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Indirect costs are allocated using either a specific
identification method, a standard cost method, a burden
rate method, or any other reasonable allocation method
(as defined under the principles of paragraph (f)(4) of
this section).
Respondent contends that “intermediate cost objectives”
distinguishes between property subject to and property not
subject to section 263A. The cited language is less than clear,
and the regulations do not expand on or define “intermediate cost
objectives” other than to offer examples “such as departments or
activities”. However, when read in the context of the above-
analyzed regulations, we find that the phrase “intermediate cost
objectives” is not meant to distinguish between property subject
to and property not subject to section 263A.
For the above reasons, we find that section 1.263A-1(g)(3),
Income Tax Regs., does not require that the reasonableness
standard of section 1.263A-1(f)(4), Income Tax Regs., govern the
first level allocation.
B. The Language and Parallel Structure of Sections
1.263A-1 and 1.451-3, Income Tax Regs.
Respondent argues that the parallel structure of sections
1.263A-1 and 1.451-3, Income Tax Regs., indicates 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. However, respondent’s argument is
not supported by the actual structure of the regulations. In
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