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attributable to * * * long-term contracts and the portion
attributable to the other activities of the taxpayer.” Id. If
indirect costs need only be allocated between one long-term
contract and the taxpayer’s other activities, the allocation
stops at the first level.
If indirect costs must be allocated to multiple long-term
contracts, the regulations provide a second level allocation:
The indirect costs required to be allocated to a
long-term contract under paragraph * * * (d)(6)(ii) of
this section shall be allocated to particular contracts
for the year such costs are incurred using either--
(A) A specific identification
(or “tracing”) method, or
(B) A method using burden rates, such as
ratios based on direct costs, hours, or other
items, or similar formulas, so long as the
method employed for such allocation
reasonably allocates indirect costs among
long-term contracts completed during the
taxable year and long-term contracts that
have not been completed as of the end of the
taxable year. * * *
Sec. 1.451-3(d)(8)(iv), Income Tax Regs.
B. Allocation of Costs to Property Produced by the
Taxpayer Under Section 263A
Section 263A governs the capitalization of costs for
property produced by the taxpayer and property acquired by
the taxpayer for resale.20 Sec. 263A(a) and (b)(1).
Section 263A does not apply to any property produced by the
20 The term “produced” includes constructed, built,
installed, manufactured, developed, or improved. Sec. 263A(g).
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