- 41 -
in evaluating the market in which Parkway was located. See id.
at 1381. The taxpayer noted that the expenses were incurred
before it was bound to buy Parkway’s stock. The Court of
Appeals, in rejecting the taxpayer’s claim to current
deductibility, stated:
Ellis also devotes a portion of its brief to arguing
that it is in the business of promoting banks, so that
the expenditures made in that business are deductible.
It is not enough to establish that expenditures are
incurred in carrying on a trade or business to qualify
for a deduction under section 162--all of the
requirements set out above [namely, the five
requirements for deductibility set forth in
Commissioner v. Lincoln Sav. & Loan Association, 403
U.S. at 352-353,] must be fulfilled. Indeed, if being
in the business sufficed, Ellis would be able to deduct
the purchase price of the Parkway stock. * * * [Id. at
1381 n.10.]
The Court of Appeals went on to say that
the expenses of investigating a capital investment are
properly allocable to that investment and must
therefore be capitalized. That the decision to make
the investment is not final at the time of the
expenditure does not change the character of the
investment; when a taxpayer abandons a project or fails
to make an attempted investment, the preliminary
expenditures that have been capitalized are then
deductible as a loss under section 165. * * * As the
First Circuit stated, ‘* * * expenditures made with the
contemplation that they will result in the creation of
a capital asset cannot be deducted as ordinary and
necessary business expenses even though that
expectation is subsequently frustrated or defeated.’
Union Mutual, 570 F.2d at 392 (emphasis in original).
Nor can the expenditures be deducted because the
expectations might have been, but were not, frustrated.
[Id. at 1382.]
Our opinion as to the salaries and benefits is further
supported by the cases of Godfrey v. Commissioner, 335 F.2d 82
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