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products.3 Respondent argues that petitioner does not qualify
under section 263A(h). Respondent asserts that Ms. Spafford does
not own substantially all of petitioner’s stock within the
meaning of section 263A(h)(3)(D)(i)(I) and that petitioner’s
paper products are utilitarian rather than unique.
We agree with respondent that petitioner is subject to the
UNICAP rules of section 263A. As to petitioner’s primary
argument, namely, that it is a reseller and not the producer of
its paper products, we disagree. The facts of this case lead us
to conclude that petitioner is and has been the only “owner” of
its paper products up until the time that they are sold to its
customers, and, thus, that petitioner is the only producer of
those products for purposes of section 263A. See sec. 1.263A-
2(a)(1)(ii), Income Tax Regs. (“a taxpayer is not considered to
be producing property unless the taxpayer is considered an owner
of the property produced under federal income tax principles”).
Petitioner’s ownership interest in the paper products attaches at
the first stage of their production; i.e., when the cartoon
characters are developed and drawn. Petitioner performs this
step solely by itself, and this step, which requires the most
skill, expertise, and creativity of any step in the production
3 For purposes of sec. 263A, the term “produce” “includes *
* * construct, build, install, manufacture, develop, improve,
create, raise, or grow.” Sec. 1.263A-2(a)(1)(i), Income Tax
Regs.
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