Subsection (b) describes the property to which section 263A applies. Briefly stated, section 263A applies to (1) property produced by the taxpayer and (2) property acquired for resale. The parties agree that the property at issue was not acquired by Von-Lusk for resale, as contemplated by the statute. Therefore, for section 263A to be applicable, the property must be "produced by the taxpayer."

Section 263A(g)(1) states that "The term 'produce' includes construct, 1995 U.S. Tax Ct. LEXIS 9">*22 build, install, manufacture, develop, or improve." The term "produce" is given further explanation in section 1.263A-1T(a)(5)(ii), Temporary Income Tax Regs., 52 Fed. Reg. 10061 (Mar. 30, 1987), which states that "For purposes of this section, the term 'produce' includes construct, build, install, manufacture, develop, improve, create, raise or grow."

If Von-Lusk's activities fall within the description "construct, build, install, manufacture, develop, improve, create, raise or grow", then Von-Lusk "produced" the property. If Von-Lusk "produced" the property, then section 263A applies. If section 263A applies, then the direct and a proper share of the indirect costs of the property are to be capitalized.

Section 263A is a relatively new addition to the Internal Revenue Code, having been added by section 803 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2350. The statute itself does not provide a comprehensive definition of "produce". Rather, it merely lists a series of examples of activities which are included in the term "produce". Sec. 263A(g)(1). The Commissioner's regulations quoted above follow this path, choosing merely to add to 1995 U.S. Tax Ct. LEXIS 9">*23 the statutory list of examples rather than setting forth a comprehensive definition.

It falls on us then to determine whether Von-Lusk's activities come within the word "produce" as used by Congress in section 263A. To the extent that the legislative history accompanying section 263A furnishes some guide as to what activities Congress meant to include within the term "produce", it may be found in the reasons behind the development of section 263A. As the Senate Finance Committee stated:

104 T.C. 207">*215 The committee believes that the present-law rules regarding the capitalization of costs incurred in producing property are deficient in two respects. First, the existing rules may allow costs that are in reality costs of producing, acquiring, or carrying property to be deducted currently, rather than capitalized into the basis of the property and recovered when the property is sold or as it is used by the taxpayer. This produces a mismatching of expenses and the related income and an unwarranted deferral of taxes. Second, different capitalization rules may apply under present law depending on the nature of the property and its intended use. These differences may create distortions1995 U.S. Tax Ct. LEXIS 9">*24 in the allocation of economic resources and the manner in which certain economic activity is organized.

The committee believes that, in order to more accurately reflect income and make the income tax system more neutral, a single, comprehensive set of rules should govern the capitalization of costs of producing, acquiring, and holding property, including interest expense, subject to appropriate exceptions where application of the rules might be unduly burdensome.

[S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 140; emphasis added.]

For virtually identical language, see H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 625; Staff of the Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986, at 508-509 (J. Comm. Print 1987).

Two purposes behind the enactment of section 263A can be gathered from this legislative history. First, Congress expected that a single set of comprehensive rules would be applied to determine whether to capitalize costs. Second, Congress expected those rules to be applied from the acquisition of property, through the time of production, until the time of disposition. To give full effect to this1995 U.S. Tax Ct. LEXIS 9">*25 congressional purpose a broad definition of "produce" is necessary.

We must determine whether the activities engaged in by Von-Lusk properly fit within a broad definition of "produce". Von-Lusk deducted as "other expenses", under the headings consultants, advertising, insurance, market research, offpremise sales, and other costs, amounts paid for the services of independent contractors. The functions performed by these independent contractors included meeting with government officials, obtaining building permits and zoning variances, negotiating permit fees, performing engineering and feasibility studies, and drafting architectural plans. Von-Lusk deducted under "other deductions--wages & salaries" amounts paid to Service Mortgage Co. The amounts paid Service Mortgage Co. represented compensation for services provided by Service Mortgage Co. in reviewing and directing the work of the contractors discussed above.

104 T.C. 207">*216 While the pursuit of building permits and zoning variances, negotiating permit fees, and similar activities may not readily spring to mind as examples of production activity, we think that upon reflection they are properly classifiable as such. Such activities are1995 U.S. Tax Ct. LEXIS 9">*26 ancillary to actual physical work on the land and are as much a part of a development project as digging a foundation or completing a structure's frame. The project cannot move forward if these steps are not taken.

Von-Lusk took purposeful steps to begin the development of the property. Petitioner attempts to place weight on the fact that Von-Lusk was formed with the stated purpose of managing, holding, and developing the property for investment. Petitioner claims Von-Lusk's activities never went beyond managing and holding. The stipulated facts indicate otherwise. Meeting with government officials, obtaining building permits and zoning variances, negotiating permit fees, performing engineering and feasibility studies, drafting architectural plans, and appealing development conditions go beyond managing and holding. These activities represent the first steps of development.

