IRS rules remediation-related costs deductible.

• Author: Howe, Vicki

In an abrupt reversal of its prior position, the IRS has withdrawn its recent (and controversial) Letter Ruling (TAM) 9541005 on the deductibility of environmental cleanup costs. The Service has now ruled that the remediation-related expenses that the company in the letter ruling incurred are currently deductible. This reversal is a victory for taxpayers, as the new result is in agreement with Rev. Ruls. 94-38 and 95-74, in which the IRS allowed a current deduction for remediation costs (except for certain equipment that must be capitalized, e.g., monitoring wells). The new ruling does not yet have a letter ruling number.

The taxpayer's facts in the most recent ruling are as follows: The company's predecessor purchased farmland. The land continued to be farmed for a number of years, and then became an industrial waste disposal site. The company later contributed the land to the county, and took a deduction for the charitable contribution. When the county discovered that the land was contaminated, it stopped developing the recreational park, and conveyed the land back to the company for $1. The company never recaptured or otherwise took the charitable contribution deductions back into income.

Environmental Protection Agency (EPA) and state officials tested the land's soil and discovered the presence of hazardous substances. The land was designated as a Superfund site. In order to satisfy the requirements necessary to enter into a consent agreement with the EPA, the company paid a consulting firm to conduct a...