Contrary to IRS opinion, land remediation expenses should be deductible.

• Author: Herndon, Diane P.

In Letter Ruling (TAM) 9315004, the IRS considered a taxpayer that had used PCB-based synthetic lubricants in its manufacturing processes; after Environmental Protection Agency inquiries, the taxpayer removed the PCBs that had been dumped into earthen pits and trenches on its property. The Service required capitalization of the costs of the soil and groundwater contamination assessments, excavation and transportation of contaminated soils and backfilling, legal defense fees, oversight costs and environmental audit and compliance costs. Interestingly, the cost was capitalized to the taxpayer's depreciable manufacturing property, rather than its land. The ruling relied principally on the general plan of rehabilitation doctrine rather than the usual analysis for Sec. 263 purposes, i.e., whether value has been added, the useful life had been prolonged or a new and different use had been created for the property.

In general, a taxpayer that has contaminated its land by disposing of waste created during a manufacturing process, under procedures considered good business practice at the time, should be allowed to deduct the expenses of the soil remediation expenditures associated with the excavation, transportation, disposal and backfilling of the contaminated soil. These expenditures do not make the land more valuable for use in the taxpayer's manufacturing business, increase the land's life or adapt it to a different use. Thus, in Collingwood, 20 TC 937 (1953), acq. 1954-1 CB 4, a current deduction was permitted for "terracing" expenditures on a taxpayer's land, designed to...