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trying to establish a reasonableness standard for the first level
allocation, respondent collapses the two levels of allocation
into one.
As discussed above, the regulations under both sections 263A
and 451 provide for two levels of allocations. At the first
level, section 1.263A-1(e)(3)(i), Income Tax Regs., provides that
“Taxpayers subject to section 263A must make a reasonable
allocation of indirect costs between production, resale, and
other activities.” Likewise, section 1.451-3(d)(6)(ii), Income
Tax Regs., “[requires] a reasonable allocation between the
portion of such costs that are attributable to * * * long-term
contracts and the portion attributable to the other activities of
the taxpayer.” “Reasonable allocation” is not defined in either
section. See secs. 1.263A-1(e)(3)(i), 1.451-3(d)(6)(ii), Income
Tax Regs.
With respect to the second level allocation, section 1.263A-
1(g)(3), Income Tax Regs., provides that the indirect costs of
property produced or property acquired for resale be “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).” In relevant part, section 1.263A-1(f)(4), Income
Tax Regs., states: “a taxpayer may use any other reasonable
method to properly allocate direct and indirect costs among units
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