112 T.C. No. 9



                     UNITED STATES TAX COURT



  NORWEST CORPORATION AND SUBSIDIARIES, SUCCESSOR IN INTEREST TO
DAVENPORT BANK AND TRUST COMPANY AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25613-95.               Filed March 8, 1999.



          D and N entered into a transaction that resulted
     in N's owning all the stock of an entity of which D was
     a part. P concedes that sec. 263(a), I.R.C., requires
     that D capitalize the costs that were directly related
     to the transaction. P disputes R's determination that
     sec. 162(a), I.R.C., does not let D deduct
     investigatory and due diligence costs and all of its
     officers' salaries. The investigatory costs relate
     primarily to services rendered by L, a law firm, before
     D agreed to participate in the transaction. D retained
     L to investigate whether a reorganization-like
     transaction with N would be good for D and its local
     community, so that D's management and board could
     decide whether D should agree to such a transaction.
     The remaining investigatory costs relate to services
     performed by L in investigating whether, after the
     transaction, N's director and officer liability
     coverage would protect D's directors and officers for
                                 - 2 -


     acts and omissions occurring before the transaction.
     The due diligence costs relate to services performed by
     L in connection with N's due diligence review. The
     disallowed officers' salaries were attributable to the
     transaction.
          Held: Sec. 162(a), I.R.C., does not let D deduct
     any of the disputed costs.



     Mark A. Hager, John R. Kalligher, William K. Wilcox, and

Walter A. Pickhardt, for petitioner.

     Jack Forsberg, for respondent.


     LARO, Judge:   Norwest Corp. (Norwest) and Subsidiaries,

Successor in Interest to Davenport Bank and Trust Co. (DBTC) and

Subsidiaries, petitioned the Court to redetermine respondent's

determination of a $132,088 deficiency in DBTC's 1991

consolidated Federal income tax.    Following petitioner's

concessions, the only issue left to decide is whether section

162(a) allows DBTC to deduct investigatory costs, due diligence

costs, and officers' salaries which respondent determined were

attributable to an acquisition of DBTC.    We hold that DBTC may

not deduct any of these costs.    Unless otherwise stated, section

references are to the Internal Revenue Code in effect for the

subject year.   Rule references are to the Tax Court Rules of

Practice and Procedure.   Dollar amounts are rounded to the

nearest dollar.
                                - 3 -


                           FINDINGS OF FACT1

1.   General Information

     Norwest is a bank holding company that was incorporated in

1929.    It is the parent corporation of an affiliated group of

corporations (Norwest consolidated group) that files consolidated

Federal income tax returns.    Its affiliates include 79 commercial

banks in 12 States and numerous other corporations which provide

financial services.    Norwest's stock is traded on the New York

and Midwest Stock Exchanges.

     Bettendorf Bank, National Association (BBNA), is a member of

the Norwest consolidated group.     BBNA is a national banking

association operating under a charter granted by the Office of

the Comptroller of the Currency (OCC).     BBNA conducts a general

banking business from its main office in Bettendorf, Iowa, and

from two branches, one in Bettendorf and the other in Davenport,

Iowa.

     DBTC is an Iowa State bank that was incorporated in 1932.

Before the transaction (defined below), it provided banking and

related services in the four-city area that consists of

Davenport, Bettendorf, Rock Island, Illinois, and Moline,

Illinois (Quad Cities area).    Its main office was in Davenport,


     1
       Most of the facts were stipulated. The stipulated facts
and the exhibits submitted therewith are incorporated herein by
this reference. When the petition was filed, petitioner's
principal place of business was in Minneapolis, Minnesota.
                               - 4 -


and it had four branches, three in Davenport and one in Donahue,

Iowa.   It filed a consolidated Federal income tax return with two

wholly owned subsidiaries.

