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See secs. 1.263A-1(e)(3)(i), 1.451-1(d)(6)(ii), Income Tax Regs.
Next, we must define “reasonable allocation” for purposes of
sections 1.263A-1(e)(3)(i) and 1.451-1(d)(6)(ii), Income Tax
Regs., and then determine whether Qwest’s incremental cost
allocation method satisfies that definition.
II. Definition of “Reasonable Allocation” for Purposes of
Sections 1.263A-1(e)(3)(i) and 1.451-1(d)(6)(ii), Income Tax
Regs.
Respondent argues that the language of section 1.263A-
1(g)(3), Income Tax Regs., requires that the reasonableness
standard of section 1.263A-1(f)(4), Income Tax Regs., governs the
first level allocations in the present case. In the alternative,
respondent contends that the reasonableness standard of section
1.263A-1(f)(4), Income Tax Regs., should be incorporated into the
undefined phrase “reasonable allocation” in sections 1.263A-
1(e)(3)(i) and 1.451-3(d)(6)(ii), Income Tax Regs. To support
this contention, respondent notes the parallel structure of the
regulations under sections 263A and 451 and cites legislative
history. On the other hand, petitioners contend that because
“reasonable allocation” is not defined by sections 1.263A-
1(e)(3)(i) and 1.451-3(d)(6)(ii), Income Tax Regs., “reasonable”
should be interpreted using its ordinary meaning.
A. The Language of Section 1.263A-1(g)(3),
Income Tax Regs.
Respondent argues that the language of section 1.263A-
1(g)(3), Income Tax Regs., requires that the reasonableness
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