Coordinated issue paper gives guidance on underground storage tanks.

• Author: Conjura, Carol

The tax treatment of environmental remediation costs has received increased attention in the past year. The Taxpayer Relief Act of 1997 added Sec. 198, allowing a taxpayer to elect to treat certain remediation costs as noncapital amounts deductible in the tax year paid or incurred. More recently, the IRS issued an "IRS Coordinated Issue Paper on Petroleum Industry Replacement of Underground Storage Tanks at Retail Gas Stations" (CIP), clarifying its position on several issues related to how the retail gasoline station industry should handle costs associated with underground storage tanks. Affected taxpayers have been awaiting guidance on issues related to underground storage tanks since the Service issued Rev. Rul. 94-38.That ruling addressed the proper treatment of remediation costs associated with soil and groundwater contaminated by the activities of a company, and the treatment of costs to construct treatment facilities. The ruling did not, however, address several issues related to underground storage tanks.

The CIP covers two common situations that occur when a business uses underground storage tanks. In the first scenario, a company will incur costs to remove storage tanks, remediate soil, install monitoring equipment associated with groundwater cleanup, and replace the old tanks with new tanks. The second scenario is the same, except that new tanks are not installed. The CIP addresses whether the costs described are capital expenditures under Secs. 263(a) and 263A or whether they are deductible in the year incurred under Sec. 162.

Sec. 162 provides a deduction for ordinary and necessary business expenses paid or incurred during a tax year in carrying on a trade or business. Regs. Sec. 1.162-4 provides a deduction for the costs of incidental repairs that neither materially add to the value of the property nor appreciably prolong its life, but that keep it in ordinarily efficient operating condition. Regs. Sec. 1.162-4 also generally provides that repairs in the nature of replacements, to the extent they arrest deterioration and appreciably prolong the life of property, shall be capitalized and depreciated in accordance with Sec. 167. Sec. 263(a)(1) provides that no deduction is allowed for amounts paid for new buildings or for permanent improvements or betterments made to increase the value of any property. Sec. 263(a)(2) also provides that no deduction is allowed for amounts expended in restoring property or in making good the...