IRS Revenue Ruling
1998-25

Code Secs. 162, 263

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26 CFR 1.162-1: Business expenses.
(Also section 263; 1.263(a)-1; 1.162-3.)

Business expenses; storage tanks. Under the circumstances described in
this revenue ruling, the costs incurred to replace underground storage
tanks containing waste by-products (including the cost of removing,
cleaning, and disposing of the old tanks, and acquiring, installing, and
filling the new tanks) are deductible as ordinary and necessary business
expenses under section 162 of the Code.


REV. RUL. 98-25

ISSUE

Under the circumstances described below, are the costs incurred to
replace underground storage tanks ("USTs") containing waste by-products
(including the cost of removing, cleaning, and disposing of the old USTs,
and acquiring, installing, and filling the new USTs) deductible by the
taxpayer as business expenses under section 162 of the Internal Revenue
Code or must they be capitalized under section 263?


FACTS

X, a corporation, employs the accrual method of accounting and uses a
calendar year. X operates a manufacturing facility. In the past, X's
manufacturing operations had produced waste by-products in the course of
its operations. Consistent with the industry-wide practice at that time, X
placed this waste in steel USTs ("old USTs") that X buried on its land.

In 1998, X incurred costs to remove its old USTs and replace them with
USTs made of a steel-fiberglass-reinforced plastic composite material
("new USTs") that comply with current federal, state, and local
environmental laws. X excavated a hole in the ground large enough to gain
access to the old USTs. X then drained the waste from the old USTs and
placed it in a temporary repository. X then lifted the old USTs out of the
hole, cleaned them, and disposed of them at an appropriate disposal
facility. In the same taxable year, X placed the new USTs in the same
hole, and transferred the waste from the temporary repository into the new
USTs. Finally, X sealed the new USTs and filled the hole with soil.

The new USTs will not be emptied and reused, but will remain filled
with the same waste indefinitely. Applicable law requires that X continue
to monitor the buried new USTs to detect leaks, if any. Once they are
filled with waste and sealed, the new USTs have no salvage value.


LAW AND ANALYSIS

Sections 162 and 1.162-1(a) of the Income Tax Regulations allow a
deduction for all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business.

Section 1.162-3 provides, in part, that taxpayers carrying materials
and supplies on hand should include in expenses the charges for materials
and supplies only in the amount that they are actually consumed and used
in operation during the taxable year for which the return is made.

Sections 263 and 1.263(a)-1(a) provide that no deduction is allowed for
any amounts paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property. Section
1.263(a)-2(a) provides that capital expenditures include the cost of
acquisition, construction, or erection of buildings, machinery and
equipment, furniture and fixtures, and similar property having a useful
life substantially beyond the taxable year.

Through provisions such as sections 162(a), 263(a), and related
sections, the Code generally endeavors to match expenses with the revenues
of the taxable period to which the expenses are properly attributable,
thereby resulting in a more accurate calculation of net income for tax
purposes. See, e.g., INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); Commissioner v. Idaho Power Co., 418 U.S. 1, 16 (1974). Moreover,
as the Supreme Court specifically recognized, the "decisive distinctions
[between capital and ordinary expenditures] are those of degree and not of
kind," and a careful examination of the particular facts of each case is
required. Welch v. Helvering, 290 U.S. 111, 114 (1933); Deputy v. duPont,
308 U.S. 488, 496 (1940); see also INDOPCO, 503 U.S. at 87.

The useful life of an asset for section 263 purposes is its useful life
to the taxpayer, not its inherent useful life. See Silverton v.
Commissioner, T.C.M. 1977-198; Massey Motors, Inc. v. United States, 364
U.S. 92 (1960). Unlike most storage tanks, which are used to hold a
substance temporarily and are emptied and refilled repeatedly throughout
their useful lives, X's new USTs are filled with waste once, sealed
indefinitely, and thereafter have no salvage value. Upon being filled with
waste and sealed, the new USTs have no remaining useful life to X. X's new
USTs are used merely to facilitate the disposal of waste and therefore are
similar to a material or supply that is consumed and used in operation
during the taxable year. Accordingly, because X acquired, filled, and
sealed the new USTs all in 1998, the costs of acquiring and installing the
new USTs are not capital expenditures, but are ordinary and necessary
business expenses deductible under section 162. The new USTs, which are
used once and then sealed indefinitely, are distinguishable from the
groundwater treatment facilities in Rev. Rul. 94-38, 1994-1 C.B. 35, which
are used by the taxpayer substantially beyond the taxable year.

Further, X's costs of removing, cleaning, and disposing of the old
USTs, and filling and on-going monitoring of the new USTs are deductible
as business expenses under section 162.

The results would be the same if X had instead ceased to operate the
manufacturing facility in 1998 or in a previous taxable year. The results
would also be the same if X had instead used storage tanks that were
designed to store waste above ground.


HOLDING:

Under the circumstances described above, the costs incurred to replace
USTs containing waste by-products (including the cost of removing,
cleaning, and disposing of the old USTs, and acquiring, installing, and
filling the new USTs) are deductible by the taxpayer as ordinary and
necessary business expenses under section 162.


EFFECT ON OTHER DOCUMENTS

Rev. Rul. 94-38 is distinguished.


DRAFTING INFORMATION

For further information contact Merrill Feldstein of the Income Tax and
Accounting division of the Office of Chief Counsel at (202) 622-4950 (not
a toll free call).

<<END RULING>>

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