     DBTC's only class of stock was thinly traded in the

Davenport over-the-counter market.     It had 1.2 million shares

outstanding, and DBTC's founder (V.O. Figge) and his five

children (collectively, the Figges) owned, collectively and

beneficially, the following numbers and percentages of these

shares:

                               Number               Percentage

     V.O. Figge               41,843                    3.5
     John K. Figge            61,140                    5.1
     James K. Figge           63,450                    5.3
     Thomas K. Figge          71,855                    6.0
     Ann Figge Brawley        77,890                    6.5
     Marie Figge Wise         69,655                    5.8
                             385,833                   32.2

DBTC's directors and executive officers, other than the Figges,

owned another 69,727 (5.8 percent) of these shares on

September 18, 1991.

2.   The Transaction

     In 1989, Iowa adopted interstate banking legislation that

allowed, for the first time, the acquisition of Iowa banks by

banking institutions located in States which were contiguous with

Iowa and which had enacted reciprocal legislation.     DBTC's

management expected that national banking would follow and that

many large banks, including some from outside Iowa, would be
                               - 5 -


competing in the Quad Cities area.     DBTC's management was

concerned that banks of DBTC's size (i.e., larger than the small

community banks and smaller than the large regional banks) would

be unable to compete in the future.

     During 1990, Norwest began talking to DBTC about joining

their businesses, and these discussions intensified in early

1991.2   DBTC retained the law firm of Lane & Waterman (L&W) to

assist it in these discussions.   L&W investigated whether DBTC

would strategically fit with Norwest and its affiliates, and

whether a reorganization between DBTC and Norwest would be good

for the community.

     On June 10, 1991, DBTC's board of directors met to consider

merging DBTC into Norwest.   Over V.O. Figge's objection to the

merger, the board authorized John K. Figge, James K. Figge, and

Thomas K. Figge, in their capacities as executive officers, to

negotiate with Norwest and to hire legal and other

representatives with the intent to recommend to DBTC's board a

letter of intent between DBTC and Norwest on a plan of

reorganization.   The board also appointed an ad hoc committee

(special committee) consisting of four outside directors to

perform an independent due diligence review, to obtain

professional advice, and to report to DBTC's board as to the


     2
       Except for the discussions set forth herein, DBTC never
discussed joining its business with that of any other entity.
                               - 6 -


fairness and appraisal of the proposed transaction.   Norwest's

board of directors, on the same day, authorized using up to 10

million shares of Norwest common stock to effect a transaction

with DBTC.

     DBTC retained J.P. Morgan & Co., Inc., as its financial

adviser for any transaction with Norwest and to render an opinion

as to the fairness of the consideration that DBTC's shareholders

might receive in the transaction.   DBTC retained KPMG Peat

Marwick to render opinions primarily on whether the proposed

transaction would be a reorganization for Federal income tax

purposes, and whether the proposed transaction would qualify for

a desired method of accounting.

     On July 22, 1991, DBTC's board met to consider a transaction

(transaction) whereby DBTC and BBNA would be consolidated to form

a national bank (New Davenport) which would be wholly owned by

Norwest.   At the meeting, the special committee recommended that

the transaction be approved, and J.P. Morgan opined that the

transaction was fair to DBTC's shareholders from a financial

point of view.   DBTC's board approved the transaction.   On the

same day, BBNA's board approved the transaction.

     Four other events also occurred on July 22, 1991, with

respect to the transaction.   First, Norwest, BBNA, and DBTC

entered into an agreement (agreement) whereby they agreed to the

transaction subject to regulatory approval, approval of DBTC's
                               - 7 -


and BBNA's shareholders, and the satisfaction of certain

conditions which included:   (1) The receipt of regulatory

approvals, including the approval of the OCC, without any

requirement or condition that Norwest would consider unduly

burdensome, and (2) the receipt of Peat Marwick’s opinions that

the transaction would qualify for the desired method of

accounting and as a tax-free reorganization.

     Second, Norwest entered into voting agreements with certain

DBTC shareholders.   These shareholders held 24.5 percent of

DBTC's stock and included John Figge, James Figge, Thomas Figge,

and other members of the Figge family.   The voting agreements

provided that these shareholders would vote their shares in favor

of the transaction and that they would help Norwest complete the

transaction.

     Third, BBNA entered into employment agreements with V.O.

Figge, John Figge, James Figge, Thomas Figge, and Richard R.

