Vol. 6, No. 4, Pg. 14. The Deductibility of Costs: Environmental Cleanup Mapping Uncharted Waters.

• Author: By Richard H. Willis, Patrick G. Jones and C. Dan Wyatt III

South Carolina Lawyer

1995.

Vol. 6, No. 4, Pg. 14.

The Deductibility of Costs: Environmental Cleanup Mapping Uncharted Waters

14The Deductibility of Costs: Environmental Cleanup Mapping Uncharted WatersBy Richard H. Willis, Patrick G. Jones and C. Dan Wyatt IIIOver the past two decades, American businesses have faced an increasing burden of environmental regulation from federal, state and local governmental entities. For example, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), 42 U.S.C. § 9601 et seq., liability for cleaning up contaminated sites is far reaching and attaches not only to property owners but to any potentially liable party. The types of costs incurred under CERCLA include environmental audits to assess and monitor the extent of environmental contamination, preparing remediation feasibility studies, actual remediation costs of soil and groundwater, treatment and disposal of hazardous waste, and legal and consulting fees.

. . . experts have placed the cost of cleaning up the country's contaminated areas over the next 30 years at anywhere between $500 billion and $1 trillion dollars."

These and other cleanup costs will be significant throughout the foreseeable future. Indeed, experts have placed the cost of cleaning up the country's contaminated areas over the next 30 years at anywhere between $500 billion and $1 trillion dollars. Given the enormous size of this outlay, taxpayers have a significant interest in knowing to what extent such costs are deductible for tax purposes.

The fundamental issue is whether a taxpayer will be allowed to deduct environmental cleanup costs as a business expense under Section 162 of the Internal Revenue Code of 1986 (Code) or will be forced to treat them as capital expenditures under Section 263. Section 162(a) allows the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business . . . ." In contrast, Section 263(a)(1) provides that "[n]o deduction shall be allowed

16for . . . [a]ny amount paid out for . . . permanent improvements or betterments made to increase the value of any property or estate [i.e., for capital expenditures]." Section 1.263(a)-(1)(b) of the income tax regulations provides that capital expenditures "include amounts paid or incurred (1) to...