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property and the long-term contracts to only the taxpayer-
produced property. At the same time, section 1.451-3(d)(6)(ii),
Income Tax Regs., would require that the taxpayer allocate 100
percent of those same common indirect costs to only the long-term
contracts. The requirement of one section could not be
reconciled with the requirement of the other without some
mechanism to allocate the common indirect costs between the
taxpayer-produced property and the long-term contracts.
Respondent’s “directly benefits” test would leave the taxpayer
without such a mechanism.
The proper rule for first-level allocations of common
indirect costs between taxpayer-produced property and long-term
contracts is arrived at by looking at sections 1.263A-1(e)(3)(i)
and 1.451-3(d)(6)(ii), Income Tax Regs., in their entirety. The
sections are similar in structure and, as found in Anschutz I,
provide an identical rule for first-level allocations.
Section 1.263A-1(e)(3)(i), Income Tax Regs., provides that
“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.” Similarly, section 1.451-3(d)(6)(ii), Income Tax
Regs., provides that “In determining what indirect costs are
properly allocable to * * * [a] long-term contract, all such
costs that directly benefit * * * or are incurred by reason of
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Last modified: May 25, 2011