Rev. Rul. 94-38 is — Internal Revenue Bulletin 1998-19

Section 162.—Trade or Business Expenses

26 CFR 1.162–1: Business expenses. (Also section 263; 1.263(a)–1; 1.162-3.)

Business expenses; storage tanks. Under the circumstances described in this revenue ruling, the costs incurred to replace underground storage tanks containing waste by-products (including the cost of removing, cleaning, and disposing of the old tanks, and acquiring, installing, and filling the new tanks) are deductible as ordinary and necessary business expenses under section 162 of the Code.

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 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 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. Com- missioner, 503 U.S. 79, 84 (1992); Com- missioner 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 (1933); Deputy v. du Pont, 308 U.S. 488, 496 (1940); see also INDOPCO, 503 U.S. at 87.

May 11, 1998 4 1998–19 I.R.B.

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).

Section 263.—Capital Expenditures

26 CFR 1.263(a)–1: Capital expenditures; in general.

Are the costs incurred to replace underground storage tanks containing waste by-products (including the cost of removing, cleaning, and disposing of the old tanks, and acquiring, installing, and filling the new tanks) deductible by the taxpayer as business expenses under § 162 of the Code, or must they be capitalized under § 263? See Rev. Rul. 98–25, page 4.

Section 2032A.—Valuation of Certain Farm, Etc., Real Property

26 CFR 20.2032A–4: Method of valuing farm real property.

Special use value; farms; interest rates. The 1998 interest rates to be used in computing the special use value of farm real property for which an election is made under section 2032A of the Code are listed for estates of decedents.

Rev. Rul. 98–22

This revenue ruling contains a list of the average annual effective interest rates on new loans under the Farm Credit Bank system. This revenue ruling also contains a list of the states within each Farm Credit Bank District.

Under § 2032A(e)(7)(A)(ii) of the Internal Revenue Code, rates on new Farm Credit Bank loans are used in computing the special use value of real property used as a farm for which an election is made under § 2032A. The rates in this revenue ruling may be used by estates that value farmland under § 2032A as of a date in 1998. Average annual effective interest rates, calculated in accordance with § 2032A(e)(7)(A) and § 20.2032A-4(e) of the Estate Tax Regulations, to be used under § 2032A(e)(7)(A)(ii), are set forth in the accompanying Table of Interest Rates (Table 1). The states within each Farm Credit Bank District are set forth in the accompanying Table of Farm Credit Bank Districts (Table 2).

198, and other revenue rulings that are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lane Damazo of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Lane Damazo on (202) 622-3090 (not a toll-free call).

REV. RUL. 98–22 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 1998)

Farm Credit Bank District in Interest Which Property Is Located Rate

Columbia . . . . . . . . . . . . . . . . . . 9.32 Omaha . . . . . . . . . . . . . . . . . . . . 8.17 Sacramento . . . . . . . . . . . . . . . . . 8.38 St. Paul . . . . . . . . . . . . . . . . . . . . 8.28 Spokane . . . . . . . . . . . . . . . . . . . 8.22 Springfield . . . . . . . . . . . . . . . . . 8.74 Texas . . . . . . . . . . . . . . . . . . . . . 8.19 Wichita . . . . . . . . . . . . . . . . . . . . 8.27

Rev. Rul. 81–170, 1981–1 C.B. 454, contains an illustrative computation of an average annual effective interest rate. The rates applicable for valuation in 1997 are in Rev. Rul. 97–13, 1997–16 I.R.B. 4. For rate information for years prior to 1997, see Rev. Rul. 96–23, 1996–1 C.B.

REV. RUL. 98–22 TABLE 2

TABLE OF FARM CREDIT BANK DISTRICTS

District States

Columbia . . . . . . . . . . . . . . . . . . . . . . . Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, Pennsyl

vania, South Carolina, Virginia, West Virginia. Omaha . . . . . . . . . . . . . . . . . . . . . . . . . Iowa, Nebraska, South Dakota, Wyoming. Sacramento . . . . . . . . . . . . . . . . . . . . . Arizona, California, Hawaii, Nevada, Utah. St. Paul . . . . . . . . . . . . . . . . . . . . . . . . Arkansas, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota,

Ohio, Tennessee, Wisconsin. Spokane . . . . . . . . . . . . . . . . . . . . . . . Alaska, Idaho, Montana, Oregon, Washington. Springfield . . . . . . . . . . . . . . . . . . . . . . Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode

Island, Vermont. Texas . . . . . . . . . . . . . . . . . . . . . . . . . . Alabama, Louisiana, Mississippi, Texas. Wichita . . . . . . . . . . . . . . . . . . . . . . . . Colorado, Kansas, New Mexico, Oklahoma.

