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Expenditures incurred in the course of a general
search for, or investigation of, an active trade or
business in order to determine whether to enter a new
business and which new business to enter (other than
costs incurred to acquire capital assets that are used
in the search or investigation) qualify as
investigatory costs that are eligible for amortization
as start-up expenditures under � 195. However,
expenditures incurred in the attempt to acquire a
specific business do not qualify as start-up
expenditures because they are acquisition costs under �
263. The nature of the cost must be analyzed based on
all the facts and circumstances of the transaction to
determine whether it is an investigatory cost incurred
to facilitate the whether and which decisions, or an
acquisition cost incurred to facilitate consummation of
an acquisition.[23]
As to the remaining fees of $27,820 ($4,120 + $23,700), all
of which were incurred after Davenport had made its final
decision as to the acquisition, the Court of Appeals for the
Eighth Circuit agreed with us that those amounts were capital
expenditures. The Court of Appeals disagreed with us, however,
as to the officers’ salaries and held that those costs were
currently deductible. The court reasoned:
23 The Commissioner’s position as to the deductibility of
investigatory expenditures incurred to acquire specific assets is
set forth in Rev. Rul. 74-104, 1974-1 C.B. 70. There, the costs
were “evaluation” expenditures which the taxpayer incurred in its
business of acquiring residential property to renovate and sell
to the public. Before acquiring the property, the taxpayer
evaluated certain localities to ascertain the feasibility of
selling the property in that locality. The taxpayer incurred a
cost to secure an initial report from an independent agent and
other costs to evaluate the report and the locality involved.
The ruling holds that the costs are capital expenditures because
they were incurred in connection with acquiring the residential
property and provide benefits beyond the current taxable year
through the sale of the renovated property.
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