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income are a matter of legislative grace, and taxpayers bear the
burden of demonstrating that they are entitled to the deductions
they claim. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992).
The principal effect of characterizing a payment as either a
business expense or a capital expenditure concerns the timing of
the taxpayer's cost recovery. A business expense is currently
deductible, while a capital expenditure is normally amortized and
depreciated over the life of the relevant asset, or, if no
specific asset or useful life can be ascertained, is deductible
upon dissolution of the enterprise. INDOPCO, Inc. v.
Commissioner, supra at 83-84.
The Supreme Court's decision in INDOPCO, Inc. v.
Commissioner, supra, serves as the starting point for any
discussion on the distinction between ordinary and necessary
business expenses and capital expenditures. The Court emphasized
at the outset "that the 'decisive distinctions' between current
expenses and capital expenditures 'are those of degree and not of
kind'". Id. at 86 (quoting Welch v. Helvering, 290 U.S. 111, 114
(1933)). As a result, "the cases sometimes appear difficult to
harmonize." Id. The Court then rejected the argument that the
creation or enhancement of a separate and distinct asset is a
prerequisite to capitalization, explaining that "the creation of
a separate and distinct asset well may be a sufficient, but not a
necessary, condition to classification as a capital expenditure."
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