Academic journal article Journal of Accountancy

Deducting Environmental Cleanup Costs

Academic journal article Journal of Accountancy

Deducting Environmental Cleanup Costs

Article excerpt

Environmental remediation costs can be deductible trade or business expenses under IRC section 162. However, under IRC section 263, businesses must capitalize expenditures that increase a property's value or its useful life or adapt it to a different use. The tax treatment of specific remediation costs is determined by the facts and circumstances of the situation.

In 1989 United Dairy Farmers, Inc., purchased two stores with soil contaminated by leakage from underground gasoline storage tanks. While neither seller operated gas stations, United Dairy was aware of the leakage at each property's closing date. The company spent $259,980 cleaning the soil and deducted the amount on its 1993 corporate tax return. The IRS argued the amounts represented capital expenditures under section 263. In 2000 the Southern District Court of Ohio agreed with the IRS. In 2001 United Dairy appealed the decision to the Sixth Circuit Court of Appeals.

Result. For the IRS. United Dairy, citing Plainfield-Union v. Commissioner, 39 TC 333 and revenue ruling 94-38, argued the expenditures were deductible under section 162 because the remediation only restored the value to the property that existed before the soil contamination. In Plainfield-Union the court had allowed a current deduction for the taxpayer's costs to restore water mains to their condition before the addition of acidic water impaired the water flow. In revenue ruling 94-38, a company was allowed to deduct cleanup costs for groundwater contamination due to hazardous waste discharge that had been part of its manufacturing process over a number of years. Both rulings had applied a test that compared the property's status after the remediating expenditure to its status before the condition that caused the expenditure. United Dairy argued it should be allowed a current deduction for its $259,980 expenditure since it restored the property to the same condition before the gasoline leakage--the event that had caused the expenditure. …

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