Anschutz Company and Subsidiaries - Page 7

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          issue.7  See secs. 1.263A-1(e)(3)(i), (f)(4), (g)(3), 1.451-                
          3(d)(6)(ii), (8)(iv), Income Tax Regs.8                                     
               The first-level allocations are governed by sections 1.263A-           
          1(e)(3)(i) and 1.451-3(d)(6)(ii), Income Tax Regs.  In his                  
          motion, respondent focuses only on one sentence of section                  
          1.263A-1(e)(3)(i), Income Tax Regs.:  “Indirect costs are                   
          properly allocable to property produced or property acquired for            
          resale when the costs directly benefit or are incurred by reason            
          of the performance of production or resale activities.”                     
          Respondent’s interpretation of this sentence, resulting in the              
          creation of a “directly benefits” test and an “incurred by reason           
          of” test, would render meaningless the remainder of section                 
          1.263A-1(e)(3)(i), Income Tax Regs., and would create an                    
          unjustifiable contradiction between sections 1.263A-1(e)(3)(i)              
          and 1.451-3(d)(6)(ii), Income Tax Regs.                                     
               If we were to apply the “directly benefits” test advocated             
          by respondent, all indirect costs that directly benefit taxpayer-           

               7  The regulations under secs. 460 and 263A do not use the             
          terminology “first level” and “second level” allocations.                   
          However, the effect of those regulations is to break the                    
          allocations into two distinct steps.  For purposes of clarity, we           
          refer to these steps as “first level” and “second level”.                   
               8  Sec. 460(c)(1) provides that costs are allocated to long-           
          term contracts in the same manner as costs are allocated to                 
          extended period long-term contracts under sec. 451 and the                  
          accompanying regulations.  Sec. 451 directs us to the regulations           
          at sec. 1.451-3(d)(6), Income Tax Regs., to allocate costs to               
          long-term contracts.                                                        

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