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Asbestos expenses are currently deductible.

P sought to recover costs incurred in removing and encapsulating asbestos in an addition to one of its office buildings. P retained C to remove or encapsulate the asbestos-containing materials in the basement and first and second levels of the addition. The project included removal and disposal of the existing drop ceiling in the basement; removal and disposal of the sprayed on, fireproofing material from certain areas; removal and disposal of pipe fittings that contained asbestos and replacement thereof with nonasbestos fittings; and encapsulation of some of the basement's existing fireproofing.

The building's original fireproofing material containing asbestos was sprayed onto various parts of the steel structure and did not create a problem for years. As the fireproofing material deteriorated, however, the danger of the asbestos circulating in the offices increased. P decided to remove or encapsulate the asbestos to restore the building's fireproofing to a state such that it would not crumble or cause asbestos to be circulated.

The work was neither prompted by any intent to sell the building nor related to any negotiations associated with such a sale. It also was not part of a broader program to refurbish the building. Rather, P used the addition both before and after the asbestos project. Further, the asbestos work did not extend the addition's useful life. P claims that the removal and encapsulation costs were ordinary and necessary business expenses. The amount of tax at issue is allegedly $279,018.


Sec. 162(a) allows the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Sec. 263 disallows a deduction for a capital expenditure, which is "[a]ny amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." Determining whether a payment is a business expense or capital expenditure is a fact-intensive inquiry; see Jones, 242 F2d 616 (5th Cir. 1957).

Regulations define some of the relevant criteria. Regs. Sec. 1.263(a)-1(b) indicates, for example, that no deductions are allowed for amounts expended to "(1) add to the value, or substantially prolong the useful life, of property owned by the taxpayer, such as plant or equipment, or (2) adapt property to a new or different use." However, the costs of incidental repairs typically would be deductible if they neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition. Repairs in the nature of replacements are capitalized, to the extent that they arrest deterioration and appreciably prolong the life of the property.

The test normally applied is that if the improvements were made to put the particular capital asset in efficient operating condition, then they are capital in nature. If, however, they were made merely to keep the asset in efficient operating condition, then they are deductible repairs (Moss, 831 F2d 833 (9th Cir. 1987)).

In the instant case, the expenditures attributable to the asbestos removal and encapsulation did not appreciably increase the value of P's property. Instead, they only restored value to the property that existed prior to the asbestos becoming friable. Moreover, the expenditures represented only a small fraction of the building's overall value. They did not substantially prolong its useful life, nor adapt the property to a new or different use. As such, the expenses in question appear to be currently deductible.

This case is analogous to Chicago, Burlington & Quincy R.R., 455 F2d 993 (Ct. Cl. 1972), rev'd on other grounds, 412 US 401 (1973). In that case, the plaintiff railroad carried out construction projects to protect and maintain its rail embankments near waterways. The work included channel diversions; the construction of dikes, dams and jetties; bridge grade raising; riprap construction; and bridge and culvert modifications. These projects were part of a continuous program to evaluate the embankments and take the steps necessary to prevent their erosion; "[w]hen necessary to correct deterioration, the steps taken are intended to arrest the problem and prevent a premature end to the service life of the embankment." Applying standards like those described, the Court of Claims concluded that the costs of these projects were currently deductible.

As in that case, the work undertaken here was designed to correct a problem--the fraying of the asbestos fireproofing, which threatened to render unserviceable P's office building. The Court of Claims, the Tax Court and other courts have all repeatedly concluded that the cost of work performed to correct deterioration not originally foreseeable is currently deductible, provided it does not increase the value or useful life of the asset prior to its deterioration; see Niagara Mohawk Power Corp., 558 F2d 1379 (Ct. Cl. 1977).

Contrary to the defendant's claim, this case is distinguishable from Dominion Resources, Inc., 219 F3d 359 (4th Cir. 2000), in which the court found that the costs of removal of asbestos-containing materials, sludge and assorted contaminants from a power plant should be capitalized. Such expenses were incurred to convert the power plant into property suitable for an entirely new use (as a real estate development).

The defendant argues that if a company acquires property with a flaw or frailty that deteriorates into a full-blown problem over time, the cost of remediation must be capitalized. However, this premise simply cannot be reconciled with the many cases in which property constructed or purchased by the taxpayer had, at the time of construction or purchase, a potential defect that eventually required repairs. In Chicago, Burlington, embankments were subject to erosion; in Mohawk, iron pipes corroded and sprung leaks; in Kansas City Southern, 112 F Supp 164 (Ct. Cl. 1953), a railbed was weakened by water; in Illinois Merchant's Trust, 4 BTA 103 (1926), pilings rotted--and in this case, asbestos fireproofing became friable over time from exposure to air. The remediation efforts to address the asbestos problem could not have been anticipated by P in the original design of the building, nor were they remedied as part of a generalized plan of rehabilitation and renovation. As such, the removal and encapsulation costs are currently deductible.

CINERGY CORP., CT. FED. CL., 3/10/03
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Author:O'Driscoll, David
Publication:The Tax Adviser
Date:May 1, 2003
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