... As deduction.

Hazardous waste cleanup is a major business issue in property acquisitions, and in the daily operation of many different types of businesses. These operations are heavily regulated by both Federal and state governments.

The IRS has issued several rulings in the past few years that for the most part have determined that cleanup costs must be capitalized. One of the major reasons cited was that the hazardous waste cleanup expenditures increased the value of the property; that is, the property was made more attractive to potential buyers and users as a direct result of those expenditures.

The IRS has now ruled in favor of the deductibility of certain hazardous waste cleanup costs in Rev. Rul. 94-38. (The facts of the ruling are summarized in the previous item.) Rev. Rul. 94-38 held that the costs to clean up the soil and groundwater contamination were ordinary and necessary business expenses; however, the construction of a groundwater treatment and monitoring system had to be capitalized. The IRS cited INDOPCO, Inc., 112 Sup. Ct. 1039 (1992), in determining that the deductibility of the soil and groundwater contamination cleanup costs were based on the fact that there was no contamination present when the corporation involved acquired the property. Therefore, these costs only restored the property to its original status. Capitalization of the groundwater treatment facility was required because an improvement was created that enhanced the value of the property and had a useful life substantially beyond the year of construction.

Note that more advice may be forthcoming from the Service in the near future, clarifying the treatment of hazardous waste cleanup costs in situations in which some or all of the contamination occurred before the taxpayer's acquisition of the property.