Naifs who look at the law as the result of a rigorously logical analysis of facts and priorities cannot have spent much time looking at what really happens in the courts, legislatures and regulatory agencies. But the cynics who declare that law is simply the outcome of competing power forces, with no basis in underlying logic, are just as wrong. The rules we are supposed to live by are created in some middle zone in which a logical underpinning for decisions is essential, but does not necessarily carry the day.

Inside both Congress and the Internal Revenue Service, that war between results and a defensible rationale is being waged over the question of how to treat, for tax purposes, the money businesses spend on advertising. The final answer may hinge on just how much clout the companies that would be most affected can muster. But the more coherent the argument for a change sounds, the more political muscle it will take to stop it.

Right now, advertising is considered a business expense much like buying raw materials or paying the rent on a store: the company gets to deduct the entire cost of a campaign in the year the expenditure is made. But some theorists are arguing that some advertising is not an attempt to make an immediate sale, but rather an investment in the future. If that is so, it should be treated not as an ordinary expense but as a capital expenditure. A company would still get a deduction, but it would be spread out over time.

Because advertising is such big business -- comapnies spend more than $100 billion a year on such promotion -- that change could make a big difference to the Treasury. The Congressional Joint Committee on Taxation estimates that if as of January 1 businesses were forced to capitalize over four years just 20% of their ad expenses, it would increase the total tax take by $3 billion in 1988. And the effect would just keep on growing. The estimated total additional revenue for the first three years is $10.8 billion.

The Joint Committee also looked at the possibility of telling big companies that they could get no tax deduction at all on 20% of their advertising budget, and would have to amortize the rest over two years. That option produces almost $38 billion more for the tax collectors between the beginning of next year and the end of 1990.

The 20% figure in both formulas is admittedly an arbitrary slice of the spending pie, but probably isn't too far off on the average. The balance between short-term and long-term gains from promotions would be very different in different industries, but the job of trying to fine-tune the percentage for every company filing a tax return is too daunting.

"The question is less one of whether 20% or some other percentage is an accurate measure of the long-term benefit created by advertising dollars, but rather, whether any portion of advertising expenses should be capitalized," says Tim Vettel of Tax Analysts. "Restated, the quesiton is whether any portion of advertising expenses incurred in year one will create income in future years."

Of course, that's what companies hope for. A good bit of corporate advertising is clearly not tied to an immediate sale. M&M Mars hopes its ads will make you salivate for a Milky Way right now, but makers of computers, corporate aircraft and fork lift trucks are using advertising to open doors for their salespeople -- and to enhance their company's reputation on Wall Street. Even consumer ads for hotel chains or liquor are trying to create an image that will linger years after the newspaper is thrown away or the sitcom forgotten. That provides a logical underpinning for treating some ad spending as a capital expense.

But a lot of the spending for which business gets an immediate deduction involves a hope for some long-term benefit as well. Executives approve the high rent charged by the prestige location not only because of the number of customers walking by, but also because having an outlet in a choice location may boost the image of the entire chain. Bright new graduates are paid more than they are "worth" this year in hopes that they will stick with their first employer when their skills catch up with their talents.

The only time an expense should be capitalized is when it "creates or enhances a separate and distinct asset which will have a value lasting more than one year," a team of Washington tax lawyers, Lester G. Fant III and Daniel M. Davidson, argued in a letter to the IRS.

The spillover effect of successful advertising is no more than that of a good marketing plan from a management consultant or good tax advice from a lawyer, and there's no doubt that bills for those professional services are fully deductible in the year they are paid -- and that there's no move to change tax treatment of those expenses. Advertisers and the media argue that any proposal to capitalize advertising expenses is illogical as long as these other business costs are treated as current expenses.

When Congress gets back from its August vacation and the members of the House Ways & Means Committee and the Senate Finance Committee start looking in earnest at how they will raise more revenue, the clash between those two sets of rationales will influence -- but may not determine -- the viability of the proposal to stretch out deductions for advertising./

Moskowitz covers legal affairs for McGraw-Hill World New