) the wire (drop
wire) running from the distribution network to and including the
station protector (also known as the block) located on the
outside wall of the customer's premises (together the “drop and
block”), and (3) the wire running from the station protector to
and around the inside of the customer's premises (the inside
wiring).
As a public utility, the telephone industry is regulated by
the Federal Communications Commission (FCC). As part of its
regulatory function, the FCC prescribes the accounting treatment
of revenues earned and expenses incurred in the operation of a
telephone business. The relevant rules are set forth in 47
C.F.R. part 31 (part 31), Uniform System of Accounts for Class A
and Class B Telephone Companies. During the years in issue, all
of petitioner's subsidiaries were telephone companies subject to
part 31 rules.
As of January 1, 1981, part 31 specified that the investment
in drop and block be accounted for in FCC account No. 232
(station connections). As of January 1, 1981, and in accordance
with part 31, petitioner so accounted for its investment in drop
and block. Beginning January 1, 1984, part 31 was changed and
specified that investment in drop and block be accumulated in FCC
account No. 242 (aerial and buried cable). For income tax
purposes, petitioner treated property in FCC account No. 232 as
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