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PDtax
PDtax, Master's Degree
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Experience:  MBA/CPA, Former college instructor and tutor.
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This is for PDTax. Following is the problem and the answer

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This is for PDTax.

Following is the problem and the answer I have. For some reason, I am unsure of the answer. Could you provide some guidance?

Problem:
Slime Company spent $250,000 to build storage tanks for its waste byproducts. This is a recurring expenditure for Slime Company because once the tanks are filled, new ones must be built. When can Slime Company deduct the $250,000? Please provide the answer along with the supporting law.

The tanks are not deductible, but rather capitalized expenditures. They will be written off under the appropriate depreciation schedules. The costs will produce a benefit that will last substantially beyond the end of the taxable year (Reg. § 1.263(a)-2(d)(4)(i)). Further, the assets will have a useful life substantially beyond one year. (See IRC § 263(a) and Commissioner v. Idaho Power Co. 418 U.S. 1 (1974)). In other words, these are capital expenditures. Buying additional tanks as a requirement of the business model does not make this a recurring expenditure. These are incremental capital expenditures.
Submitted: 5 months ago.
Category: Business and Finance Homework
Expert:  PDtax replied 5 months ago.

PDtax :

Hi Diana.

PDtax :

I'll be back online this afternoon, and can look at this after lunch.

Customer: replied 5 months ago.
okay, thanks.
Expert:  PDtax replied 5 months ago.
I disagree. I believe the cost of the tanks is deductible as ordinary and necessary under IRC 162.

I am relying on a Revenue Ruling specifically mentioning waste tanks that are not reused. The reuse would indicate a future benefit and useful life, and therefore depreciable. Rev Rul 98-25 specifically covers such tanks, and treats their cost as an expense, fully deductible when the tanks are filled and sealed, never to be reused.

http://www.irs.gov/pub/irs-drop/rr-98-25.pdf is the link. An excerpt from the Rev Rul follows:

"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 §§ 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 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."

Let me know if this covers it for you. Thanks again for asking for me.

Brian
PDtax
PDtax, Master's Degree
Satisfied Customers: 1748
Experience: MBA/CPA, Former college instructor and tutor.
PDtax and 5 other Business and Finance Homework Specialists are ready to help you
Customer: replied 5 months ago.
Thank you. I thought I was wrong.
Expert:  PDtax replied 5 months ago.
Glad to help. Better yet, glad this was covered so well in a Rev Rul.

Customer: replied 5 months ago.
Thanks

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