The Internal Revenue Service will now allow the costs of environmental cleanups to be tax deductible, but bankers and other financial institutions are wondering whether cleanups on polluted property they have inherited through foreclosures will fall under the revenue ruling. The question is whether or not the service will make a distinction between the original polluter and the purchaser of the property, James OConnor, a tax specialist at the Savings & Community Bankers of America told Mortgage Marketplace. OConnor says if the service decides to allow the rule to be applied to foreclosed property, it will be a big break for financial institutions with these properties on their books. The IRS reversed its original position on the issue taken back in 1993, and plans to unveil its final ruling June 20 in Internal Revenue Bulletin 1994-25. The service had originally not allowed environmental cleanup costs to be taken all at once, but required taxpayers to amortize the cost of cleanups over the useful life of the property. The ruling specifically deals with situations where the property is contaminated by the taxpayer, and I think that is a very important distinction, said Marc Levy, a partner with Arthur Andersens office of federal tax services in Washington. In the context that a bank that made a loan on a property and the borrower defaults, one could make a compelling argument that that type of liability is the same as a liability that the debtor would have had. I think banks should be able to argue that they are stepping into the borrowers shoes and should be able to take the write-off. Bankers are hoping more specific guidance on the issue will, indeed, be on the way, and the service has eluded as much by saying its recent decision is only part of a series of rulings to come down the pike. Until then, financial institutions with polluted foreclosed property on their books will be holding their collective breaths for definitive guidance. Levy, however, believes the service hasnt even considered the issue and it is highly unlikely there will be a clarification on foreclosed properties. That leaves financial institutions to duke it out with IRS agents on a case-by-case basis. It would surprise me to hear that they [IRS] had even considered this issue, Levy said. My guess is that this has not been one of the fact patterns that they are considering. Without a clarification from the IRS, bankers are at risk of agent scrutiny if they take cleanup writeoffs in the first year, rather than amortizing them. Before the ruling came out, there was speculation in the industry that if you waited to clean up a site you would have to clean up the damage over a three-year period and it wouldnt be deductible, Levy said. Now banks at least have a chance to write these charges off in the first year.
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