CHAP 16 HOMEWORK ASSIGNMENT
- Complete the attached Memorandum based on your research and taking into consideration the facts as described in the Memo. Your Memo should contain a brief but comprehensive answer as to whether MAXAM can claim a current deduction for environmental clean-up costs. Your homework should be typed, in Word, and no more than 3 pages long.
Partial list of research aids:
Rev. Rul. 94-38, 1994-1 C.B. 35
Rev. Rul. 2004-18, 2004-8 I.R.B. 509
Treas. Reg. §1.263(a)–3
To: John Smith, Partner
From: [Your Name]
Subject: MAXAM – Environmental Clean-up Costs
From its inception in 1872 as the Alfred Nobel Spanish Dynamite Manufacturing Company, MAXAM has become one of the leading explosives manufacturers and technical services providers in the world. For several decades, the company has used land in Texas to test its munitions. TNT and other explosives remain in the ground for decades. In 2014, the Texas Commission on Environmental Quality informed MAXAM that it was required to clean-up the explosives-contaminated soil on the Texas property. While the explosives’ residue rarely poses an immediate health threat, Texas officials fear that it could seep into groundwater or poison plants (which has happened before). Conventional cleanup techniques, such as incinerating the soil, are expensive and time-consuming. In 2015, MAXAM spent a substantial amount cleaning-up a portion of the land (30%). MAXAM’s in-house counsel believes that the IRS will require that the cost of clean-up must be added to the basis in the Texas property because the clean-up improved the land.
For 2016, MAXAM does not anticipate that it will incur any significant costs to clean the remaining portion of the land. Based on a successful study by a veterinary scientist at Oregon State University, MAXAM will be using sheep to clean-up the remaining contaminated land. Bacteria in a sheep’s stomach that help digest cellulose can also rapidly convert TNT into a harmless compound. Sheep work for free.
Issue and Short Answer:
Whether MAXAM can take a current deduction for the clean-up costs or must such costs be added to MAXAM’s basis in the Texas property?
[Provide short answer]