Having determined that Von-Lusk's activities represented the first steps in the development of the property, it then follows that Von-Lusk produced the property, as contemplated by Congress. As such, section 263A applies to the property, and Von-Lusk must capitalize the direct and a proper share of the indirect1995 U.S. Tax Ct. LEXIS 9">*27 costs of the property.

We note that petitioner made no argument as to whether the costs at issue represented direct or indirect costs of the property. Petitioner contended only that section 263A does not apply to the property. Although we may treat this issue as conceded, see Rule 142(a), we consider it briefly below.

Section 263A(a)(2) states that the costs described in this paragraph with respect to any property are (A) the direct costs of such property, and (B) such property's proper share of those indirect costs (including taxes) part or all of which are allocable to such property. Section 1.263A-1T(b)(2)(i), Temporary Income Tax Regs., 52 Fed. Reg. 10061-10062, states: "Direct material costs and direct labor costs must be capitalized with respect to a production or resale activity * * * 'Direct labor costs' include the cost of labor that can be identified or associated with a particular activity." The costs deducted under "other deductions" pertained to the cost of 104 T.C. 207">*217 various professionals. As such they represent the cost of labor which can be identified or associated with a particular activity.

The fact that the services of these professionals1995 U.S. Tax Ct. LEXIS 9">*28 were arranged by the Lusk Co. or performed by Service Mortgage Co. does not take them out from under section 263A. While they may, therefore, become indirect costs, they remain "costs that directly benefit or are incurred by reason of the performance of a production or resale activity". Sec. 1.263A-1T(b)(2)(ii), Temporary Income Tax Regs. They still must be capitalized. While only the "proper share" of the indirect costs is to be capitalized, petitioner offered no proof or argument that any of these costs did not relate to the activities that we have determined to be part of the development of the property.

The property taxes paid by Von-Lusk must also be capitalized. Taxes otherwise allowable as a deduction are specifically listed as an example of indirect costs. Sec. 263A(a)(2)(B); sec. 1.263A-1T(b)(2)(iii)(I), Temporary Income Tax Regs., 52 Fed. Reg. 10062 (Mar. 30, 1987).

Petitioner states in its brief: "With respect to the terms used to define 'produce' it would seem to be a logical conclusion that the physical appearance of raw land would be altered to some degree." Petitioner attempts to use the fact that no physical change occurred on the property1995 U.S. Tax Ct. LEXIS 9">*29 to argue that there was no production. However, section 263A contains no requirement that there be a physical change. To read such a requirement into the statute would, in our judgment, subvert the purpose of Congress in enacting a broad set of uniform rules. In our opinion, Congress meant to include in the costs to be capitalized the preliminary, nonphysical steps of development at issue here.

Petitioner's argument is similar to one rejected by this Court in Louisiana Land & Exploration Co. v. Commissioner, 7 T.C. 507">7 T.C. 507 (1946), affd. 161 F.2d 842">161 F.2d 842 (5th Cir. 1947). There the taxpayer attempted to deduct amounts expended for a geophysical survey of property under lease to the taxpayer. The Commissioner argued that those amounts should be capitalized under section 24(a)(2) of the Internal Revenue Code of 1939 (the forerunner of section 263). Section 24(a)(2) prohibited the deduction of amounts paid for permanent 104 T.C. 207">*218 improvements or betterments made to increase the value of any property or estate.

The taxpayer argued: "the geophysical survey was not an improvement or betterment of its property, because it added nothing tangible1995 U.S. Tax Ct. LEXIS 9">*30 thereto, and that it did not and could not increase the value of the property". 7 T.C. 507">Louisiana Land & Exploration Co. v. Commissioner, supra at 514. The Court rejected this argument. In language especially pertinent to the present case, the Court stated:

Under these circumstances it seems abundantly clear that the survey was the first step in the over-all development for oil of these tracts of land and that the benefit derived from the expenditure was to be enjoyed by petitioner in its business during the entire useful life of the asset being developed. * * * It is well settled that development expenses such as the platting, mapping, and subdividing of a tract of land held for sale must be capitalized and treated as an adjustment of the taxpayer's basis for such property. * * *, and we are unable to perceive any significant difference between such expenses and the one involved here. [7 T.C. 507">Id. at 516; citations omitted.]

The Court rejected a requirement of physical change for capitalization. The result there reached is even more strongly called for in the present case. In Louisiana Land & Exploration Co., the Court dealt 1995 U.S. Tax Ct. LEXIS 9">*31 with the precursor of section 263, whereas here the controlling provisions are in section 263A. And the legislative history of section 263A discloses that Congress was concerned with broadening, not narrowing, the scope of section 263 so as to avoid a "mismatching of expenses and the related income", and sought to provide for a more accurate reflection of income. See supra p. 215.

