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the subject overburden removal costs should have been
treated as production costs. As such, these costs should
have been included in petitioner’s cost of goods sold
and should have offset gross income from sales, see
sec. 1.61-3(a), Income Tax Regs., and no part of those
costs should have been capitalized and amortized.
Significantly, this is the manner in which petitioner
treated the subject overburden removal costs for financial
accounting purposes, as described above. From 1976, when
mining on the Gillette property started, until 1993 when
petitioner sold Cordero, Cordero consistently treated the
overburden removal costs incurred at the Gillette mine on
its books as a cost of producing the coal, and it included
those costs in Cordero’s cost of goods sold.
In these proceedings, petitioner seeks to treat the
subject overburden removal costs incurred at the Gillette
mine during 1983, 1984, and 1986 as production costs on its
tax returns for those years. If petitioner were permitted
to do so, the subject overburden removal costs would be
treated as increases of petitioner’s cost of goods sold
for the year in which the costs were incurred, and no part
of such costs would be subject to capitalization under
sections 291(b)(1)(B) and (2)(B)(i), or included in
qualified investment for purposes of computing investment
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