IRS guidance on environmental cleanup projects.

For a two-year period that began on February 2, 1998, taxpayers may seek written guidance from the IRS on the capitalization or deductibility of environmental cleanup costs incurred during multiyear projects under revenue procedure 98-17 (1998-5 IRB 1). This new procedure is similar to one the IRS proposed last year (revenue procedure 97-7, 1997-1, IRB 8). Generally, 98-17 removes some procedural impediments to resolving all of the tax issues associated with an environmental remediation project.

The environmental cleanup guidance could cover years for which a return has been filed, is under examination or is before an IRS appeals office. It also could cover future years. The IRS will not provide guidance, however, if the taxpayer (or a related party) is litigating the issue under discussion.

The written guidance applies only to the costs of activities that the taxpayer describes in its request for a ruling. These may include costs for assessment, mitigation, removal or remediation of environmental hazards, whether latent or imminent, on the taxpayer's property or other property. An environmental cleanup project may consist of one or more related cleanup activities, such as

* Studying, remediating and monitoring soil and groundwater at a former manufacturing site.

* Removing and replacing asbestos in manufacturing equipment located at several of the taxpayer's operating plants.

* Removing underground storage tanks, treating contaminated soil and groundwater, and removing asbestos from a retail facility where the taxpayer intends to begin operations.

Observation: Revenue procedure 98-17 signals that it is the IRS's intention to continue addressing capitalization issues one by one, taxpayer by taxpayer. The IRS has resisted suggestions that It issue "generic" guidance on distinguishing between costs that may be deducted on a current basis and those that should be capitalized. But, environmental remediation would be particularly amenable to broad guidance as projects tend to have similar characteristics.

Generally, the procedure set forth in 98-17 allows taxpayers to obtain unified consideration of issues that otherwise might be dealt with on a piecemeal basis as federal income tax returns are audited. A company undertaking an expensive remediation project may welcome this opportunity to put the tax issues to rest early. Some may want to first explore the benefits of this procedure, possibly by using the pre-submission conference procedure announced by the IRS last spring.

--Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.