T.C. Memo. 2006-124
UNITED STATES TAX COURT
ANSCHUTZ COMPANY AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 6169-03. Filed June 14, 2006.
Herbert N. Beller, John W. Bonds Jr., Andrew B. Clubok,
Thomas L. Evans, Mark B. Hamilton, Tony Y. Lam, and Todd F.
Maynes, for petitioners.
Virginia L. Hamilton and Michael C. Prindible, for
respondent.
*
This Supplemental Memorandum Opinion supplements our
prior opinion in Anschutz Co. & Subs. v. Commissioner, T.C. Memo.
2006-40.
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SUPPLEMENTAL MEMORANDUM OPINION
HAINES, Judge: On April 12, 2006, pursuant to Rule 161,
respondent filed a motion for reconsideration of this Court’s
Memorandum Findings of Fact and Opinion in Anschutz Co. & Subs.
v. Commissioner, T.C. Memo. 2006-40 (Anschutz I).1
In his motion, respondent alleges that this Court erred “by
failing to address whether Qwest’s Common Indirect Costs directly
benefited its section 263A retained assets, and * * * by not
requiring those costs be allocated to Qwest’s section 263A
retained assets.” This Supplemental Memorandum Opinion addresses
respondent’s allegations of error.
Background
We adopt the findings of fact in our prior Memorandum
Findings of Fact and Opinion, Anschutz I. For convenience and
clarity, we repeat below the facts necessary for the disposition
of this motion.
During the years in issue, Qwest entered into contracts to
install conduit (conduit installation projects) and to pull
fiberoptic cable (IRU projects) for third-party customers.2
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
2
The years in issue were July 31, 1994 through 1996.
Before and during the years in issue, Qwest was known by
different names, but for convenience, it will be referred to only
(continued...)
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These contracts were long-term contracts as defined by section
460. After Qwest contracted with the third-party customers, it
decided to install for its own potential future use or sale
additional conduit or fiberoptic cable along the same route as
the customers’ conduit or cable.3
Because Qwest was engaged in the simultaneous installation
and sale of conduit or fiber to third-party customers and the
installation and retention of additional conduits or fibers for
its own potential future sale or use, Qwest allocated total
project costs between third-party contracts and the retained
assets using an incremental cost allocation method. Qwest’s
incremental cost allocation method is described as follows: (1)
Qwest allocated to the customer contracts what it determined to
be direct costs associated with those contracts; (2) Qwest
allocated to its retained assets what it determined to be the
direct costs associated with its retained conduits and fibers;
and (3) Qwest allocated what it determined to be indirect costs
2
(...continued)
as “Qwest”. At the beginning of the years in issue, petitioners
owned 75 percent of Qwest and, by August 1995, owned 100 percent.
For a description of the conduit installation projects and the
IRU projects, see Anschutz I.
3
Qwest also engaged in other projects which were not at
issue. For a description of all projects during the years in
issue, see Anschutz I.
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incrementally between the customer contracts and its retained
assets.4
On February 4, 2003, respondent mailed a notice of
deficiency to petitioners for the years in issue. Respondent
determined that Qwest’s incremental cost allocation did not
clearly reflect income and that an average cost allocation
approach should be used for all of Qwest’s conduit installation
and IRU projects. Petitioners’ petition to this Court followed
on April 24, 2003.
In Anschutz I, respondent contended that Qwest’s incremental
cost allocation method was not a reasonable allocation method
under section 1.263A-1(f)(4), Income Tax Regs. Further,
respondent asserted that Qwest’s incremental cost allocation
method failed to clearly reflect income, and thus respondent
could change it to an average cost allocation method. We found
that Qwest’s incremental cost allocation method was a reasonable
allocation method under sections 1.263A-1(e)(3)(i) and 1.451-
3(d)(6)(ii), Income Tax Regs., and that respondent abused his
discretion in determining that Qwest’s incremental cost
allocation method failed to clearly reflect income.
4
The incremental cost allocation method was used for both
the conduit installation projects and the IRU projects, but the
method varied slightly. For a detailed description of Qwest’s
incremental cost allocation method, see Anschutz I.
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Discussion
Reconsideration under Rule 161 is intended to correct
substantial errors of fact or law and allow the introduction of
newly discovered evidence that the moving party could not have
introduced, by the exercise of due diligence, in the prior
proceeding. Estate of Quick v. Commissioner, 110 T.C. 440, 441
(1998). This Court has discretion whether to grant a motion for
reconsideration and will not do so unless the moving party shows
unusual circumstances or substantial error. Id.; see also Vaughn
v. Commissioner, 87 T.C. 164, 166-167 (1986). “Reconsideration
is not the appropriate forum for rehashing previously rejected
legal arguments or tendering new legal theories to reach the end
result desired by the moving party.” Estate of Quick v.
