Environmental clean-up: repair vs. improvement.

• Author: Hersh, Robert

The controversy over the tax treatment of land clean-up costs resulting from environmental soil contamination has been brewing for some time. The issue is whether the clean-up costs and be currently deducted or whether they must be capitalized and, if capitalized, whether they are subject to depreciation or amortization.

The IRS recently said in Letter Ruling (TAM) 9315004 that a tax-payer's costs to clean up contaminated soil surrounding some of its facilities must be capitalized as an addition to its depreciable facilities.

The TAM concluded that the soil remediation activities under-taken by the taxpayer (excavation, transportation and disposal of contaminated soil, and back-filling) were permanent improvements to the property, increased its value and constituted a general plan of rehabilitation.

The TAM also held that soil contamination assessment costs, i.e., those associated with identifying the location and extent of contamination, should be capitalized to the extent the property assessment required remediation. Alternatively, if the assessment did not require remediation, the associated costs would be deductible.

One positive outcome of this ruling is that these capitalized costs do not become part of the nondepreciable land cost but rather become part of the facilities located on the land. As such, the costs would be depreciable (albeit over 27 1/2 or 31 1/2 years).

Since the TAM was issued, senior IRS officials have shed additional light on the deductibility of environmental clean-up costs. In one instance, an official noted that if the clean-up occurred every year, the costs would be currently deductible. If the taxpayer waited four or five years, however, the costs would be...