Fruit-Tree and the Ordinary Income Base

Abstract

The distinction between capital gain and ordinary income is one of the great complicating features of the federal income tax. In broad terms, it can be said that capital gains are gains that result from sales of investment property-typically, securities and real estate-and that ordinary income consists chiefly of wages and salaries, business profits, and dividends, interest and rents. But while the main categories are thus familiar, the application of the capital-ordinary distinction in less conventional cases is often problematic, and borderline definitional issues, though inevitable, are generally agreed to be too numerous for comfort. The fault, at the first level, lies with the statute itself. Although Code § 1221 makes some effort to state what qualifies as a "capital asset," the classification scheme is incomplete and in the end relies too heavily on ambiguous terms like "property" and "business." At another level, this failing probably reflects a fundamental uncertainty on the part of Congress itself about what it really meant to achieve by exempting a major fraction of long-term investment gains from the ordinary tax base.