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Unlike the taxpayers in Freeland, the kind of transaction out of
which the litigation arose was petitioners’ original acquisition
of the hotel, and the litigation essentially resulted in a
reduced purchase price for the hotel.
Finally, petitioners claim that acquisition costs are only
required to be capitalized when a new asset is acquired or the
costs extend the life or increase the value of the asset.
Petitioners contend that because the Truckee Hotel was
substantially overvalued at the time of purchase and its
capitalized value remained substantially in excess of its fair
market value after the settlement agreement, there was no
increase in the life or value of the hotel as a result of the
litigation.
We recently rejected the argument that acquisition costs are
capitalizable only if they create or add value to a capital
asset. In Lychuk v. Commissioner, 116 T.C. at 413-414, we
stated:
we disagree with * * * [the taxpayers] that acquisition
costs are capitalizable under section 263(a) only if
they create or add value to a capital asset. In Dustin
v. Commissioner, 467 F.2d 47, 49-50 (9th Cir. 1972),
affg. 53 T.C. 491 (1969), the taxpayer was a
shareholder of an S corporation (Capitol) that agreed
to acquire the stock of a company that owned and
operated radio station KGMS. In 1961, Capitol incurred
$12,460 of legal, engineering, and accounting fees in
connection with the transfer to Capitol of control of
station KGMS’ radio-broadcasting license. The taxpayer
deducted his proportionate share of these expenses, and
the Commissioner disallowed the deduction asserting
that the expenses were capital expenditures. The
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