Anschutz Company and Subsidiaries - Page 19

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          presence (POPs).12  The purpose of the agreement was to provide             
          connectivity to the POPs.                                                   
                    8.   MCI Swaps                                                    
               On April 3, 1995, Qwest entered into a letter agreement with           
          MCI for construction/conduit swaps in Santa Barbara, San Jose,              
          Sacramento, and St. Louis.                                                  
          IV. Qwest’s Incremental Cost Allocation Method                              
               During the years in issue, petitioners used an accrual                 
          method of accounting for tax purposes.  In most cases,                      
          petitioners reported income from their customer contracts using             
          the percentage of completion method.                                        
               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 the third-party contracts and the retained            
          assets using an incremental cost allocation method.  Qwest                  
          developed the incremental cost allocation method in part by                 
          looking at third-party subcontractors’ bids to install conduits.            
          Bids to install only one conduit, when compared to the bids to              
          install multiple conduits, indicated that the third-party                   
          subcontractors increased the bid on an incremental basis as more            


               12  A POP is the point at which a line from a long-distance            
          carrier connects to the line of the local telephone company or to           
          the user if no local telephone company is involved.                         




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