Suzy's Zoo - Page 13




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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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Last modified: May 25, 2011