The Capital and Revenue Distinction Across the Atlantic: A Comparison of Inland Revenue Commissioners v Carron Co and INDOPCO, Inc v Commissioner

Abstract

The issue of characterising expenditure as revenue or capital in nature has long been one of the most turbulent and contentious areas of tax law. The need for an expense to be revenue in nature to qualify for deduction has meant that this characterisation distinction will often have a significant impact on the income of taxpayers. The complexity and variance of cases in this area have led courts to adopt varying approaches to characterisation, highlighted by the absence of any strictly determinative rule. The differences within this area of law can be seen between jurisdictions. Despite the existence of an overlap in general characterisation principles, the approaches to the application of these principles are widely varied. This article will be a case study of the approaches to the issue of capital and revenue characterisation based on the English House of Lords decision in The Commissioners of Inland Revenue v Carron1 (Carron) and the Supreme Court of the United States case of INDOPCO, Inc. v Commissioner of Inland Revenue2 (INDOPCO). The purpose of this article is to explain and analyse the reasoning in each court, and then compare the approaches taken.