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Discussion
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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