Distinguishing Between Capital Expenditures and Ordinary Business Expenses: A Proposal for a Universal Standard

It is apparent from an examination of the various court decisions that there is no single, common standard used to distinguish between capital expenditures and ordinary business expenses. The courts are not completely to blame for this situation, however, because the Internal Revenue Code provides little guidance on the capital/ordinary distinction. This Note proposes an amendment to the Tax Code that would provide courts with a universal standard to apply in differentiating between the two types of expenditures and that best reflects the general purpose of the Code in matching income with its related expenses. Part I analyzes the historical development of the capital/ordinary distinction and the various line-drawing tests that are currently applied by the courts. Part II proposes a Tax Code framework for distinguishing between capital and ordinary expenditures. Part III applies this framework to two instances in which courts have disagreed about the deductibility of certain expenditures: prepublication expenses of authors and publishers and bank branching expenses.