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The Court of Appeals for the Eleventh Circuit also applied
the case of Commissioner v. Idaho Power Co., supra, in Ellis
Banking Corp. v. Commissioner, 688 F.2d 1376 (11th Cir. 1982), to
require capitalization of certain acquisition-related
expenditures. There, the taxpayer was a bank holding company
that, under State law, had to acquire the stock of other banks or
organize new banks in order to expand its business into new
geographic markets. The taxpayer agreed with another bank
(Parkway) and certain of Parkway’s shareholders to acquire all of
Parkway’s stock in exchange for taxpayer stock. The agreement
was contingent on the satisfaction of certain events. Prior to
consummation of the acquisition, but in connection therewith, the
taxpayer incurred various expenses conducting a due diligence
examination of Parkway’s books. These expenses were for office
supplies, filing fees, travel expenses, and accounting fees. The
taxpayer deducted these expenses, and respondent disallowed the
deduction. Respondent determined that the expenses had to be
capitalized.
We sustained respondent’s disallowance. We held that the
expenses were capital expenditures because they were incurred in
connection with the acquisition of a capital asset. The Court of
Appeals for the Eleventh Circuit agreed. The taxpayer had argued
that the expenses were "ordinary and necessary" because they were
incurred in connection with its decision to acquire the stock and
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