1998–19 I.R.B. 5 May 11, 1998

sistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Susan Athy on (202) 622-3130 (not a tollfree call).

Section 4071.—Imposition of Tax

26 CFR 48.4071–1: Imposition and rates of tax.

If consular officers or employees purchase directly from the manufacturer thereof an article otherwise subject to federal excise tax on sales by manufacturers, or purchase from a retailer an article otherwise subject to federal excise tax on sales by retailers, will the transaction be taxed? See Rev. Rul. 98–24, on this page.

Section 4081.—Imposition of Tax

26 CFR 48.4081–2: Taxable fuel; tax on removal at the rack.

Section 4091.—Imposition of Tax

Section 4161.—Imposition of Tax

26 CFR 48.4161(a)–1: Imposition and rate of tax; fishing equipment.

26 CFR 48.4161(b)–1: Imposition and rates of tax; bows and arrows.

Section 4041.—Imposition of Tax

26 CFR 48.4041–3: Application of tax on sales of special motor fuel for use in motor vehicles and motorboats. (Also sections 4071, 4081, 4091, 4161; 48.4071–1, 48.4081–2, 48.4161(a)–1, 48.4161(b)–1.)

Exemption from certain federal ex- cise taxes for consular officers and em- ployees. If consular officers and employees and members of their families forming part of their households purchase from the manufacturer thereof an article otherwise subject to a federal excise tax on sales by manuacturers, or purchase from a retailer an article otherwise subject to a federal excise tax on sales by retailers, the transaction will not be taxed. Rev. Rul. 73–198 modified and Rev. Rul. 68–352 obsoleted.

Rev. Rul. 98–24

This revenue ruling modifies Rev. Rul. 73–198, 1973–1 C.B. 425, which discusses exemptions from certain federal excise taxes extended to foreign diplomatic, consular, and other officers, and agencies or commissions of foreign governments.

Rev. Rul. 73–198 provides that if ambassadors, ministers, other duly accredited diplomatic representatives of foreign governments, the members of their families living with them, members of their households (but not servants), attaches, secretaries, clerks, and also officers of missions to the United Nations and the Organization of American States serving in a representative capacity and family members living with such officers, purchase from the manufacturer thereof an article otherwise subject to a federal excise tax on sales by manufacturers, or purchase from a retailer an article otherwise subject to a federal excise tax on sales by retailers, the transaction will not be taxed. Rev. Rul. 73–198 does not extend this benefit to consular officers and employees of foreign governments and members of their families forming part of their households.

Under section 201(c) of the Foreign Missions Act, 22 U.S.C. § 4301 (1994), the Secretary of State is authorized to determine the treatment that should be accorded a foreign mission in the United

States based on due consideration of the benefits, privileges, and immunities provided to missions of the United States in the country or territory represented by the foreign mission. The Secretary of State, after due consideration of the benefits, privileges, and immunities provided to missions of the United States under the Vienna Convention on Consular Relations and other governing treaties, has determined that if consular officers and employees (not including honorary consuls) and members of their families forming part of their households purchase from the manufacturer thereof an article otherwise subject to a federal excise tax on sales by manufacturers, or purchase from a retailer an article otherwise subject to a federal excise tax on sales by retailers, the transaction will not be taxed.

This benefit does not extend to U.S. nationals or permanent residents of the United States or to consular officers and employees (and their family members) of a consular mission representing a country or territory that does not provide benefits, privileges, and immunities to missions of the United States on a reciprocal basis as determined by the Secretary of State. “Consular officer” is defined as any person, including the head of a consular post, entrusted in that capacity with the exercise of consular functions, and “consular employee” is defined as any person employed in the administrative or technical service of the consular post.

As a result of this revenue ruling, Rev. Rul. 68–352, 1968–2 C.B. 487, is no longer determinative of the exemption from federal retailers and manufacturers excise taxes with respect to consular officers and employees (not including honorary consuls) of the Government of France and members of their families forming part of their households. Accordingly, Rev. Rul. 68–352 is declared obsolete.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 73–198 is modified. Rev. Rul. 68–352 is obsoleted.

DRAFTING INFORMATION

The principal author of this revenue ruling is Susan Athy of the Office of As

May 11, 1998 6 1998–19 I.R.B.