tax question?

Question

Your client is a manufacturer. For several years, the company buried empty paint cans on its property. The paint was used in the production process. Recently, a state environmental agency informed the company that it was required to dig up the paint cans and decontaminate the land. The company spent a substantial amount for this environmental cleanup in the current year. An IRS agent contends that the cost must be added to the basis in the land because the cleanup improved the land. The company’s CFO has asked you to determine if any authority exists that would support a current deduction for these costs.

Answer 1

These costs were not incurred in the production of income. The cleanup is not an improvement to the land. There is no deduction.

In addition, I have some doubt that the cleanup costs can be added to the basis of the land, since this was not an improvement but a correction of a defect caused by the taxpayer's noncompliance with state law.

Answer 2

First, there is IRC section 198, that allows an election to expense environmental cleanup in certain cases. Also, there are court cases that support a current deduction for such expenses in some circumstances (but not all), even if the requirements of section 198 are not met. It would probably be worth while to engage an attorney to argue the case for you.

Answer 3

I'd talk to your congressman. Either way ,its a fiscal loss on your taxes. That upgrade in the land value is a bunch of crap