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method of accounting for the costs of self-constructed assets did
not clearly reflect income, in part because it expensed
incremental overhead costs.
In Dana Corp. v. United States, 174 F.3d 1344 (Fed. Cir.
1999), the taxpayer corporation paid a law firm an annual
retainer fee, which was paid to prevent the law firm from
representing parties adverse to the taxpayer in a takeover
attempt and for standing by to represent the taxpayer both if
subject to a hostile takeover and in other matters. Id. at 1346.
The law firm received the retainer whether it rendered legal
services during the retainer year or not. Id. at 1350. For some
years it rendered no legal services and, during others, it
rendered services in connection with deductible (non-capital)
matters. Id. During the year in question, the law firm rendered
services in connection with the taxpayer’s acquisition of a
capital asset and credited the year’s retainer amount against the
amount billed for those services. Id. For that year, the
taxpayer deducted the retainer amount and capitalized the
remaining fee. Id. The Court of Appeals disallowed the
taxpayer’s deduction of the retainer amount, stating: “Even
though the retainer fees were allowed as deductible expenses for
most of the years * * * [the taxpayer] paid them, the use of the
fee in a particular year determines the deductibility of the
expense in that year, and not the pattern of other years of
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