Horst.   The employment agreements provided that the five listed

people would be employed as officers of New Davenport for 1 year

at the same salaries they were receiving from DBTC.   The parties

to the transaction contemplated that John Figge, James Figge, and

Thomas Figge would become senior vice presidents of New Davenport

and that the members of DBTC's board would become members of New

Davenport's board.   Norwest agreed to cause John Figge to be

elected to its board.
                                   - 8 -


     Fourth, Norwest issued a press release announcing that it

had agreed with DBTC to acquire DBTC.          The release, quoting V.O.

Figge, stated in part:

     After extensive deliberations, the Board [of DBTC] has
     determined that it is in the best interests of
     Davenport Bank and its stockholders, customers,
     employees, and the community it serves, to become part
     of a larger and more diversified financial institution
     that offers local, national and international resources
     through what might be termed a personal hometown
     presence * * *

               *      *     *      *       *    *    *

     It is for these reasons that the board has given
     careful consideration to a merger with an organization
     that competes aggressively on a regional and national
     basis, and can provide the Quad-Cities with a broader
     array of banking products and services.

     Following the signing of the agreement, Norwest commenced a

due diligence review on DBTC and on DBTC's business activities.

DBTC employees and L&W helped Norwest perform the review, which

lasted throughout August.       L&W primarily acted as the contact for

both Norwest and DBTC.

     On or about August 29, 1991, Norwest applied to the OCC for

approval to consolidate DBTC and BBNA.         At or about the same

time, a prospectus was filed with the Securities and Exchange

Commission (SEC) for the issuance to DBTC shareholders of up to

10 million shares of Norwest common stock upon the consummation

of the transaction.   The prospectus also served as the proxy

statement for a special meeting (special meeting) of DBTC's

shareholders to be held on November 26, 1991, for the purpose of
                               - 9 -


voting on the transaction.   The SEC approved the proxy statement,

and it became effective on October 23, 1991.   On the effective

date, DBTC notified its shareholders of the special meeting,

advised them that its board recommended voting in favor of the

transaction, and mailed them a copy of the proxy statement.

     On November 20, 1991, BBNA's board called a special

shareholder meeting for December 19, 1991, for the purpose of

voting on the transaction.

     At the special meeting on November 26, 1991, DBTC's

shareholders approved the transaction.   Approximately 3 weeks

later, BBNA's shareholders approved the transaction.

     On or about January 29, 1992, the OCC approved DBTC's

consolidation with BBNA, effective January 19, 1992.   Shortly

before the approval, DBTC and BBNA had entered into an agreement

providing that the transaction would be effective as of 12:01

a.m. on the date that it was approved by the OCC.   Thus, on

January 19, 1992, the transaction became effective.    Among other

things, (1) DBTC and BBNA were merged to form a consolidated

national banking association under BBNA's charter and under the

name "Davenport Bank and Trust Company"3 and (2) New Davenport

became a wholly owned subsidiary of Norwest, Norwest exchanging

     3
       Pursuant to 12 U.S.C. sec. 215 (1994), the statutory
provision under which the consolidation took place, the
identities of DBTC and BBNA continued in New Davenport. See also
DeFoe v. Board of Pub. Instruction, 

 (5th Cir. 1943);
Cannon v. Dixon, 

 (4th Cir. 1940).
                              - 10 -


9,665,713 shares of its common stock for the stock of DBTC (other

than fractional shares and shares with respect to which

dissenter's appraisal rights were exercised and for which $33,341

was paid) and then receiving all the stock of New Davenport in

exchange for the stock of DBTC.

     Following the transaction, New Davenport carried on a

banking business.   New Davenport's main office was the same

office as DBTC's, and New Davenport's branches were at the four

locations at which DBTC had formerly operated (not including the

main office) and at each of the three locations at which BBNA had

formerly operated (including the location that had been BBNA’s

main office).   New Davenport offered a wider array of products

and services than DBTC had offered before the transaction and

continued DBTC’s tradition of being a charitable and community

leader.

