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expenses were for office supplies, filing fees, travel expenses,
and accounting fees. The taxpayer deducted these expenses, and
the Commissioner disallowed the deduction. The Commissioner
determined that the expenses had to be capitalized.
We sustained the Commissioner's disallowance. We held that
the expenses were capital in nature because they were incurred
incident to the acquisition of a capital asset. The Court of
Appeals for the Eleventh Circuit agreed. The taxpayer had argued
that the expenses were "ordinary and necessary" because they were
incurred in connection with its decision to acquire the stock and
in evaluating the market in which Parkway was located. Ellis
Banking Corp. v. Commissioner, 688 F.2d at 1381. The taxpayer
noted that the expenses were incurred before it was bound to buy
Parkway's stock. The Court of Appeals, in rejecting the
taxpayer's claim to current deductibility, stated that
the expenses of investigating a capital investment are
properly allocable to that investment and must
therefore be capitalized. That the decision to make
the investment is not final at the time of the
expenditure does not change the character of the
investment; when a taxpayer abandons a project or fails
to make an attempted investment, the preliminary
expenditures that have been capitalized are then
deductible as a loss under section 165. * * * As the
First Circuit stated, "... expenditures made with the
contemplation that they will result in the creation of
a capital asset cannot be deducted as ordinary and
necessary business expenses even though that
expectation is subsequently frustrated or defeated."
Union Mutual, 570 F.2d at 392 (emphasis in original).
Nor can the expenditures be deducted because the
expectations might have been, but were not, frustrated.
[Id. at 1382.]
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