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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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