                        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.
                                 - 2 -

                    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...)
                                   - 3 -

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.
                                - 4 -

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.
                               - 5 -

                             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
                                 - 6 -

      “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.
                               - 7 -

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.
                               - 8 -

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
                               - 9 -

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
                               - 10 -

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.]
                                - 11 -

     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.
                        - 12 -

To reflect the foregoing,


                                  An appropriate order

                             will be issued.