Commissioner, supra at 441-442.
In his motion for reconsideration, respondent alleges that
“the Court failed to analyze the application of the ‘directly
benefits’ test, as required by the section 263A regulations.”
Respondent further argues:
Section 1.263A-1(e)(3)(i) implements the section 263A
requirement that a taxpayer must allocate the costs of
producing an asset to that asset. Section 1.263A-
1(e)(3)(i) of the regulations provides: “Indirect
costs are properly allocable to property produced or
property acquired for resale when the costs directly
benefit or are incurred by reason of the performance of
production or resale activities.” (Emphasis added.)
The test in section 1.263A-1(e)(3)(i) is disjunctive:
Qwest must allocate Common Indirect Costs to its
section 263A retained assets if those costs meet either
prong of the test. The Court’s opinion is based on the
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“incurred by reason of” prong. The Court did not
address the “directly benefits” prong as required by
the regulatory test. Qwest’s Common Indirect Costs
plainly meet the “directly benefits” prong and should
have been allocated to Qwest’s section 263A retained
assets.
Before the motion, respondent never argued that the section 263A
regulations provided for a “direct benefits” test.5 Respondent’s
motion for reconsideration is not the appropriate forum to raise
a new legal theory and can be denied on that basis alone. See
id. Nevertheless, to explain why we conclude that respondent
misconstrues the regulations under section 263A and ignores the
regulations under section 460, we shall address respondent’s new
theory.
At issue in Anschutz I was Qwest’s allocation of indirect
costs, incurred when installing conduit or when pulling fiber,
between its retained assets and its long-term customer contracts.
Section 263A governed the cost allocations to its retained
assets, while section 460 governed the cost allocations to its
long-term customer contracts.6 We found that the regulations
under each section provided for two levels of allocation of
indirect costs, and only the first-level allocations were at
5
In his answering brief, respondent analyzed Qwest’s
incremental cost allocation method under both the clear
reflection of income standard and under the “reasonable
allocation” test. The Court addressed both in Anschutz I.
6
See Anschutz I for a detailed description of each
Internal Revenue Code section.
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issue.7 See secs. 1.263A-1(e)(3)(i), (f)(4), (g)(3), 1.451-
3(d)(6)(ii), (8)(iv), Income Tax Regs.8
The first-level allocations are governed by sections 1.263A-
1(e)(3)(i) and 1.451-3(d)(6)(ii), Income Tax Regs. In his
motion, respondent focuses only on one sentence of section
1.263A-1(e)(3)(i), Income Tax Regs.: “Indirect costs are
properly allocable to property produced or property acquired for
resale when the costs directly benefit or are incurred by reason
of the performance of production or resale activities.”
Respondent’s interpretation of this sentence, resulting in the
creation of a “directly benefits” test and an “incurred by reason
of” test, would render meaningless the remainder of section
1.263A-1(e)(3)(i), Income Tax Regs., and would create an
unjustifiable contradiction between sections 1.263A-1(e)(3)(i)
and 1.451-3(d)(6)(ii), Income Tax Regs.
If we were to apply the “directly benefits” test advocated
by respondent, all indirect costs that directly benefit taxpayer-
7
The regulations under secs. 460 and 263A do not use the
terminology “first level” and “second level” allocations.
However, the effect of those regulations is to break the
allocations into two distinct steps. For purposes of clarity, we
refer to these steps as “first level” and “second level”.
8
Sec. 460(c)(1) provides that costs are allocated to long-
term contracts in the same manner as costs are allocated to
extended period long-term contracts under sec. 451 and the
accompanying regulations. Sec. 451 directs us to the regulations
at sec. 1.451-3(d)(6), Income Tax Regs., to allocate costs to
long-term contracts.
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produced property would have to be allocated to that property.
However, section 1.263A-1(e)(3)(i), Income Tax Regs., provides
that “Indirect costs may be allocable to both production and
resale activities, as well as to other activities that are not
subject to section 263A.” The section then requires that
indirect costs be reasonably allocated between taxpayer-produced
property and the taxpayer’s other activities. If all indirect
costs that directly benefit the taxpayer-produced property were
allocated to that property, as respondent suggests, common
indirect costs that also benefit the taxpayer’s other activities
could not be reasonably allocated to those activities, as
contemplated by the remainder of the section.
