John J. Reichel - Page 4

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               Respondent disallowed petitioner's deduction for real estate           
          taxes on the San Bernardino parcels.  Respondent argues that                
          petitioner is a "producer" with respect to the San Bernardino               
          parcels under section 263A(g)(1), and, accordingly, that section            
          263A(a)(2)(B) requires petitioner to capitalize all real estate             
          taxes on this property.                                                     
               Petitioner argues that for 1993, section 263A(a)(2)(B) did             
          not require a taxpayer to capitalize real estate taxes until the            
          taxpayer took positive steps to begin producing the property.1              
          He states that because he took no steps to develop the San                  
          Bernardino properties before or during 1993, he had not begun               
          production of the properties and was not required to capitalize             
          the taxes he paid on them.                                                  

               1  There is no dispute that current regulations, if applied            
          according to their terms, would require that petitioner                     
          capitalize the real estate taxes at issue.  For post-1993 tax               
          years, sec. 1.263A-2(a)(3)(ii), Income Tax Regs. provides:                  
               If property is held for future production, taxpayers must              
               capitalize direct and indirect costs allocable to such                 
               property (e.g., purchasing, storage, handling, and other               
               costs), even though production has not begun.  If property             
               is not held for production, indirect costs incurred prior to           
               the beginning of the production period must be allocated to            
               the property and capitalized if, at the time the costs are             
               incurred, it is reasonably likely that production will occur           
               at some future date. Thus, for example, a manufacturer must            
               capitalize the costs of storing and handling raw materials             
               before the raw materials are committed to production. In               
               addition, a real estate developer must capitalize property             
               taxes incurred with respect to property if, at the time the            
               taxes are incurred, it is reasonably likely that the                   
               property will be subsequently developed. [Emphasis added.]             

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