Petitioner next argues that the property could not be "produced" until the "production period" began. The "production period" is defined in section 263A(f)(4)(B) as beginning on the date on which production of the property begins, and ending on the date on which the property is ready to be placed in service or is ready to be held for sale. Petitioner relies upon the following explanation of the term "production period" in I.R.S. Notice 88-99, 1988-2 C.B. 422.

For purposes of the interest capitalization rules, the production period of real property generally begins when physical activity is first performed upon the property (e.g., the grading or clearing of land, the excavation of foundations or lines for utilities, the performance of mechanical activities such as plumbing or1995 U.S. Tax Ct. LEXIS 9">*32 electrical work upon a building that is being rehabilitated 104 T.C. 207">*219 or improved, or any other work relating to the construction or improvement of real property). * * *

Petitioner argues that since no physical activity was performed on the property, the production period did not begin for purposes of the interest capitalization rules, and that it therefore did not "produce" the property.

While petitioner's argument does have a superficial appeal, it does not survive close scrutiny. Subsection (f) of section 263A provides special rules for the allocation of interest to property produced by the taxpayer. It has no effect on the costs here at issue. Indeed, the narrow scope of subsection (f) is reflected in the Commissioner's concession as to the deductibility of the interest items for each of the 3 years at issue. To read the requirements of subsection (f) as applying to all costs would change the special rule to a general rule. Put differently, if no costs were to be capitalized until the beginning of the "production period", then section 263A(f)(1)(A) would be superfluous. Such a construction "offends the well-settled rule of statutory construction that all parts of a statute, 1995 U.S. Tax Ct. LEXIS 9">*33 if at all possible, are to be given effect." Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609">412 U.S. 609, 412 U.S. 609">633 (1973); see also Phillips Petroleum Co. v. Commissioner, 101 T.C. 78">101 T.C. 78, 101 T.C. 78">97 (1993) (all parts of a statute must be read together, and each part should be given its full effect).

Petitioner next argues for a consistency requirement between section 263A and section 312(n)(1). Section 312(n)(1) requires an adjustment to the earnings and profits account for construction period carrying charges. It imposes a capitalization requirement for interest, property taxes, and similar carrying charges incurred during the construction period. The term "construction period" is given the same meaning as the term "production period" under section 263A(f)(4)(B). Sec. 312(n)(1)(C).

Because the costs at issue were not incurred during the section 263A(f)(4)(B) production period, they were not incurred during the "construction period" and are, therefore, not required to be capitalized under section 312(n)(1). Petitioner argues that, in the interest of consistency, we should not require capitalization under section 263A. We disagree.

Section1995 U.S. Tax Ct. LEXIS 9">*34 312(n)(1) applies to costs that are otherwise deductible. Section 312(n)(1)(B) includes construction period 104 T.C. 207">*220 carrying charges "to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred." If costs must be capitalized under other provisions of the Internal Revenue Code, then section 312(n)(1) is not applicable. Earnings and profits will be accurately reflected through the taxpayer's decreased deductions and increased income.

The final argument made by petitioner is that some of these costs are specifically excluded from capitalization under section 1.263A-1T(b)(2)(v)(A), Temporary Income Tax Regs., 52 Fed. Reg. 10063. The costs excluded by that regulation are marketing, selling, advertising, and distribution expenses. Petitioner uses this regulation to argue that the advertising, market research, and off premise sales expenses are not capital expenditures.

Petitioner stipulated that those expenditures "refer to costs incurred to advise Von-Lusk as to the appropriateness1995 U.S. Tax Ct. LEXIS 9">*35 of product mix and pricing for the Property. Von-Lusk did not engage in active sales efforts during 1988, 1989 and 1990." As such, these expenses are not of the type contemplated by the above-cited regulation. The label applied by petitioner is irrelevant.

We are aware that conditions imposed on Von-Lusk by local government authorities made the delay of this project unavoidable and the continued pursuit of the project so financially unattractive as to possibly preclude going forward with it. That does not change our view that steps were taken to begin the development of the property. The result of those steps is that Von-Lusk came under the rule of section 263A. ²

1995 U.S. Tax Ct. LEXIS 9">*36 In the light of our conclusion above that the deductions in controversy must be capitalized, it is unnecessary to consider the Commissioner's alternative argument that the "other expenses", if not required to be capitalized by section 263A, should be capitalized under section 263.

104 T.C. 207">*221 Since respondent has conceded the interest deductions originally at issue,

Decision will be entered under Rule 155.