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of their lack of an accounting for costs, respondent attempted to
reconstruct them from petitioners' receipts and canceled checks.
In the reconstruction, respondent included as cost of goods
sold $2,008.06 of indirect costs incurred in 1995 along with
other verified Vallecito costs of $61,353.99 to arrive at a cost
of goods sold of $69,049.98, an amount less than that reported on
the return. Had respondent allowed the $2,008.06 as expenses for
1995, the adjustment to cost of goods sold for 1996 would have
been larger by that amount.
The uniform capitalization rules of section 263A(a)(1)
require that all direct costs and certain indirect costs
allocable to certain property be included in inventory, or
capitalized if such property is not inventory. Items that would
not otherwise be taken into account1 in computing taxable income
may not be taken into account as costs allocable to property
under section 263A. See sec. 263A(a).
For settlement purposes, after verification of the purpose
of the $11,104.67 check to the US Bank, Appeals agreed that the
$2,008.06 in costs was associated with the construction or
acquisition of the Vallecito property sold in 1996 and is
deductible as expenses for 1995. Appeals cited as authority for
the agreement the de minimis rule of the simplified production
method of section 1.263A-2(b)(3)(iv), Income Tax Regs. The
1If, for example, an item of indirect cost were not properly
substantiated under sec. 274, it would not be a proper cost under
sec. 263A. See sec. 1.263A-1(c)(2), Income Tax Regs.
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