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The tax treatment of environmental cleanup costs, which some observers have termed the "tax accounting issue of the 1990s," is under study by a task force consisting of officials of the IRS and Treasury. The goal of the task force, which was formed in early 1993, is to issue comprehensive guidance concerning the treatment of such costs, most likely in the form of a revenue ruling which will address a number of fact patterns. Meanwhile, following the termination of a suspension of technical advice memoranda on the subject, the IRS recently released TAM 9411002, in which it concluded that some costs incurred in abating asbestos hazards must be capitalized, while other such costs may be deducted. TAM 9411002 may presage elements of the more comprehensive guidance expected to be issued.
As reported previously, the debate over the treatment of environmental cleanup costs ensued from the release of controversial technical advice memoranda which held that most costs incurred in removing asbestos (TAM 9240004) and remediating soil contaminated by PCBs (TAM 9315004) must be capitalized. See "Environmental Cleanup Costs: Legislative Solution Unlikely; Taxpayers Await Administrative Action by IRS," 9 Tax Mgmt. Real Est. J. 216 (November 1993); "Environmental Cleanup Costs: IRS to Develop Criteria Concerning Capitalization Versus Expense Problem," 9 Tax Mgmt. Real Est. J. 82 (April 1993). In TAM 9411002, the IRS again addressed the treatment of costs incurred in reducing health hazards associated with asbestos in a taxpayer's business facilities. However, unlike TAM 9240004, in TAM 9411002 the IRS concluded that certain costs were deductible.
In TAM 9240004, the taxpayer's paper-and pulp-making facilities contained extensive pre-1980 piping which was insulated with asbestos. The taxpayer initiated a program involving the complete removal of asbestos insulation from the piping and its replacement with other insulating materials. The taxpayer had determined that the removal approach would ultimately save money compared to an alternative program of continuously monitoring asbestos levels and encapsulating asbestos that became disturbed. The replacement insulation was 10% less thermally efficient than the removed asbestos insulation and, therefore, would not save energy or effect other operating efficiencies.
The taxpayer in TAM 9240004 deducted the costs of the asbestos removal as repairs pursuant to Regs. sec1.162-4, which permits a deduction for expenditures that do not add...