Document 8Vrxze5kN4JG2087o5ngwXDDZ
Bulletin No. 4
Latham m Watkins
Client
Alert
from the Environmental Department
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CEL-IIH
May 16,1994
New TAM on Asbestos Removal
n a recently released Techni verted to a two-truck garage and
Ical Advice Memorandum, office space. The office space was 9411002, the IRS ruled that rented to a related party. Portions of costs ofasbestos removal must bethe asbestos insulation in the ware house were encapsulated. Theuseof capitalized, but that costs ofas
bestos encapsulation may be de
ducted currently. The ruling, which is highly focused on the specificfactual circumstances, is described below.
Supetfidalfy, there is much about this JAM that appears favorable, but doser scrutiny is much less satisfying. Thus, while the result is one thatprobably will
The IRS has just released a new
not provoke cries ofoutrage, the
Technical Advice Memorandum ("TAM") on the tax treatment of costs incurred to abate asbestos con tamination in buildings. The TAM addresses two factual circumstances involving a warehouse and an ad joining boiler house. The property,
analysis and reasoning will, in the long run, be troublesome in different factual situations. Moreover, to the extent the
IRS poky is seen as one which will ollow ament deductibility only when the
source of contamination continues to
which was purchased in year 1, con tained asbestos insulation at the time of purchase. The use of the boiler
pose a health hazard, such a poky is unnecessary and irresponsible.
house to heat the warehouse was
abandoned in year 2. In a subse quent [unspecified] year, the tax payer was required by its lender to
the warehouse in the taxpayer's busi ness was unchanged.
abate the asbestos in both facilities "in order to secure a bank loan for expansion of its facilities." The as bestos was removed from the boiler house, and the boiler house was con
The TAM holds that the removal costs must be capitalized and the encapsu lation costs may be deducted currently.
Asbestos Removal
_ :
The TAM concludes that expendi
tures for removing asbestos from the
boiler house must be capitalized for
two separate reasons. First, the re
moval "increased the value, use and
capacity ofthe taxpayer's property."
Second, the expenditures "...adapt
such property to a new and different
use."
In support of the increase in value, use and capacity, the TAM recites the following factors as determina tive:
1. The expenditures permanently eliminated the health risks posed by the presence ofasbestos.. ..Therefore, the expenditures created better oper ating conditions and prevented any further contamination of employees or lessees.
2. The expenditures made the prop erty significantly more attractive to potential buyers, investors, lenders, and customers.
3. The expenditures enhanced the usefulness and capacity of the prop erty by enabling the taxpayer to pro-