Henry C. Boler and Sherry M. Boler - Page 17




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          Sec. 461(h); secs. 1.446-1(c)(1)(ii)(A), 1.461-1(a)(2)(i), Income           
          Tax Regs.  Petitioners contend that AIM properly included the               
          $17,532 in its cost of goods sold for 1994 because AIM was an               
          accrual method taxpayer and the requirements of section 461(h)              
          were satisfied in that all events establishing the fact and                 
          amount of the liability had occurred, and economic performance,             
          i.e., AIM’s payment of the $17,532, occurred in 1994.                       
               Petitioners’ contention that AIM’s inclusion of $17,532 in             
          cost of goods sold in 1994 satisfies section 1.461-1(a)(2)(i),              
          Income Tax Regs., does not take into account section 263A.                  
          Section 1.461-1(a)(2)(i), Income Tax Regs., provides that, under            
          section 263A, a liability that relates to the creation of an                
          asset having a useful life extending substantially beyond the               
          close of the taxable year must be capitalized in the taxable year           
          incurred.  Section 263A requires the capitalization of all direct           
          and certain indirect costs properly allocable to property                   
          produced or acquired for resale.  Sec. 263A; sec. 1.263A-1(e)(1),           
          Income Tax Regs.  The term “produce” means “construct, build,               
          install, manufacture, develop, or improve.”  Sec. 263A(g)(1); see           
          sec. 1.263A-2(a)(1)(i), Income Tax Regs.  AIM produced property             
          for Morton.  “Direct costs” include “direct material costs and              
          direct labor costs.”  Sec. 1.263A-1(e)(2)(i), Income Tax Regs.              
          In 1994, AIM had direct costs of $15,795.40 for labor and                   
          $1,739.50 for materials.  Thus, AIM must capitalize as direct               






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