rr-98-25.pdf

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Part I
Section 162.-- Trade or Business Expenses
26 CFR 1.162-1: Business expenses.
(Also § 263; 1.263(a)-1; 1.162-3.)
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 § 162 of the Internal Revenue Code or must they be
capitalized under § 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

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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

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fixtures, and similar property having a useful life substantially
beyond the taxable year.
Through provisions such as §§ 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 (1993);
Deputy v. du Pont, 308 U.S. 488, 496 (1940); see also INDOPCO,
503 U.S. at 87.
The useful life of an asset for § 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

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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 § 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 § 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
§ 162.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 94-38 is distinguished.

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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).