From 1987 to 1993, petitioners engaged in various activities to obtain a zoning change. Petitioners' efforts were first reflected in litigation challenging the constitutionality of the Skippack Township zoning provisions. These efforts were initially unsuccessful, but petitioners filed an appeal. In 1991, by reason of a settlement offer and stipulation, petitioners' efforts were thereafter directed to achieving an amicable disposition of their claims which would result in an acceptable change in the zoning.

On October 23, 1991, Skippack Township 1997 Tax Ct. Memo LEXIS 242">*245 adopted a new comprehensive land use plan. The new plan increased, from 80 to 337, the number of acres of land in Skippack Township designated for housing at four dwellings per acre (Village Residential). During 1991 and 1992, petitioners worked with Skippack Township with respect to the development, review, and enactment of a new zoning ordinance which included petitioners' land.

On May 23, 1993, the Board of Supervisors voted to change the zoning ordinance as applied to petitioners' undeveloped land and approximately 217 more acres. This change allowed petitioners' undeveloped land to be developed as Village Residential, i.e., four residential units per acre.

Petitioners' Expenses and Federal Income Tax Returns

Petitioners capitalized the startup costs for LM Development including the cost of acquiring the undeveloped land in 1977 and 1987.

During the years at issue, petitioners paid professional fees to a land use planning firm and engineers for services such as review of the land use plan, a wetlands survey, and evaluation of sewerability. Petitioners also paid for legal assistance in their zoning appeal and in negotiating the stipulation. Other expenditures included payment 1997 Tax Ct. Memo LEXIS 242">*246 for repair of a broken floppy disk drive on petitioners' computer and for typing services. Petitioners used their computer for word processing, to keep business records, and to prepare their tax returns. In 1992, petitioners used the services of a tax accountant and a tax lawyer to review their records. ²

Petitioners timely filed U.S. Individual Income Tax Returns for the taxable years 1991 and 1992. They claimed deductions for LM Development's 1991 and 1992 business activities on Schedules C as follows:

All of the above expenses were incurred attendant to petitioners' business as LM Development and, with one exception, see infra pp. 11-12, were directly 1997 Tax Ct. Memo LEXIS 242">*247 related to petitioners' attempt to improve the value of the land.

Respondent's Determinations

Respondent issued the notices of deficiency for the taxable years 1991 and 1992 on January 6, 1995. The adjustments to income were as follows:

Previous Litigation

Hustead v. Commissioner, T.C. Memo. 1994-374, concerned the deductibility of petitioners' Schedule C expenses for LM Development for the taxable years 1989 and 1990. The petition therein was filed with the Court on September 11, 1992. The Court in its opinion, filed August 8, 1994, agreed with respondent that the disputed expenses were to be capitalized. The Court of Appeals for the Third Circuit, without published opinion, affirmed this Court's decision on June 28, 1995. Hustead v. Commissioner, 61 F.3d 895">61 F.3d 895 (3d Cir. 1995).

OPINION

The issue in this case is whether petitioners' 1991 and 1992 Schedule C expenses can be deducted as current business expenses or whether they constitute capital expenditures. The amounts or business purpose of the claimed expenses are not in dispute.

Although the parties have stipulated 1997 Tax Ct. Memo LEXIS 242">*248 that the above is the only issue for decision, petitioners on brief continue to assert that "respondent's failure to cite any basis in law (reference to an IRC section) acts to deprive taxpayers of a fair trial and due process of law." Petitioners request that the burden of proof be upon respondent as a sanction for such failure.

The notices of deficiency indicated that respondent had disallowed all Schedule C expenses for both 1991 and 1992. This clearly advised petitioners of the basis for the deficiencies. The Court's opinion in the earlier case, which addressed the same issue, was issued prior to the mailing of the notices involved herein. Petitioners cannot claim surprise or ignorance as to the basis for the determinations.

Under the circumstances herein, we reject petitioners' request noting that, in any event, we can dispose of the case on the merits based on the undisputed facts with the result that the location of the burden of proof becomes irrelevant.

Section 162(a) ³ allows the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". However, section 263(a)(1) provides that "No deduction shall 1997 Tax Ct. Memo LEXIS 242">*249 be allowed for * * * any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate."

The parties have stipulated that the activities of LM Development constituted a "business", but that is not determinative of deductibility. As the Court of Appeals for the Ninth Circuit stated in Madden v. Commissioner, 514 F.2d 1149">514 F.2d 1149, 514 F.2d 1149">1150 (9th Cir. 1975), revg. and remanding 57 T.C. 513">57 T.C. 513 (1972)^{41997 Tax Ct. Memo LEXIS 242">*250} :

The statutes involved in this appeal are relatively clear. Sections 162 and 212 allow a taxpayer to deduct many current expenses from ordinary income if they are related to business or profit-seeking activity. Once that nexus is established, however, the taxpayer still cannot be sure of deducting the expenses. Rather, an additional question must be answered: Are the expenses "capital" in nature under § 263? If they are capital, they cannot be deducted as business expense. [Citations omitted.]

