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timber farm constituted a for-profit, business activity with
respect to which the ordinary and necessary expenses are
deductible under section 162.
Capital Costs of Water Reservoir and Pond
Respondent argues that, using a direct-labor percentage,
the percentage of timber farm general expenses that should be
capitalized as part of the capital costs of the water reservoir
and pond on the timber farm should take into account the hours
that petitioner and his two employees worked on the reservoir
and pond and that some portion of the costs relating to the
nonreservoir-unique equipment should be allocated to the
reservoir and pond and therefore capitalized.
We agree with respondent as to the need to include in the
direct-labor percentage (used to allocate general expenses of
the timber farm to the capital costs of the water reservoir and
pond) a factor for petitioner’s and his two employees’ labor on
the reservoir.
With regard to the direct costs of the nonreservoir-unique
equipment, we do not believe an allocation to the capital costs
of the water reservoir and pond is appropriate. The evidence is
not compelling that any nonreservoir-unique equipment was used
extensively on the water reservoir or pond. We do not sustain
this adjustment.
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