The Story of INDOPCO: What Went Wrong in the Capitalization v. Deduction Debate?
Stanford Law School
TAX STORIES: AN IN-DEPTH LOOK AT TEN LEADING FEDERAL INCOME TAX CASES, Foundation Press, Forthcoming
This paper presents the story of INDOPCO v. Commissioner, 503 U.S. 79 (1992), the most recent decision in this volume, and, in part for that reason, the decision that is most frequently discussed in the tax world. A case such as Knetch v. United States exerts its influence subtly, in forming the basis for today's economic substance doctrine. Lawyers can (and do) debate the merits of that doctrine, and in so doing comment upon the Knetch decision, but the decision itself has faded into the background. INDOPCO, by contrast, is still very much alive. Industry has lined up an (anti) "INDOPCO Coalition," headed by the (former) IRS Commissioner who pursued the case; the government has recently issued INDOPCO regulations; the decision (and its aftermath) is discussed in today's tax and business journals. The case is important, then, for its practical significance. It is the most recent Supreme Court announcement on the deductibility of business expenses that do not produce or enhance tangible assets.
In time, of course, INDOPCO will lie under, and help give shape to, newer cases and regulations. The case will be worth studying less for its practical import than the light it sheds on the administration of an income tax, or, more speculatively, any tax or set of rules shaped by the political process. The judge, legislator, or administrator must balance competing goals: uniformity, certainty, practicality and so on. In INDOPCO, that balancing act failed: the opinion in the case is widely seen as making a bad situation worse. What makes this failure particularly sobering is that the case fell into seemingly able hands. The opinion was written by the most knowledgeable tax jurist ever to sit on the Court and solicited by an administration whose leadership opposed everything the opinion came to stand for.
The paper will be published as a chapter in a book to be entitled Tax Stories: An In-Depth Look at Ten Leading Federal Income Tax Cases (Foundation Press, forthcoming 2002). Additional financial support for the project has been provided by the American Tax Policy Institute.
Accepted Paper Series
Date posted: August 16, 2002
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