Norwest Corporation and Subsidiaries, Successor in Interest to Davenport Bank and Trust Company and Subsidiaries - Page 21




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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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