John J. Reichel - Page 6

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                         (1)  In general.--The term "produce"                         
                    includes construct, build, install,                               
                    manufacture, develop, or improve.                                 
               Section 263A(a)(1)(B) requires that taxpayers capitalize               
          certain costs.  Section 263A(b)(1) provides that the                        
          capitalization requirement applies to property "produced" by the            
          taxpayer.  Section 263A(g)(1) specifies that the term "produce"             
          means, among other things, "develop".  Thus, by its terms, the              
          statute requires taxpayers to capitalize indirect costs, such as            
          real estate taxes, that they incur in connection with property              
          they develop.                                                               
               Petitioner argues that the outcome in this instance is                 
          controlled by our holding in Von-Lusk v. Commissioner, 104 T.C.             
          207 (1995).  The question in Von-Lusk was whether a partnership             
          had to capitalize costs incurred before it undertook any                    
          activities that would physically alter certain land it was                  
          developing.  The taxpayer had begun activities, such as                     
          performing engineering and feasibility studies, similar to those            
          normally conducted by petitioner.  The taxpayer's parcels of                
          land, coincidentally, were located in San Bernardino County.                
          We held that activities such as these were development activities           
          even though they had no immediate physical impact on the property           
          and that a taxpayer who undertakes them has begun producing the             
          property.  Id.                                                              
               Petitioner argues that Von-Lusk established the principle              
          that some such activity must have taken place for production of             
          the property to have begun.  Since he has never undertaken any              

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