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of days that each item was physically located within the United
States. During the time petitioner owned the Equipment, it was
used to assemble or manufacture furniture. The foreign business
using the Equipment was not subject to U.S. Federal income tax.
Petitioner sold the furniture that was manufactured using the
Equipment.
II. Petitioner’s Accounting
For all relevant years, petitioner used the accrual method
of accounting. On its Form 1120, U.S. Corporation Income Tax
Return, for each of the relevant years, petitioner depreciated
each item of the Equipment using either the double-declining
balance method or the straight line method. For each item
petitioner depreciated using the double-declining balance method,
petitioner used either a 3-year or a 5-year recovery period. For
each item petitioner depreciated using the straight line method,
petitioner used a 5-year recovery period.
Respondent examined petitioner’s returns for each of the
relevant years and issued a notice of deficiency with respect to
those years. Therein, respondent determined that petitioner’s
deductions for depreciation of items of the Equipment for the
relevant years must be decreased because petitioner failed to
compute depreciation using the alternative depreciation system
for tangible property used predominantly outside the United
States, as required under section 168(g)(1)(A). Respondent also
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