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production of income. The last sentence of section 164(a)
provides an exception in that notwithstanding the second
sentence, certain taxes are required to be capitalized. Thus,
any tax, other than any of those itemized in the first sentence,
which is paid or accrued in connection with the acquisition or
disposition of property, is to be treated as a cost of the
acquired property or as a reduction in the amount realized on the
disposition of property, as the case may be.
The last sentence of section 164(a) was added by section
134(a)(1) of TRA 1986, 100 Stat. 2116. According to the
conference report, there previously was uncertainty as to whether
certain taxes incurred in a trade or business or an income-
producing activity could be deducted or had to be capitalized.
The conference report explains that the new provision was added
to make it clear that State, local, or foreign taxes (other than
real property taxes and certain other specified taxes) that are
incurred in a trade or business or in an income-producing
activity in connection with the acquisition or disposition of
property are to be capitalized. H. Conf. Rept. 99-841 (Vol. 2),
at II-20 (1986), 1986-3 C.B. (Vol. 4) 20.
In the case before us petitioner would deem it advantageous
to have SLR capitalize the rollback taxes. For example, section
68 places an overall limitation on itemized deductions in cases
where the adjusted gross income of individuals exceeds an
"applicable amount". (The shares of the realized gain on the
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