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Environmental remediation.

A major area of concern to many taxpayers is the tax treatment of environmental cleanup costs, particularly after INDOPCO, Inc., 503 US 79 (1992). The demarcation between those currently deductible and those that must be capitalized is often very murky. The IRS provided some guidance on the treatment of environmental cleanup costs in Rev. Rul. 94-38, which concluded that costs to clean up land that had been contaminated by the taxpayer were currently deductible, but costs to construct treatment facilities were capital expenditures under Sec. 263. While helpful, that ruling left many questions unanswered.

These uncertainties are further compounded; due to the nature of many environmental cleanup projects, many taxpayers cannot satisfy Rev. Proc. 98-1's requirements for obtaining a letter ruling. Because of the particular problems faced by taxpayers in this area, the Service issued special procedures in Rev. Proc. 98-17 for taxpayers seeking written guidance on environmental cleanup costs. These special procedures are available for ruling requests submitted between Feb. 2, 1998 and Feb. 2,2000.

Rev. Proc. 98-17 has several important features for taxpayers. Recognizing that cleanup projects may span many years, the IRS will issue guidance on a project's costs that cover several years, including prior and future years (Section 3.01). This guidance will relate only to a particular project and will not apply to any other project not specifically addressed in the letter ruling (Section 6.01). If any year is under examination or before an Appeals Office, the Service will treat the request as a taxpayer-initiated request for technical advice that must meet the general requirements of Rev. Proc. 98-2 (Section 4.02 of Rev. Proc. 98-17).

For Rev. Proc. 98-17 purposes, "environmental cleanup costs" generally include any costs associated with the assessment, mitigation, removal or remediation of environmental hazards (whether latent or imminent) on the taxpayer's or another's property. The taxpayer can seek a ruling on the costs of a entire project or only on the costs of particular activities.

Generally, the IRS will not issue a letter ruling on alternative plans of proposed transactions or on hypothetical situations. Thus, a taxpayer must have a proposed environmental cleanup plan on which to base its request. However, the Service recognizes that all aspects of any environmental cleanup project may not be definite at the time of the ruling request--particularly if the contamination's assessment is not yet complete. Ordinarily, this will not preclude issuance of a letter ruling if the IRS is given sufficient facts to reach a determination.

If the project changes after the ruling is issued, the taxpayer may request that the IRS National Office modify or supplement its ruling to address the project's changes (Section 8).

All letter ruling requests submitted under Rev. Proc. 98-17, including supplemental requests, must be accompanied by the user fee determined from Appendix A of Rev. Proc. 98-1, except as provided in Sections 15.03 and 15.04 of that procedure (Section 10 of Rev. Proc. 98-17). A user fee is also required for letter ruling requests submitted for years under examination or before an Appeals Office (Section 4.02).
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Title Annotation:tax law
Author:Cohen, Lawrence H.
Publication:The Tax Adviser
Date:May 1, 1998
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