IRS's mixed treatment of asbestos abatement costs.

• Author: Conjura, Carol

Over the past two years, the IRS has addressed the deductibility of environmental remediation costs in several technical advice memorandums. In these rulings, the Service has generally concluded that the costs directly associated with remediation must be capitalized. In Letter Ruling (TAM) 9240004, for example, the IRS required the taxpayer to capitalize the costs it incurred, in response to regulatory standards, for the removal and replacement of asbestos insulation in manufacturing equipment. In Letter Ruling (TAM) 9315004, the Service reached the same conclusion with respect to costs incurred in response to legal actions to remediate PCB-contaminated soil resulting from the prior use of the taxpayer's equipment.

In each of these rulings, the IRS concluded that the costs did not qualify as currently deductible repair costs because the costs either increased the value of the property or enhanced its use to the taxpayer, thereby resulting in permanent improvements the costs of which must be capitalized. The Service's conclusions in the rulings have been publicly challenged by both taxpayers and members of Congress, and the IRS has responded by forming an IRS-Treasury study group to revisit these conclusions and provide more guidance on the Service's application of the current law to different types of environmental remediation programs.

Pending the final results of the study group, the IRS is continuing to resolve individual cases that arise in current examinations and has released a third technical advice memorandum dealing with an environmental remediation fact pattern. In contrast to the Service's previous conclusions, the conclusions in Letter Ruling (TAM) 9411002 are mixed: while the IRS concluded that asbestos removal costs must be capitalized, it permitted the taxpayer to currently deduct asbestos encapsulation costs as incidental repairs.

Letter Ruling 9411002 involved a corporation engaged in the sale of rental warehouse space and related services. In order to secure a bank loan for expansion of its facilities, the taxpayer was required to --remove all asbestos-containing materials from its boiler house that was to be converted into a two-truck garage and office space; and --encapsulate exposed and damaged asbestos-containing pipe insulation located in its adjacent warehouse.

In requiring capitalization of the removal costs, the Service distinguished the taxpayer's asbestos removal costs from the pipe lining replacement costs found...