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standard of section 1.263A-1(f)(4), Income Tax Regs., governs the
first level allocation in the present case. Specifically,
respondent states:
As a preface to Treas. Reg. �1.263A-1(g),
paragraph (f)(1) states that paragraph (g) provides
general rules of applying paragraph (f)’s detailed
allocation methods. In the general rule applicable to
this case, Treas. Reg. � 1.263A-1(g)(3) provides that
Common Costs are generally to be first allocated to
“intermediate cost objectives.” The regulation uses
“activities” to illustrate what is meant by
intermediate cost objectives. Thus, it intends that
the phrase “intermediate cost objectives” refers to the
first level of cost allocation referenced above, i.e.,
between � 263A activities and other activities. Treas.
Reg. � 1.263A-1(c). Treas. Reg. � 1.263A-1(g)(3)
further states that this allocation of Common Costs at
the intermediate level, or first level of allocation
between section 263A and non-263A activities, is to be
allocated using * * * any other reasonable allocation
method as defined under paragraph (f)(4).
Respondent’s argument is premised on the notion that section
1.263A-1(g)(3), Income Tax Regs., governs Qwest’s first level
allocations between its customer contracts and its retained
assets. However, respondent’s interpretation of section 1.263A-
1(g)(3), Income Tax Regs., is not supported by the language of
sections 1.263A-1(f)(1), (g)(1) and (2), Income Tax Regs.
In pertinent part, section 1.263A-1(f)(1), Income Tax Regs.,
provides: “The language of paragraph (f) sets forth various
detailed * * * cost allocation methods * * * [used] to allocate
direct and indirect costs to property produced and property
acquired for resale.” This language explicitly limits the cost
allocation methods of section 1.263A-1(f), Income Tax Regs., to
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