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acquisition of properties listed as collateral in the recorded
mortgages. Petitioners' position is that the taxes in issue are
deductible under the second sentence of section 164(a). They
argue that REE and ME are not required to capitalize the taxes in
issue because they were incurred in connection with the
acquisition of the construction loans and not the acquisition of
the properties. For reasons outlined infra, we disagree with
both respondent's and petitioners' positions.
The parties have not referred us to, and we have not
otherwise found, any cases or legislative history which directly
address the scope of the phrase "in connection with an
acquisition of property" as it is used in the third sentence of
section 164(a). After careful consideration, we conclude that
the taxes in issue were more closely incurred in connection with
obtaining the construction loans than in acquiring the real
properties and may be amortized over the definite terms of the
construction loans.
First, the Florida taxes in issue are levied upon the amount
borrowed by the taxpayer, not the value of the property which
secures the obligation. Second, the amounts of the taxes in
issue were treated as closing costs of the construction loans by
REE, ME, and SouthTrust Bank. The taxes reduced the principal
amounts of loan proceeds receivable by REE and ME; thus the taxes
constitute a cost of obtaining the loan proceeds. Third, the
loan proceeds were only partly advanced for the purchase of the
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