Anschutz Company and Subsidiaries - Page 3

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          These contracts were long-term contracts as defined by section              
          460.  After Qwest contracted with the third-party customers, it             
          decided to install for its own potential future use or sale                 
          additional conduit or fiberoptic cable along the same route as              
          the customers’ conduit or cable.3                                           
               Because Qwest was engaged in the simultaneous installation             
          and sale of conduit or fiber to third-party customers and the               
          installation and retention of additional conduits or fibers for             
          its own potential future sale or use, Qwest allocated total                 
          project costs between third-party contracts and the retained                
          assets using an incremental cost allocation method.  Qwest’s                
          incremental cost allocation method is described as follows:  (1)            
          Qwest allocated to the customer contracts what it determined to             
          be direct costs associated with those contracts; (2) Qwest                  
          allocated to its retained assets what it determined to be the               
          direct costs associated with its retained conduits and fibers;              
          and (3) Qwest allocated what it determined to be indirect costs             

          as “Qwest”.  At the beginning of the years in issue, petitioners            
          owned 75 percent of Qwest and, by August 1995, owned 100 percent.           
          For a description of the conduit installation projects and the              
          IRU projects, see Anschutz I.                                               
               3  Qwest also engaged in other projects which were not at              
          issue.  For a description of all projects during the years in               
          issue, see Anschutz I.                                                      

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