Load, Inc. - Page 10

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               On audit, respondent determined that the above costs were              
          not currently deductible by petitioners under section 162 as                
          ordinary and necessary business expenses but instead should be              
          included under section 263A in petitioners’ inventory costs of              
          the manufactured homes.                                                     

                                       OPINION                                        
               Generally, under section 263A(a) and (b), indirect costs               
          allocable to inventory acquired for resale are not currently                
          deductible and are to be included in inventory.3                            
               Regulations promulgated under section 263A expressly include           
          transportation, rent, taxes, and repair and maintenance costs               
          relating to property held for resale as examples of indirect                
          costs to be included in inventory.  Sec. 1.263A-1(e)(3)(ii)(G),             
          (K), (L), (O), Income Tax Regs.                                             
               Also, costs associated with storing property held for resale           
          generally are to be included in inventory.  Sec. 1.263A-                    
          1(e)(3)(ii)(H), Income Tax Regs.                                            
               However, under section 1.263A-1(e)(3)(iii)(I), Income Tax              
          Regs., storage costs relating to inventory which are incurred by            



               3 Although residential homes constructed on-site for resale            
          generally are not treated as inventory and costs associated                 
          therewith are to be capitalized under sec. 263A(a)(1)(B),                   
          manufactured homes, as long as they have not become fixtures to             
          real property, are treated as personal property, and costs                  
          associated therewith are subject to inventory treatment under               
          sec. 263A(a)(1)(A).  See, e.g., Murray v. Zerbel, 764 P.2d 1158,            
          1161 (Ariz. Ct. App. 1988)                                                  



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