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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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