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The Committee believes that, in order to more
accurately reflect income and make the income tax
system more neutral, a single, comprehensive set of
rules should govern the capitalization of costs of
producing, acquiring, and holding property * * *
subject to appropriate exceptions where application of
the rules might be unduly burdensome.
S. Rept. 99-313, supra at 140, 1986-3 C.B. (Vol. 3) at 140. The
concern expressed in the Senate report is that taxpayers can
structure their economic activity in such a way that creates a
mismatch of income and expenses. Respondent suggests that
Qwest’s goal in using its incremental cost allocation method was
to create such a mismatch.
As an example, in the MCI Denver-El Paso project, Qwest
allocated $30,422 per conduit mile to the customer contract,
while allocating only $6,500 per conduit mile to the retained
conduit. Respondent contends that Qwest knew its retained
conduit was worth at least $30,000 to $40,000 per conduit mile,
but Qwest intentionally allocated a disproportionate amount of
expenses to the single conduit laid pursuant to a customer
contract. Because more expenses were allocated to the customer’s
conduit, respondent contends that Qwest’s income was understated
when Qwest reported its income on the percentage of completion
basis under section 460. Also, fewer expenses had to be
capitalized under section 263A. The result was that Qwest was
able to take advantage of the expense deductions up front and
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