Similar to section 1.263A-1(e)(3)(i), Income Tax Regs.,
section 1.451-3(d)(6)(ii), Income Tax Regs., provides that costs
which directly benefit the performance of long-term contracts
must be allocated to those contracts. If we interpreted section
1.451-3(d)(6)(ii), Income Tax Regs., in the same manner
respondent interprets section 1.263A-1(e)(3)(i), Income Tax
Regs., the two sections would contradict each other when a
taxpayer like petitioner must allocate common indirect costs that
directly benefit both taxpayer-produced property and long-term
contracts. Section 1.263A-1(e)(3)(i), Income Tax Regs., would
require that the taxpayer allocate 100 percent of the common
indirect costs that directly benefit both the taxpayer-produced
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property and the long-term contracts to only the taxpayer-
produced property. At the same time, section 1.451-3(d)(6)(ii),
Income Tax Regs., would require that the taxpayer allocate 100
percent of those same common indirect costs to only the long-term
contracts. The requirement of one section could not be
reconciled with the requirement of the other without some
mechanism to allocate the common indirect costs between the
taxpayer-produced property and the long-term contracts.
Respondent’s “directly benefits” test would leave the taxpayer
without such a mechanism.
The proper rule for first-level allocations of common
indirect costs between taxpayer-produced property and long-term
contracts is arrived at by looking at sections 1.263A-1(e)(3)(i)
and 1.451-3(d)(6)(ii), Income Tax Regs., in their entirety. The
sections are similar in structure and, as found in Anschutz I,
provide an identical rule for first-level allocations.
Section 1.263A-1(e)(3)(i), Income Tax Regs., provides that
“Indirect costs are properly allocable to property produced or
property acquired for resale when the costs directly benefit or
are incurred by reason of the performance of production or resale
activities.” Similarly, section 1.451-3(d)(6)(ii), Income Tax
Regs., provides that “In determining what indirect costs are
properly allocable to * * * [a] long-term contract, all such
costs that directly benefit * * * or are incurred by reason of
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the performance of * * * long-term contracts, must be allocated
to * * * long-term contracts”. These sentences, in isolation, do
not provide a rule for how indirect costs that directly benefit
or are incurred by reason of both taxpayer-produced property and
long-term contracts should be allocated between the property and
the contracts. To allocate indirect costs between taxpayer-
produced property and long-term contracts when the same costs
benefit both the property and the contracts, the remainder of the
sections must be considered.
Each section goes on to recognize that some indirect costs
may be allocable to activities subject to that section (either
taxpayer-produced property or long-term contracts) and to the
taxpayer’s other activities. In pertinent part, section 1.263A-
1(e)(3)(i), Income Tax Regs., provides:
Indirect costs may be allocable to both production and
resale activities, as well as to other activities that
are not subject to section 263A. Taxpayers subject to
section 263A must make a reasonable allocation of
indirect costs between production, resale, and other
activities. [Emphasis added.]
Similarly, section 1.451-3(d)(6)(ii), Income Tax Regs., provides:
Certain types of costs may directly benefit, or be
incurred by reason of the performance of * * * long-
term contracts of the taxpayer even though the same
type of costs also benefits other activities of the
taxpayer. Accordingly, such costs require 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. [Emphasis added.]
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Section 1.263A-1(e)(3)(i), Income Tax Regs., does not
provide for a “directly benefits” test or an “incurred by reason
of” test, of the kind suggested by respondent. Instead, as found
in Anschutz I and as indicated by the above-emphasized language,
sections 1.263A-1(e)(3)(i) and 1.451-3(d)(6)(ii), Income Tax
Regs., provide a “reasonable allocation” test for a taxpayer’s
allocation of indirect costs among taxpayer-produced property,
long-term contracts, and other activities. The “reasonable
allocation” test was the focus of the Court’s analysis in
Anschutz I. Using the appropriate test, we found that Qwest’s
incremental cost allocation method was a reasonable cost
allocation method under sections 1.263A-1(e)(3)(i) and 1.451-
3(d)(6)(ii), Income Tax Regs. For these reasons, respondent’s
allegation that the Court improperly focused on the “incurred by
reason of” test while ignoring the “directly benefits” test is
without support.
Respondent has failed to demonstrate unusual circumstances
or substantial errors of fact or law. Respondent seeks only to
assert a new legal theory, which we find unpersuasive.
Accordingly, we will deny respondent’s motion for
reconsideration.
We have considered all arguments and contentions made, and,
to the extent not mentioned, we conclude that they are moot,
irrelevant, or without merit.
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To reflect the foregoing,
An appropriate order
will be issued.