Whether an expenditure may be deducted or must be capitalized is a question of fact. INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79, 503 U.S. 79">86 (1992); A. E. Staley Manufacturing Co. v. Commissioner, 105 T.C. 166">105 T.C. 166, 105 T.C. 166">193 (1995).

Petitioners characterize some phases of their land development activities as lobbying, citing section 162(e), or marketing. In this context, they seek to distinguish the situation involved in the earlier years and disposed of in Hustead v. Commissioner, T.C. Memo. 1994-374, on the basis that those years involved litigation activities whereas negotiating activities were the focus in the years involved herein. We think this is a distinction without a difference. In any event, petitioners' characterizations are not determinative of deductibility. The question remains what is the origin or nature of the transaction out of which the expenses arose. Petitioners refer to some expenses as those of being in business, e.g., office supplies, alleging that respondent has disallowed these expenses on a theory of guilt by association. Again, the same analysis governs these expenses. It is not the nature 1997 Tax Ct. Memo LEXIS 242">*251 of the item paid for, but the nature of the transaction giving rise to that expense. 105 T.C. 166">A. E. Staley Manufacturing Co. v. Commissioner, supra at 195.

Petitioners contend that their land development activities did not change the physical characteristics of the land itself nor did they affect title and that, therefore, there were no "improvements or betterments" to the land. Petitioners also maintain that they did not have a vested interest in the zoning change during the years at issue and would not acquire such an interest until a land-use permit was granted; consequently, they argue, their activities did not lead to a "permanent" change during the years at issue, which, as petitioners interpret section 263(a)(1), is required for capitalization.

While physical alterations, e.g., construction, or actions affecting title, may be sufficient conditions to classify an expense as capital, they are not necessary conditions. 503 U.S. 79">INDOPCO, Inc. v. Commissioner, supra at 86-87; Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345">403 U.S. 345, 403 U.S. 345">358 (1971) ("§ 263 does not provide a complete list of nondeductible expenditures"). Nor does section 263(a)(1) require that the change for which the funds were 1997 Tax Ct. Memo LEXIS 242">*252 expended be completed or vested within a specific tax year for that change to be permanent within the meaning of that section.

The foregoing principles have been applied in a number of cases where expenditures in efforts to obtain changes in land zoning have been required to be capitalized. Godfrey v. Commissioner, 335 F.2d 82">335 F.2d 82, 335 F.2d 82">84-85 (6th Cir. 1964) (where the efforts were unsuccessful but the expenditures were held not to be deductible, the court stating: "The purpose of the expenditure was to create a permanent benefit. The fact that it created neither a permanent nor exhaustible benefit does not change its character."); Soelling v. Commissioner, 70 T.C. 1052">70 T.C. 1052, 70 T.C. 1052">1055-1056 (1978); Galt v. Commissioner, 19 T.C. 892">19 T.C. 892, 19 T.C. 892">910 (1953), affd. in part and modified on other issues 216 F.2d 41">216 F.2d 41 (7th Cir. 1954). ⁵

Most of petitioners' disputed Schedule C expenses, including office supplies and depreciation of their computer, arose out of their activities to change the zoning and enhance the value of their undeveloped land. The very purpose of their business was to conduct these activities. 1997 Tax Ct. Memo LEXIS 242">*253 Indeed, petitioners stipulated without qualification that "The expenses [Schedule C] were directly related to petitioners' attempts to improve the value of the land." The benefit to petitioners' land from rezoning is one which inures beyond the year of the expenditures. Income will be realized from petitioners' activities when, and not until, the property is sold. Capitalization of petitioners' Schedule C expenses leads to a closer matching of expenses with income. See 503 U.S. 79">INDOPCO, Inc. v. Commissioner, supra at 84, where the Supreme Court emphasized the importance of such matching principle.

In sum, we are satisfied, as we were in the earlier case, that petitioners' Schedule C expenses, with one exception, are not currently deductible and must be capitalized.

The exception relates to State and local real property taxes of $ 1,793.94 and $ 2,008.31 which petitioners paid in the taxable years 1991 and 1992, respectively. The obligation to pay these taxes arose out of mere ownership of the undeveloped land, not out of petitioners' rezoning activities. We hold that these taxes are deductible under section 164(a). ^{61997 Tax Ct. Memo LEXIS 242">*254}

To implement our holdings and respondent's concessions,

Decision will be entered under Rule 155.