Environmental cleanup costs as business expense and....

• Author: Waltemyer, Edward L.

While concern for the environment by the mass population is admirable, the legislative strength placed into the hands of governmental agencies has created stagnant and debilitating business growth in our country.

The ability of many manufacturing plant owners to expand operations by moving to enlarged quarters or selling existing cramped quarters to other interested manufacturers is often stymied by strict and overzealous environmental regulations; the prospect of costly cleanup expenses effectively prevents many business moves.

On June 1, 1994, in Rev. Rul. 94-38, the IRS addressed the tax treatment of the current costs required to remedy any existing soil and water contamination, and for costs incurred to construct treatment facilities to prevent future contamination of the soil or water.

At issue was whether the costs incurred to clean up land and to treat groundwater that a taxpayer contaminated with hazardous waste from its business were deductible by the taxpayer as a business expense or did they have to be capitalized.

In Rev. Rul. 94-38, an accrualbasis corporation owned and operated a manufacturing plant that it built on land purchased in 1970; the land was not contaminated when the company bought it. The company's manufacturing operations discharged hazardous waste, which was then buried on portions of the company's land.

In order to comply with presently applicable and reasonably anticipated Federal, state and local environmental requirements, in 1993 the company decided to remediate the soil and groundwater that had been contaminated by the hazardous waste. It also decided to establish an appropriate system for the continued monitoring of the groundwater to ensure that all hazardous waste had been removed.

Accordingly, the company began excavating the contaminated soil, transporting it to appropriate waste disposal facilities and backfilling the excavated areas with uncontaminated soil. The soil cleanup activities began in 1993 and will be completed in 1995. The company also began constructing groundwater treatment facilities (including wells, pipes, pumps and other equipment) to extract, treat and monitor contaminated groundwater. Construction began in 1993 and the facilities will remain in operation until 2005.

The effect of the cleanup and treatment will be to restore the company's land to essentially the same physical condition that existed before the contamination. During and after the cleanup and treatment, the company...