     DBTC's board and management anticipated that the transaction

would produce significant long-term benefits for DBTC and its

shareholders, among others.

3. Costs Incurred by DBTC in 1991

     During 1991, DBTC paid L&W $474,018 for services rendered

($460,000) and disbursements made ($14,018) during the year.

DBTC deducted the $474,018 on its 1991 Federal income tax return.

     Petitioner concedes that DBTC's $474,018 deduction was

improper, alleging that the deduction should have been $111,270.
                              - 11 -


DBTC paid $83,450 of the $111,270 for services rendered (and

disbursements made) before July 21, 1991, in investigating the

products, services, and reputation of Norwest and BBNA,

ascertaining whether Norwest and BBNA would be a good business

fit for DBTC, and ascertaining whether the proposed transaction

with Norwest and BBNA would be good for the Davenport community.

None of the $83,450 was for fees or disbursements related to

services performed by L&W in negotiating price, working on the

fairness opinion, advising DBTC’s board with respect to fiduciary

duties, or satisfying securities law requirements.

     Twenty-three thousand, seven hundred dollars of the $111,270

related to services performed (and disbursements made) by L&W in

late July and August 1991 in connection with Norwest's due

diligence review.   The remainder of the amount alleged to be

deductible ($4,120) related to services performed (and

disbursements made) by L&W in connection with investigating

whether Norwest's director and officer liability coverage would

protect DBTC's directors and officers following the transaction,

for acts and omissions occurring beforehand.   At the time of the

services, DBTC had a director and officer policy that was due to

expire on January 23, 1992.   Norwest agreed with DBTC to maintain

insurance until at least January 18, 1995, that would protect

DBTC's directors and officers against acts and omissions
                                - 12 -


occurring before January 19, 1992, the effective date of the

transaction.   Norwest eventually bought such a policy.

     During 1991, DBTC had 9 executives and 73 other officers

(collectively, the officers).    John Figge, James Figge, Thomas

Figge, and Richard Horst worked on various aspects of the

transaction, as did other officers.       None of the officers were

hired specifically to render services on the transaction; all

were hired to conduct DBTC's day-to-day banking business.       DBTC’s

participation in the transaction had no effect on the salaries

paid to its officers.   Of the salaries paid to the officers in

1991, $150,000 was attributable to services performed in the

transaction.   DBTC deducted the salaries, including the $150,000,

on its 1991 Federal income tax return.       Respondent disallowed the

$150,000 deduction; i.e., the portion attributable to the

transaction.

                                OPINION

     Following petitioner's concession that DBTC must capitalize

most of the costs related to the transaction, we are left to

decide whether DBTC may deduct the officers' salaries and some of

its legal fees.   Respondent argues that INDOPCO, Inc. v.

Commissioner, 

 (1992), requires that these costs be

capitalized because, respondent states, the transaction here,

like the transaction there, involved a friendly acquisition from

which the parties thereto anticipated significant long-term
                               - 13 -


benefits for the acquired entity.    Petitioner argues that the

costs are deductible currently.    Petitioner asserts that the

officers' salaries were part of the annual salaries that DBTC

agreed to pay the officers to conduct DBTC's everyday banking

business, and, although the officers worked on the transaction,

this work was tangential to the specific duties they were hired

to perform.    Petitioner asserts that the other costs in dispute

represent ordinary and necessary expenses which DBTC incurred

primarily for investigatory and due diligence services related to

the expansion of its business and which, for the most part, were

incurred before DBTC's management decided to enter into the

transaction.   Petitioner asserts that INDOPCO is not controlling

because it did not overrule a long line of cases (e.g.,

Briarcliff Candy Corp. v. Commissioner, 

 (2d Cir.

1973), revg. and remanding T.C. Memo. 1972-43, and NCNB Corp. v.

United States, 

 (4th Cir. 1982)), which allowed a

deduction for investigatory and due diligence costs incurred

incident to the expansion of an existing business.    Petitioner

asserts that section 195 and its application to corporate

acquisitions support its position.

