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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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