IRS rules remediation-related costs deductible.

In an abrupt reversal of its prior position, the IRS has withdrawn its recent (and controversial) Letter Ruling (TAM) 9541005 on the deductibility of environmental cleanup costs. The Service has now ruled that the remediation-related expenses that the company in the letter ruling incurred are currently deductible. This reversal is a victory for taxpayers, as the new result is in agreement with Rev. Ruls. 94-38 and 95-74, in which the IRS allowed a current deduction for remediation costs (except for certain equipment that must be capitalized, e.g., monitoring wells). The new ruling does not yet have a letter ruling number.

The taxpayer's facts in the most recent ruling are as follows: The company's predecessor purchased farmland. The land continued to be farmed for a number of years, and then became an industrial waste disposal site. The company later contributed the land to the county, and took a deduction for the charitable contribution. When the county discovered that the land was contaminated, it stopped developing the recreational park, and conveyed the land back to the company for $1. The company never recaptured or otherwise took the charitable contribution deductions back into income.

Environmental Protection Agency (EPA) and state officials tested the land's soil and discovered the presence of hazardous substances. The land was designated as a Superfund site. In order to satisfy the requirements necessary to enter into a consent agreement with the EPA, the company paid a consulting firm to conduct a hazardous waste study and an "investigation." The company also paid consulting firms to assist in meetings with U.S. and state senators, to deal with the media, to address community relations issues and to attend hearings. The company also paid fees to a law firm for the negotiation and drafting of the EPA Consent Order and contracts with the consulting firms.

In the revised letter ruling, the Service ruled that (1) consulting costs paid to an engineering firm that conducted the hazardous waste study, (2) legal fees paid in connection with drafting and negotiating the EPA Consent Order and the consulting contract and (3) other consulting fees were all currently deductible.

Many commentators believed that the IRS position in TAM 9541005 was unreasonable, and perhaps motivated by questionable charitable contribution deductions that the company had taken in earlier years stemming from the transfer of the same land that eventually required remediation. One reason given to justify the result (that the expenses were not currently deductible) was that the taxpayer had failed to carry its burden of substantiating the deductibility of the costs. The new ruling states that this lack of proof was overcome by the company before the letter ruling was reconsidered by the IRS National Office.