Lee D. and Marjorie L. Hustead - Page 9

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               income if they are related to business or profit-                      
               seeking activity.  Once that nexus is established,                     
               however, the taxpayer still cannot be sure of deducting                
               the expenses.  Rather, an additional question must be                  
               answered:  Are the expenses "capital" in nature under �                
               263?  If they are capital, they cannot be deducted as                  
               business expense.  [Citations omitted.]                                
                                                                                     
               Whether an expenditure may be deducted or must be                      
          capitalized is a question of fact.  INDOPCO, Inc. v.                        
          Commissioner, 503 U.S. 79, 86 (1992); A. E. Staley Manufacturing            
          Co. v. Commissioner, 105 T.C. 166, 193 (1995).                              
               Petitioners characterize some phases of their land                     
          development activities as lobbying, citing section 162(e), or               
          marketing.  In this context, they seek to distinguish the                   
          situation involved in the earlier years and disposed of in                  
          Hustead v. Commissioner, T.C. Memo. 1994-374, on the basis that             
          those years involved litigation activities whereas negotiating              
          activities were the focus in the years involved herein.  We think           
          this is a distinction without a difference.  In any event,                  
          petitioners' characterizations are not determinative of                     
          deductibility.  The question remains what is the origin or nature           
          of the transaction out of which the expenses arose.  Petitioners            
          refer to some expenses as those of being in business, e.g.,                 
          office supplies, alleging that respondent has disallowed these              
          expenses on a theory of guilt by association.  Again, the same              
          analysis governs these expenses.  It is not the nature of the               
          item paid for, but the nature of the transaction giving rise to             






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