IRS Notice 97-7: draft revenue procedure on obtaining private rulings on environmental remediation issues.

• Position: Tax Executives Institute's comments of June 11, 1997

On June 11, 1997, Tax Executives Institute submitted the following comments to the Internal Revenue Service on IRS Notice 97-7, which sets forth a draft revenue procedure on obtaining private rulings from the agency on the proper tax treatment of environmental remediation expenditures. The comments were prepared under the aegis of the Institute's Federal Tax Committee, whose chair is David L. Klausman of Intel Corporation. Margaret A. Satko of General Motors Corporations materially contributed to the preparation of TEI's submission.

The Internal Revenue Service published Notice 97-7 in the Internal Revenue Bulletin (1997-1 I.R.B. 8) on January 6, 1997. The Notice sets forth a draft of a proposed revenue procedure that will provide special procedures for obtaining private guidance on the proper tax treatment of environmental cleanup costs under sections 162 and 263 of the Internal Revenue Code. In response to the IRS's invitation in Notice 97-7, Tax Executives Institute is pleased to submit the following comments on the draft revenue procedure.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's more than 5,000 members represent 2,800 of the largest companies in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to environmental cleanup issues generally and to the issues raised specifically by Notice 97-7 relating to a proposed revenue procedure providing guidance to taxpayers seeking to obtain private guidance concerning the treatment of environmental remediation expenditures.

Notice 97-7

In Notice 97-7, the IRS proposes a new special revenue procedure permitting taxpayers to obtain private guidance on the tax treatment of environmental cleanup costs. The purpose of the procedure is "to facilitate the resolution of issues involving the capitalization or deduction of environmental cleanup costs for both prior and future years of a single environmental cleanup transaction."(1)

Consequently, the new procedure will depart from current ruling practice by permitting taxpayers generally to (i) obtain a private letter ruling after filing a return for the year of the transaction, (ii) obtain technical advice covering all years of a transaction rather than just the years under examination, and (iii) in connection with settlement of an examination, obtain a ruling addressing the future tax treatment of expenditures where part of the costs will be incurred under a continuing plan for environmental cleanup.

TEI commends the IRS for its effort to implement procedures facilitating the resolution of issues, especially the proper tax treatment of environmental cleanup costs. Under some circumstances, the proposed procedure will prove salutary in resolving the deductibility of costs incurred in environmental cleanup transactions. Hence, the Institute supports the issuance of the procedure, but that support is tempered by our often expressed opinion that the resolution of capitalization issues generally, and environmental cleanup issues specifically, can and should be addressed more broadly and efficiently by the issuance of generally applicable guidance that can be relied upon by taxpayers and revenue agents alike.(2) Indeed, the number and extent of disputes over the deductibility of environmental remediation costs--and the rancor that is sometimes engendered during the disputes--have been exacerbated by the dearth of generally applicable formal guidance.

Issuing Private Letter Rulings and Technical Advice Memoranda Is Not an Effective Means of Providing Guidance on Capitalization Issues

TEI does not believe that the tax law governing environmental cleanup expenditures can be effectively developed through the issuance of piecemeal guidance in private letter rulings and technical advice memoranda. Private rulings involve the application of the law to the taxpayer's specific facts; hence, they are not designed to serve as general guidance. The rulings have no precedential effect and are not intended to be relied upon by anyone other than the taxpayer to whom the ruling is directed.(3)

The precedential effect of private rulings is limited for good reason. Many rulings, especially in their redacted form, are not detailed enough to provide useful precedent. In order to protect the confidentiality of the taxpayer, the discussion of the facts is frequently abbreviated. In addition, the factual patterns posed in many rulings are not representative of common circumstances or transactions. Moreover, important factual alternatives may be omitted or the factual question may be narrowly framed. Similarly, alternative legal theories may not be addressed in the ruling and the legal analysis may be attenuated. Finally, private rulings are not subject to the same level of review by policy...