Construction Costs

CONSTRUCTION COSTS can sometimes be allocated largely to the part of a project that a company will sell at completion to a third party, even though the company will retain part of

September 01, 2006

CONSTRUCTION COSTS can sometimes be allocated largely to the part of a project that a company will sell at completion to a third party, even though the company will retain part of the project for itself.

Qwest, the US phone company, had contracts with various companies to bury conduit for holding fiber optics cables along rail beds. The company charged $30,000 to $40,000 a mile. Conduits are tubes through which fiber optics cable is pulled. The customers would own the conduits and fiber cable eventually pulled through them.The jobs involved digging trenches. In addition to burying conduits for its customers, Qwest would also put in conduits that it would keep for its own future use.Qwest allocated the cost of the construction jobs largely to the customer conduits, and assigned to the conduits it kept only the incremental costs of putting additional conduits in the trenches.

The IRS told Qwest it had to average the costs between the two uses — conduits that it sold and those that it kept.

The US Tax Court disagreed in a decision in March. The case is Anschutz Co. v. Commissioner.

The court said the incremental cost approach used by Qwest was more consistent with its business plan. The company would not have undertaken the projects without a customer contract.

Keith Martin