Environmental cleanup costs include expenditures incurred for the assessment,
mitigation and/or remediation of environmental hazards. These hazards
can include contamination of soil, water, and other tangible property.
Examples include leaking underground storage tanks, chemical spills, asbestos,
lead paint, etc.
In the United States, the major tax issue involving environmental cleanup
costs is whether the expenditures should be capitalized for tax purposes
and depreciated over a period of years or expensed immediately.
The major arguments in favor of capitalizing these expenditures are:
they have increased the value of the property, significantly prolonged
the use of the property, adapted the property for a new use, or created
benefits with a duration of more than one year. The arguments in
favor of immediate expensing these costs are: the expenditures have
merely restored the property to its previous condition prior to the pollution
activities, allowed the taxpayer to continue to use the property, or kept
the property in usable condition. In many court cases, the IRS has
argued for capitalizing these costs and depreciating them over future periods
whereas taxpayers preferred the immediate expensing of these costs.
Court decisions have been mixed. (See INDOPCO, Inc., 92-1 USTC 50,113,
503 US 79 (1992); Red Star Yeast and Products Co. v. Com., CCH Dec.
21,351, 25 T.C. 321 (1955); Woolrich Woolen Mills v. U.S., 61-1 USTC 9397,
289 F.2d 444 (CA-3); Moss v. Com., 87-2 USTC 9590 (CA-9); Mountain
Fuel Supply v. U.S., 71-2 USTC 9681, 449 F.2d 816 (CA-10).)
In l997, the Tax Court, in Norwest Corp. v. Com.,(CCH Dec. 52,008, 108
T.C. 265[1997]), ruled that a taxpayer incurring asbestos removal costs
in connection with the remodeling of a building was required to capitalize
these costs as part of the remodeling plan. The opinion indicated
the asbestos removal costs would not have been incurred if the remodeling
work had not been done; therefore, the removal costs were part of the general
plan of remodeling and must be capitalized. The taxpayer's arguments
that the asbestos removal costs did not increase the value of the building,
were made to eliminate a health hazard, and merely restored the building
to its prior value before the discovery of the asbestos were denied.
If the asbestos removal costs had been incurred separately from the remodeling
work, there is good reason to believe that the removal costs would be currently
deductible.
In January l998, the IRS issued Rev. Proc. 98-17, (1998-5 I.R.B. 21),
that allows taxpayers to request a letter ruling on the immediate deductibility
or capitalization of environmental cleanup costs incurred in a continuing
project which spans a period of years. The letter ruling can cover
years in which the taxpayer has already filed tax returns. A letter
ruling will not be issued, however, if the identical environmental cleanup
issues are currently pending in litigation in a case involving the IRS
and the taxpayer. The Rev. Proc. is effective for requests submitted
during the two year period: February 2, l998 to February 2, 2000.
The Taxpayer Relief Act of l997 added Code Sec. 198 entitled "Expensing
of Environmental Remediation Costs." Under Code Sec. 198, which is effective
for expenditures paid or incurred after August 5, l997 through December
31, 2000, the taxpayer can elect to currently deduct qualified environmental
remediation (cleanup) costs which would otherwise be capitalized.
Qualified cleanup costs must be incurred in connection with the abatement
or control of hazardous substances at a qualified contaminated site. Hazardous
substances normally include toxic pollutants and hazardous chemical wastes.
A qualified contaminated site would be property held for use in trade or
business, for the production of income, or inventory which is certified
by an appropriate state agency to be located within a targeted area which
contains a hazardous substance. Targeted areas include empowerment
zones and enterprise communities as designated under current law, 76 EPA
Brownfield's Pilot Project sites, and population census tracts with a proverty
rate of 20% or more, and certain industrial and commercial areas contiguous
to these population census tracts. Code Sec. 198 does not apply to
costs incurred in the demolition of structures and mining and solid waste
reclamation costs.
(This brief summary has been adapted from: Kreiser, Larry, Butcher,
William, and Schoch, Hebert, "The Taxation and Management of Environmental
Cleanup Costs: A Growing Worldwide Concern," TAXES-THE TAX MAGAZINE, Vol.
76 No. 5 (May l998), pp. 29-34.)
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