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property already subject to section 263A. Section 1.263A-
1(f)(1), Income Tax Regs., goes on to state: “Paragraph (g) of
this section provides general rules for applying these allocation
methods to various categories of costs.” (Emphasis added.) This
language indicates that section 1.263A-1(g), Income Tax Regs.,
gives general rules for applying cost allocation methods already
limited to property subject to section 263A. Because the first
level allocation deals with property not subject to section 263A,
we find the language of section 1.263A-1(f)(1), Income Tax Regs.,
limits the application of section 1.263A-1(g), Income Tax Regs.,
to the second level allocation.
This interpretation is supported by the language of section
1.263A-1(g)(1) and (2), Income Tax Regs. Section 1.263A-1(g)(1),
Income Tax Regs., provides that “Direct material costs * * * must
be allocated to the property produced or property acquired for
resale by the taxpayer using the taxpayer’s method of accounting
* * *.” (Emphasis added.) Section 1.263A-1(g)(2), Income Tax
Regs., provides that “Direct labor costs * * * are generally
allocated to property produced or property acquired for resale”.
(Emphasis added.) The above-emphasized language limits those
subparagraphs to property already subject to section 263A.
Section 1.263A-1(g)(3), Income Tax Regs., states:
Indirect costs * * * are generally allocated to
intermediate cost objectives such as departments or
activities prior to the allocation of such costs to
property produced or property acquired for resale.
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