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Tax Year Ended Deficiency
July 31, 1994 $467,424
July 31, 1995 4,837,121
July 31, 1996 9,503,991
After concessions,1 the issues for decision are: (1) Whether
Qwest’s incremental cost allocation method is a reasonable
allocation method for purposes of sections 263A and 460 for tax
years ended July 31, 1994 (1994), July 31, 1995 (1995), and July
31, 1996 (1996) (collectively, years in issue); and (2) whether
respondent abused his discretion in determining that Qwest’s
incremental cost allocation method failed to clearly reflect
income under section 446.2
1 Petitioners agree to: (1) Decrease the cost of sales for
costs allocated to conduits sold to Metropolitan Fiber Systems
(MFS) in the MFS Dallas and MFS Los Angeles projects by $915,870
and $635,317, respectively, and increase the basis in the
retained conduits installed for petitioners’ own account during
these projects by $915,870 and $635,317, respectively; and (2)
decrease the cost of sales for costs allocated to conduit sold to
MCI Telecommunications Corporation (MCI) in the MCI Dillard-
Myrtle Creek project by $265,912, and increase the basis in the
retained conduits installed for petitioners’ own account during
this project by $265,912.
The parties agree that adjustments proposed by respondent in
the notice of deficiency for net operating loss, additional sec.
263A costs, additional sec. 263A(f) interest, adjustment to NOL
carryover, and additional charitable deduction are computational
adjustments that are dependent on our decision in this case.
2 Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
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