Fruit-Tree and the Ordinary Income Base

The distinction between capital gain and ordinary income isone of the great complicating features of the federal income tax. Inbroad terms, it can be said that capital gains are gains that resultfrom sales of investment property-typically, securities and realestate-and that ordinary income consists chiefly of wages andsalaries, business profits, and dividends, interest and rents. Butwhile the main categories are thus familiar, the application of thecapital-ordinary distinction in less conventional cases is often problematic,and borderline definitional issues, though inevitable, aregenerally agreed to be too numerous for comfort.\u27 The fault, at thefirst level, lies with the statute itself. Although Code § 1221 makessome effort to state what qualifies as a capital asset, the classificationscheme is incomplete and in the end relies too heavily on ambiguousterms like property and business. At another level,this failing probably reflects a fundamental uncertainty on the partof Congress itself about what it really meant to achieve by exempting2a major fraction of long-term investment gains from theordinary tax base