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incurred during the taxable year, (2) be for carrying on any
trade or business, (3) be an expense, (4) be a necessary expense,
and (5) be an ordinary expense. Commissioner v. Lincoln Sav. &
Loan Association, 403 U.S. 345, 352 (1971). The principal
difference between classifying a payment as a deductible expense
or a capital expenditure concerns the timing of the taxpayer’s
recovery of the cost. See INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 83-84 (1992); Interstate Transit Lines v. Commissioner,
319 U.S. 590 (1943); Lychuk v. Commissioner, 116 T.C. 374 (2001);
Metrocorp, Inc. v. Commissioner, 116 T.C. 211 (2001).
Just because a particular expense fits within the literal
language of section 162, it does not automatically become
deductible. This is because other sections, such as section 261,
except certain payments from the current deductibility
provisions. INDOPCO, Inc. v. Commissioner, supra at 84. Section
261 states that “no deduction shall in any case be allowed in
respect of the items specified in this part”, e.g., Part IX,
Items Not Deductible. Section 263(a)(1), which is contained in
Part IX, generally provides that a deduction is not 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."
As we recently noted in Lychuk v. Commissioner, supra at
386, the Supreme Court’s mandate as to capitalization requires
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