United States

Cash method landfill owner can deduct estimated future cleanup costs

TAX ALERT  | 

On July 11, 2017, the Tax Court ruled in favor of the petitioners in the case of Gregory, et. al. v. Commissioner (No. 17198-13; No. 17210-13; 149 T.C. No. 2), extending the availability of deductions for future obligations to cash method taxpayers.

The decision hinged on the statutory interpretation of the term ‘taxpayer’—a deceptively simple question. Counsel for the petitioner, William Gerhardt of RSM US LLP, explains the significance. “Although this dealt with the seemingly innocuous statutory meaning of the word ‘taxpayer,’ the tedious nature of this type of analysis actually was interesting and challenging as we composed our argument. In the end, I believe the Tax Court got it right and I was happy to see a fair and balanced approach by the Court in its analysis of the Code.”

The petitioners are owners of a landfill business – an S corporation named Texas Disposal Systems Landfill Inc. (TDSL) – that used the overall cash method of accounting. Under section 468(a)(1), a taxpayer may deduct a portion of the reclamation and closing costs that will take place at an indeterminate time in the future. The petitioners took deductions for unpaid future cleanup costs in 1996 and 1997.

Under section 461(h), accrual basis taxpayers may not deduct expenses until (1) all events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred. Section 468 provides an exception to the economic performance requirement, allowing taxpayers with mining or solid-waste cleanup costs to significantly accelerate their deductions for those expenses.

Cash basis taxpayers, on the other hand, are subject to a general rule requiring an actual cash outlay before an item of expense can be deducted. Under this principle, reclamation and closing costs would not be deductible until the taxpayer actually paid to reclaim or close its mine or landfill.

The IRS argued that, because section 468 involves primarily accrual-basis concepts, it applied only to accrual basis taxpayers. TTDSL used the cash basis of accounting for tax purposes and therefore, it was improper to use section 468 to accelerate deductions before they were paid. TDSL argued that taxpayer in section 468 also applied to cash basis taxpayers.

The court held that there was no limitation in the text of section 468(a), nor was there any implied limitation. The plain text meaning of the statute, bolstered by the definitions section of the Code, supported the idea that taxpayer is not limited to accrual basis taxpayers in section 468. Therefore, the court ruled that cash basis taxpayers could avail themselves of section 468 to take a deduction for unpaid future cleanup costs.

Cash basis taxpayers with these types of expenses should contact their tax advisors to determine whether the Gregory case presents an opportunity for them.

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