      We agree with respondent that INDOPCO requires us to sustain

his determination.    Section 162(a) provides a deduction for an

accrual method taxpayer like DBTC only for an expenditure that

is:   (1) An expense, (2) an ordinary expense, (3) a necessary
                                - 14 -


expense, (4) incurred during the taxable year, and (5) made to

carry on a trade or business.    See Commissioner v. Lincoln Sav. &

Loan Association, 

 (1971); see also Rule 142(a);

INDOPCO, Inc. v. Commissioner, supra at 86; Welch v. Helvering,

, 114-116 (1933).    An expense that creates a separate

and distinct asset is not "ordinary".    See Commissioner v.

Lincoln Sav. & Loan Association, supra at 354; see also FMR Corp.

& Subs. v. Commissioner, 

, 417 (1998); PNC Bancorp,

Inc. v. Commissioner, 

 (1998); Iowa-Des Moines Natl.

Bank v. Commissioner, 

, 878 (1977), affd. 

(8th Cir. 1979).    Nor is an expense "ordinary" when it generates

a significant long-term benefit that extends beyond the end of

the taxable year.   See INDOPCO, Inc. v. Commissioner, supra at

87-88; United States v. Mississippi Chem. Corp., 

,

310 (1972); Central Tex. Sav. & Loan Association v. United

States, 

, 1183 (5th Cir. 1984); FMR Corp. & Subs. v.

Commissioner, supra at 426; Connecticut Mut. Life Ins. Co. &

Consol. Subs. v. Commissioner, 

, 453 (1996); see also

In re Federated Dept. Stores, Inc., 171 Bankr. 603 (S.D. Ohio

1994).   Recognizing income concomitantly with the recognition of

the related expenses is a goal of our income tax system, and a

proper matching is achieved when an expense is deducted in the

taxable year or years in which the related income is recognized.

See Newark Morning Ledger Co. v. United States, 

, 565
                              - 15 -


(1993); Hertz Corp. v. United States, 

, 126 (1960);

Ellis Banking Corp. v. Commissioner, 

, 1379 (11th

Cir. 1982), affg. in part and remanding in part on an issue not

relevant herein T.C. Memo. 1981-123; Liddle v. Commissioner,

, 289 (1994), affd. 

 (3d Cir. 1995); Simon

v. Commissioner, 

, 253 (1994), affd. 

 (2d

Cir. 1995).

     In INDOPCO, Inc. v. Commissioner, supra, the Supreme Court

set forth its most recent elucidation on the subject of

capitalization.   There, the taxpayer was a public corporation,

the two largest shareholders of which were approached in October

1977 about selling their stock in a friendly transaction.    The

shareholders indicated that they would part with their stock if a

transaction was structured under which they could do so tax free.

A tax-free acquisition plan was formulated under which the

shareholders could transfer their stock to the acquirer.    Shortly

thereafter, the taxpayer's board of directors retained an

investment banking firm to evaluate the formal offer for the

stock, render a fairness opinion, and generally assist in the

event of the emergence of a hostile tender offer.   The

transaction was consummated in August 1978.

     The Commissioner determined that section 162(a) did not let

the taxpayer deduct the direct costs that it incurred to

facilitate the transaction; namely:    (1) Investment banking fees
                                 - 16 -


and expenses and (2) legal fees and expenses related to advice

given to the taxpayer and its board on their legal rights and

obligations with respect to the transaction, the participation in

negotiations, the preparation of documents, and the preparation

of a request for a ruling from the Commissioner on the tax-free

acquisition plan.   We agreed.    We found that it was in the

taxpayer's long-term interest to shift ownership of its stock to

the acquirer.   See National Starch & Chem. Corp. v. Commissioner,

 (1989), affd. 

 (3d Cir. 1990), affd. sub

nom. INDOPCO, Inc. v. Commissioner, 

 (1992).     We

stated that the expenses were capitalizable because they were

incurred incident to a shift in ownership the benefits of "`which

could be expected to produce returns for many years in the

future.'"   Id. at 75 (quoting E.I. du Pont de Nemours & Co. v.

United States, 

, 1059 (3d Cir. 1970)).

