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conclude that the Washington properties had the following fair
market values on December 20, 1985:
Timberland $31.0 million
Development 10.5 million
Port Ludlow 4.5 million
Port Gamble 2.5 million
$48.5 million
Deductibility of Expenses
The next issue we must decide is whether petitioner may
offset certain expenses incurred in connection with the
distribution against its section 311(d) gain. In 1985,
petitioner incurred $1,364,071 of legal, accounting, investment
banking, and other fees relating to the formation of the
Partnership, the transfer of the Washington properties, and the
distribution of the partnership units. Petitioner agrees that
these expenses are capital in nature and, therefore, not
deductible under section 162. Rather, petitioner argues that
such sales expenses may be used to offset its gain on the taxable
distribution.
It is well settled that costs connected with the sale of a
capital asset are capital expenditures to be used to offset
against the sales price. Woodward v. Commissioner, 397 U.S. 572,
576 (1970); Kirschenmann v. Commissioner, 488 F.2d 270, 273 (9th
Cir. 1973), revg. 57 T.C. 524 (1972); Spangler v. Commissioner,
323 F.2d 913, 921 (9th Cir. 1963), affg. T.C. Memo. 1961-341;
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