- 18 -
* * * of * * * property having a useful life substantially beyond
the taxable year” is a capital expenditure. Sec. 1.263(a)-2(a),
Income Tax Regs. The same expenditure that may be deductible in
one setting might be capitalized in another, if it is incurred in
connection with the acquisition of a capital asset. Commissioner
v. Idaho Power Co., 418 U.S. 1, 13 (1974); Ellis Banking Corp. v.
Commissioner, 688 F.2d 1376, 1379 (11th Cir. 1982), affg. in part
and remanding in part on another ground T.C. Memo. 1981-123.
Petitioner recognizes the applicability of the “process of
acquisition” test in this case to decide whether expenditures are
currently deductible or whether they must be capitalized. See
Honodel v. Commissioner, 76 T.C. 351, 365 (1981), affd. 722 F.2d
1462 (9th Cir. 1984). The process of acquisition test focuses on
the direct relationship between the cost and the acquisition, so
that costs originating in the process of acquiring a capital
asset are considered capital expenditures. Woodward v.
Commissioner, 397 U.S. 572 (1970); Lychuk v. Commissioner,
116 T.C. 374, 390 (2001).
In applying the process of acquisition test to the facts of
this case, we analyze what FRGC was attempting to acquire when it
incurred its expenses in 1998. FRGC’s operating agreement and
private placement materials specifically state that FRGC’s sole
business purpose was to engage in predevelopment activities to
acquire suitable property for Flagstaff Ranch. FRGC and Cherry
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011