     Our holding was affirmed by the U.S. Court of Appeals for

the Third Circuit, which rejected the taxpayer's argument, based

on Commissioner v. Lincoln Sav. & Loan Association, supra at 354,

that the expenses were not capitalizable because they did not

create or enhance a separate and distinct asset.     See National

Starch & Chem. Corp. v. Commissioner, 918 F.2d at 428-433.       The

Supreme Court also rejected this argument.     The Court stated that

Lincoln Savings stands merely for the proposition that an expense

must be capitalized under section 263(a)(1) when it serves to
                             - 17 -


create or enhance a separate and distinct asset.   The Court

noted, however, that the creation or enhancement of a separate

asset is not the sole determinant for capitalization.   The Court

clarified its holding in Lincoln Savings, stating:

          Nor does our statement in Lincoln Savings that
     "the presence of an ensuing benefit that may have some
     future aspect is not controlling" prohibit reliance on
     future benefit as a means of distinguishing an ordinary
     business expense from a capital expenditure. Although
     the mere presence of an incidental future benefit--
     "some future aspect"--may not warrant capitalization, a
     taxpayer's realization of benefits beyond the year in
     which the expenditure is incurred is undeniably
     important in determining whether the appropriate tax
     treatment is immediate deduction or capitalization.
     Indeed, the text of the Code's capitalization
     provision, section 263(a)(1), which refers to
     "permanent improvements or betterments," itself
     envisions an inquiry into the duration and extent of
     the benefits realized by the taxpayer. [INDOPCO, Inc.
     v. Commissioner, supra at 87-88; fn. ref. and citations
     omitted.]

The Court concluded that the professional fees before them fell

within the longstanding rule that expenses directly incurred in

reorganizing or restructuring a corporate entity for the benefit

of future operations are not deductible under section 162(a).

The purpose for which these expenses are made, the Court stated,

"'has to do with the corporation's operations and betterment * *

* for the duration of its existence or for the indefinite future

or for a time somewhat longer than the current taxable year'".

Id. at 90 (quoting General Bancshares Corp. v. Commissioner,

, 715 (8th Cir. 1964), affg. 

 (1962)).
                               - 18 -


     On two occasions, we have applied INDOPCO to require

capitalization of acquisition-related expenditures.    First, in

Victory Mkts., Inc. & Subs. v. Commissioner, 

 (1992),

we held that INDOPCO prohibited a taxpayer from currently

deducting expenses for professional services incurred incident to

a takeover that was not hostile.    It appears that these expenses

were attributable to an agreement that the taxpayer had with E.F.

Hutton to provide advice and services on the takeover.    See id.

at 652.   The taxpayer had argued that these expenses were

currently deductible because the takeover was a hostile one from

which it received no long-term benefit.    We found that the

takeover was not hostile and that it generated long-term

benefits.

     Most recently, in A.E. Staley Manufacturing Co. & Subs. v.

Commissioner, 

 (1995), revd. and remanded 

 (7th Cir. 1997), we held that INDOPCO prevented the taxpayer

from currently deducting expenses for investment bankers' fees

and printing costs incurred incident to a takeover.    The taxpayer

had argued that these expenses were currently deductible because

the takeover was hostile.    We held that the expenses had to be

capitalized because they were incurred incident to the taxpayer's

change of ownership from which it derived significant long-term

benefits.   Upon appeal, the Court of Appeals for the Seventh

Circuit disagreed in part.    The Court of Appeals held that the
                              - 19 -


expenses were deductible to the extent that they were not

incurred to facilitate the transaction at issue there.

