- 4 -
incrementally between the customer contracts and its retained
assets.4
On February 4, 2003, respondent mailed a notice of
deficiency to petitioners for the years in issue. Respondent
determined that Qwest’s incremental cost allocation did not
clearly reflect income and that an average cost allocation
approach should be used for all of Qwest’s conduit installation
and IRU projects. Petitioners’ petition to this Court followed
on April 24, 2003.
In Anschutz I, respondent contended that Qwest’s incremental
cost allocation method was not a reasonable allocation method
under section 1.263A-1(f)(4), Income Tax Regs. Further,
respondent asserted that Qwest’s incremental cost allocation
method failed to clearly reflect income, and thus respondent
could change it to an average cost allocation method. We found
that Qwest’s incremental cost allocation method was a reasonable
allocation method under sections 1.263A-1(e)(3)(i) and 1.451-
3(d)(6)(ii), Income Tax Regs., and that respondent abused his
discretion in determining that Qwest’s incremental cost
allocation method failed to clearly reflect income.
4 The incremental cost allocation method was used for both
the conduit installation projects and the IRU projects, but the
method varied slightly. For a detailed description of Qwest’s
incremental cost allocation method, see Anschutz I.
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Last modified: May 25, 2011