One of the longest continuing disagreements between the IRS and the taxpayers is the issue about capitalization of an expense incurred in a business. The most crucial queries in income tax law are with regard to an expenditure incurred in the course of a business. The question arises as to whether the expenditure so incurred can be subtracted at present to determine the payer’s tax liability, or should it be capitalized. Capitalization in several cases ensues in an asset which can be amortized or depreciated with the passage of time. But sometimes capitalization may be only an offset to a sale when the asset is sold of or even prevent any kind of subtraction at any time. Over the years, the practice in assortment gave rise to huge uncertainty and court case which has created an extensive body of perplexing and opposing right. Controversies of this kind arose after the decision rendered by the Supreme Court in INDOPCO, Inc. v. Commr, 503 U.S. 79 (1992) (Mayer Brown Rowe & Maw, 2003).
In yet another case of Commissioner v. Lincoln Savings & Loan Assn. [71-1 ustc 9476], it was held simply that the formation of a separate and discrete asset may be an adequate condition for categorization as a capital expenditure. But this is not a prerequisite to such classification. Lincoln Savings also does not disallow dependence on future gain as substance of differentiating a regular business expense from that of a capital expenditure. Even though the existence of a subsidiary future advantage may not permit capitalization, a taxpayer’s recognition of profits in future is vital in deciding whether the proper tax treatment is instant deduction or capitalization (Commissioner v. Lincoln Savings & Loan Assn. 71-1 ustc 9476; Pp. 4-12).
The court in the case of Commissioner v. Lincoln Savings & Loan Assn. stated thus "the presence of an ensuing