     The cases of INDOPCO, Victory Markets, and A.E. Staley all

addressed the capitalization of expenses which were incurred as

direct costs of effecting a corporate acquisition.   In the

instant case, by contrast, DBTC incurred the disputed costs

before and incidentally with its acquisition.   Petitioner focuses

on the timing of the disputed costs and invites the Court to

allow deductibility of these costs because they were incurred in

investigating the expansion of its existing business, before the

time that DBTC's management had formally decided to enter into

the transaction by approving the agreement.   We decline this

invitation.   The disputed expenses are mostly preparatory

expenses that enabled DBTC to achieve the long-term benefit that

it desired from the transaction, and the fact that the costs were

incurred before DBTC's management formally decided to enter into

the transaction does not change the fact that all these costs

were sufficiently related to the transaction.   In accordance with

INDOPCO, the costs must be capitalized because they are connected

to an event (namely, the transaction) that produced a significant

long-term benefit.   To the extent that petitioner relies on cases

such as Briarcliff Candy Corp. v. Commissioner, 

 (2d

Cir. 1973), and NCNB Corp. v. United States, 

 (4th

Cir. 1982), for a different result, petitioner's reliance is
                                - 20 -


misplaced.   We read INDOPCO to have displaced the body of law set

forth in Briarcliff Candy and its progeny insofar as they allowed

deductibility of investigatory costs in a setting similar to that

at hand; i.e., where an expenditure does not create a separate

and distinct asset.    Accord FMR Corp. & Subs. v. Commissioner,

 (1998).   The Supreme Court granted certiorari in

INDOPCO to resolve the conflict among the Courts of Appeals on

the requirements for capitalization in the absence of a separate

and distinct asset.    The Supreme Court in INDOPCO required that

an expense be capitalized when it produces a significant long-

term benefit, even when, as is the case here, the expense does

not produce a separate and distinct asset.

     Petitioner's position on the timing of the investigatory

fees is similar to an argument that was rejected by the courts in

Ellis Banking Corp. v. Commissioner, T.C. Memo. 1981-123.      There,

the taxpayer was a bank holding company that, under State law,

had to acquire the stock of other banks or organize new banks in

order to expand its business into new geographic markets.      The

taxpayer agreed with another bank (Parkway) and certain of

Parkway's shareholders to acquire all of Parkway's stock in

exchange for taxpayer stock.    The agreement was contingent on the

occurrence of certain events.    Before the acquisition, but

incident thereto, the taxpayer incurred various expenses

conducting a due diligence examination of Parkway's books.      These
                              - 21 -


expenses were for office supplies, filing fees, travel expenses,

and accounting fees.   The taxpayer deducted these expenses, and

the Commissioner disallowed the deduction.   The Commissioner

determined that the expenses had to be capitalized.

     We sustained the Commissioner's disallowance.    We held that

the expenses were capital in nature because they were incurred

incident to the acquisition of a capital asset.    The Court of

Appeals for the Eleventh Circuit agreed.   The taxpayer had argued

that the expenses were "ordinary and necessary" because they were

incurred in connection with its decision to acquire the stock and

in evaluating the market in which Parkway was located.      Ellis

Banking Corp. v. Commissioner, 688 F.2d 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 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.]
                              - 22 -


     Nor does our reading of section 195 support a contrary

conclusion.   Recently, in FMR Corp. & Subs. v. Commissioner,

supra, we addressed the applicability of section 195 in a context

analogous to the setting at hand, holding that section 263(a)

required that the taxpayer capitalize the costs which it incurred

in developing and launching 82 new regulated investment companies

(RIC's).   The costs were incurred in a series of activities

starting with the development of the idea for the new RIC and

continuing with the development of the initial marketing plan,

drafting of the management contract, formation of the RIC,

obtaining the board of trustee's approval of the contract, and

registering the new RIC with the SEC and the States in which the

RIC would be marketed.   Id. at 413.    The taxpayer had argued that

section 195 allowed for the current deductibility of all these

costs because, it asserted, they were incurred in expanding an

existing business.   We disagreed.    We held that section 195 does

not require "that every expenditure incurred in any business

expansion is to be currently deductible."     Id. at 429.

     In sum, we hold that DBTC may not deduct any of the disputed

costs because all costs were sufficiently related to an event

that produced a significant long-term benefit.     Although the

costs were not incurred as direct costs of facilitating the event

that produced the long-term benefit, the costs were essential to

the achievement of that benefit.     We have considered all
                              - 23 -


arguments by petitioner for a contrary holding, and, to the

extent not discussed above, find them to be irrelevant or without

merit.   To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.