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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.

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