Asbestos expenses are currently deductible.

• Author: O'Driscoll, David

P sought to recover costs incurred in removing and encapsulating asbestos in an addition to one of its office buildings. P retained C to remove or encapsulate the asbestos-containing materials in the basement and first and second levels of the addition. The project included removal and disposal of the existing drop ceiling in the basement; removal and disposal of the sprayed on, fireproofing material from certain areas; removal and disposal of pipe fittings that contained asbestos and replacement thereof with nonasbestos fittings; and encapsulation of some of the basement's existing fireproofing.

The building's original fireproofing material containing asbestos was sprayed onto various parts of the steel structure and did not create a problem for years. As the fireproofing material deteriorated, however, the danger of the asbestos circulating in the offices increased. P decided to remove or encapsulate the asbestos to restore the building's fireproofing to a state such that it would not crumble or cause asbestos to be circulated.

The work was neither prompted by any intent to sell the building nor related to any negotiations associated with such a sale. It also was not part of a broader program to refurbish the building. Rather, P used the addition both before and after the asbestos project. Further, the asbestos work did not extend the addition's useful life. P claims that the removal and encapsulation costs were ordinary and necessary business expenses. The amount of tax at issue is allegedly $279,018.

Analysis

Sec. 162(a) allows the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Sec. 263 disallows a deduction for a capital expenditure, which is "[a]ny amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." Determining whether a payment is a business expense or capital expenditure is a fact-intensive inquiry; see Jones, 242 F2d 616 (5th Cir. 1957).

Regulations define some of the relevant criteria. Regs. Sec. 1.263(a)-1(b) indicates, for example, that no deductions are allowed for amounts expended to "(1) add to the value, or substantially prolong the useful life, of property owned by the taxpayer, such as plant or equipment, or (2) adapt property to a new or different use." However, the costs of incidental repairs typically would be deductible if they neither materially add to...