David J. Lychuk and Mary K. Lychuk, et al. - Page 43




                                       - 40 -                                         
               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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