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Tax case meno - Research Paper Example

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Tax case meno

Normally, the cost of tools forms part of capital goods that the company requires to run its operation. Under the IRC section 263A, the uniform capitalization rule dictates that the taxpayer should produce information for all direct costs and certain in direct cost concerning tangible and real property. The law defines tangible and real property as those that lead to production such as to construct, build, install, manufacture, develop, improve, create, raise or grow (DiNardo, Baldwin and Harris 106). From this provision of the law, it is evident that the allowances that the company pays to cater for the cost of various tools of trade fall under capital goods and that they are tangible in nature. If this were the case, the provision of IRC section 263A, states that the taxpayer should treat such information as direct because they affect the cost of capital. It follows therefore, that Cambro Construction Company should treat the allowances it reimburses as cost for capital goods. Combro Company should treat this case as cost associated with tangible assets, which it uses to aid production. Therefore, the tax treatment for this case should be ordinary. Under this category, the taxpayer should accumulate all the information concerning this cost and treat them a cost of assets used in production. Thus, Cambro Construction Company should prepare tax report concerning the accumulated cost it incurred to reimburse cost for the capital goods. For a cost to qualify as capitalization cost under IRC section 263A, it must fall into the capital accounts as defined by section 1.446-1(c) (1) (ii). This provision tends to define the treatment of cost incurred by a company to buy assets or other related costs. The section 263A states that: Except as otherwise provided, direct and indirect costs that directly benefit or are incurred by reason of the performance of production or resale activities must be capitalized to the property produced or acquired for resale (DiNardo, Baldwin and Harris 106). The provision of section 1.263A-1(e) (3) (iii) gives examples of indirect costs which the taxpayers should capitalize are tools and equipment. Further, this provision indicates that the producers must capitalize costs other interest whether incurred before, during, and after production period of property. Arguing from this provision, the cost incurred by Cambro Construction Company to reimburse the capital cost of its carpenters fall under the indirect costs. Thus, Cambro Construction Company should treat such indirect cost as provided for in the section 263A of the IRC. The must record this information whether it incurred it before, during, or after the production period. This implies that the law does not exempt the company from compiling tax information concerning the property that it acquired during its construction period. Largely, the fact that Cambro Construction Company does its activities with an aim of reselling them further makes it necessary for it to capitalize this cost. Cases bordering incidental repair of property seems to be closer to the above facts but not exact. In incidental repair, the taxpayer deducts a given cost to repair of the property with a view of prolonging the use of that property. Section 167 provides the treatment of such repairs. When a taxpayer makes full replacement for the property, the treatment that follows should be capitalization or depreciation as ...Show more


Tax Case Memorandum To: From: Date: Facts Cambro Construction Company hires union carpenters for home building. Cambro requires, as a condition of employment, that the carpenters provide and maintain various tools of their trade. Cambro pays each carpenter a set amount per hour as a “tool allowance” to cover the costs of the tools…
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