John J. Reichel - Page 7

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          such activities with respect to the San Bernardino parcels,                 
          petitioner states, he has never begun producing them within the             
          meaning of section 263A, and therefore he need not capitalize the           
          real estate taxes.                                                          
               We disagree with petitioner's reading of Von-Lusk v.                   
          Commissioner, supra.  We did not decide in Von-Lusk whether                 
          capitalization is required for expenses incurred before                     
          production begins.  We decided principally that the taxpayer had            
          already begun development of the land in question and had to                
          capitalize related development costs even though the land had not           
          yet been physically changed.  In deciding Von-Lusk, we reviewed             
          the text and legislative  history of section 263A and observed              
          that the Congress intended the term "produce" to be broadly                 
          construed.  We noted that "Congress expected those rules to be              
          applied from the acquisition of property, through the time of               
          production, until the time of disposition."  Von-Lusk v.                    
          Commissioner, supra at 215 (emphasis added).2                               
               A close analysis of the language and structure of section              
          263A supports the conclusion that Congress intended that the                
          capitalization rules cover costs incurred before as well as                 

               2 Petitioner also relies on Hustead v. Commissioner, T.C.              
          Memo. 1994-374, affd. without published opinion 61 F.3d 895                 
          (3d Cir. 1995).  In Hustead, we indicated that taxpayers who                
          increased the value of their land by challenging a local zoning             
          ordinance had not begun producing the land within the meaning of            
          sec. 263A(g).  We held, however, that the legal costs the                   
          taxpayers incurred in challenging the ordinance had to be                   
          capitalized under sec. 263.  Since sec. 263 controlled the result           
          in Hustead, we were not required to decide whether sec. 263A                
          would apply to the taxpayer.                                                

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