Current tax deduction for underground storage tank removal.

The tax treatment of costs to remedy environmental contamination and initial property clean-up remains unsettled. The IRS has ruled that many such costs should be capitalized and recovered through amortization. For example, in Rev. Rul. 94-38, the Service held that the costs of soil remediation and ongoing groundwater treatment were deductible; however, the costs of groundwater treatment systems had to be capitalized. On the other hand, taxpayers have maintained that all costs should be immediately deductible, arguing that they are virtually all remedial and provide no future benefit to the taxpayer.

Fortunately, the IRS has been moving toward current deductibility of costs. Recently, the Service issued Rev. Rul. 98-25, dealing with the cost of removal of underground storage tanks (USTs). In this ruling, a manufacturer maintained USTs (the old USTs) for holding waste byproducts generated in the manufacturing process. The manufacturer evacuated a hole in the ground, drained the waste products out of the old USTs and placed the waste in a temporary repository. The manufacturer then removed the old USTs and replaced them with new USTs made of steel and filter glass, and transferred the waste byproduct to the new USTs. The new USTs were sealed and the hole was filled with soil.

The IRS held that the cost associated with the removal and disposition of the old USTs was currently deductible, and that the cost of the new USTs was also deductible; the expenditure for the new USTs was not a capital expenditure that would benefit the taxpayer in future years, because the new USTs were completely sealed and had no remaining useful life.

Note that the facts in the ruling are unique, in that the new USTs were sealed and not to be used again. The ruling notes that most storage tanks are used to hold a substance temporarily and are emptied and refilled repeatedly throughout their useful lives. Although not addressed directly, presumably the costs of USTs used as temporary storage facilities would be capitalized and recovered over their useful lives.

Many taxpayers are currently removing or repairing USTs, often in response to state or Federal environmental regulations. In light of this latest ruling, taxpayers with USTs should consult with their tax advisers as to the proper tax treatment of the related costs.