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20 ELR 10547 | Environmental Law Reporter | copyright © 1989 | All rights reserved An Overview of the Tax Implications of Environmental LitigationEvan SlavittEditors Summary: The primary focus of environmental litigation is on liability issues, and few tax issues have been specifically addressed or dispositively resolved in the environmental law context. This Article explores many tax issues lurking in environmental cases. First, it analyzes the deductibility of environmental litigation costs, including criminal penalties and civil fines, consent decree penalties, natural resources damages, enforcement and oversight costs, and legal fees. Next, it examines tax issues involving remediation costs resulting from a settlement agreement, expenditures by facility owners for capital improvements and repairs, and interest on remediation fund deposits. The author concludes that payments to federal or state governments must be analyzed to determine their resemblance to fines, penalties, compensatory damages, or traditional business expenses. Noting that current tax law and regulations are built on the flawed assumption that a payment is either punitive or compensatory, the author warns practitioners to be aware of inconsistencies in the case law and invites policy makers to take a fresh look at the entire area. Evan Slavitt, an associate in the Boston office of Hinckley, Allen, Snyder & Comen, concentrates in environmental law. The views and content of this Article were solely determined by Mr. Slavitt. In the last decade, environmental litigation has become pervasive. Suits by federal and state governments have been supplemented by suits between private parties. Quite naturally, their primary focus has been on fundamental issues of liability. Nonetheless, these cases often contain tax law ramifications of substantial importance. If they do not analyze them promptly, plaintiffs or prosecutors maybe stymied in reaching efficient settlements, and defense counsel may give unsatisfactory — or even inadequate — advice to the client. For example, A defendant in a Clean Water case is ordered to pay $ 50,000 to the United States and $ 50,000 to a local conservation group. A putative settlor in a Superfund case is asked to pay $ 200,000 into an escrow account as partial payment of its share of the expected cost of a cleanup to take place over the next five years. The operator of a hazardous waste disposal facility is required to make corrective actions at the facility, which include installation of new drainage/treatment machinery and a building to contain it. Each of these situations raises two questions. Is the payment deductible? If it is, when can the deduction be taken? This Article highlights important tax issues raised by these and other situations. Its analysis should be read with three caveats. First, the Article is intended primarily to sensitize environmental lawyers; it is not exhaustive. Each case must be addressed on its own circumstances. The environmental lawyer will find it necessary to consult with a tax specialist, often more than once during settlement or litigation. Second, tax law changes constantly, both in case law and in revised regulations and statutes. While this Article is current as of its writing, any practitioner should update central regulations and decisions. Finally, few tax issues have been addressed specifically in the environmental law context; even fewer have been dispositively resolved. Thus, much of the analysis will, for the next few years, perforce be by analogy. The general rule for the deductibility of payments made pursuant to the environmental laws is set forth in § 162 of the Internal Revenue Code (I.R.C.): (a) In general — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.1 Thus an expense must be ordinary, necessary, and reasonable to be deducted under § 162. An ordinary expense is one that a businessperson would commonly incur to meet the particular circumstances involved. To be "ordinary" a particular expense need not be routine; indeed, it may occur only once. As Justice Cardozo has said, [A] law suit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. Nonetheless, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack.2 This explains why the term "ordinary" depends on the circumstances. The "necessary" requirement is often understood to be met if the expense is "appropriate" or "helpful" to the taxpayer's business or nonbusiness activities.3 The concept of "appropriate or helpful" is viewed generously. For example, the court in Kanelos v. Commissioner4 found that the employment of an attorney is an ordinary act if "consonant with that of a reasonably prudent man in the same circumstances. . . . The course selected not being frivolous, we are unwilling to substitute our judgment for its necessity [20 ELR 10548] for that of petitioners."5 Thus, "necessary" need not mean the shortest route. As with other qualifications, no bright lines adumbrate the concept of necessity; ultimately, whether an expense is necessary is a fact-based judgment. In environmental cases, however, § 162's general requirement that expenses be "ordinary and necessary" should be easy to meet. In almost every such case, the putative defendant will have unquestionably good cause to incur the expenses. The real issues, therefore, arise not with the general provision, but with its exception. This key exception to the general rule is stated in deceptively simple terms in subsection (f): (f) Fine and penalties — No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.6 The regulations expand on this prohibition, at least to some degree: § 1.162-21 Fines and penalties (a) In general. No deduction shall be allowed under section 162(a) for any fine or similar penalty paid to — (1) The government of the United States, a State, a territory or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico; [ (2) The government of a foreign country; or (3) A political subdivision of, or corporation or other entity serving as an agency or instrumentality of, any of the above. (b) Definition. (1) For purposes of this section a fine or similar penalty includes an amount — (i) Paid pursuant to conviction or a plea of guilty or nolo contendere for a crime (felony or misdemeanor) in a criminal proceeding; (ii) Paid as a civil penalty imposed by Federal, State, or local law, including additions to tax and additional amounts and assessable penalties imposed by chapter 68 of the Internal Revenue Code of 1954; (iii) Paid in settlement of the taxpayer's actual or potential liability for a fine or penalty (civil or criminal); or (iv) Forfeited as collateral posted in connection with a proceeding which could result in imposition of such a fine or penalty. (2) The amount of a fine or penalty does not include legal fees and related expenses paid or incurred in the defense of a prosecution or civil action arising from a violation of the law imposing the fine or civil penalty, nor court costs assessed against the taxpayer, or stenographic and printing charges. Compensatory damages (including damages under section 4A of the Clayton Act (15 U.S.C. 15a), (as amended) paid to a government do not constitute a fine or penalty.7 To put the matter in a (possibly oversimplistic) nutshell, payments to federal or state governments must be analyzed to determine if they more resemble fines or penalties, or if they more resemble either (1) compensatory damages or (2) traditional business expenses.8 Before launching into the details of various situations, one overall philosophic comment is appropriate. Although attorneys and the courts must perform the analysis just described, they do so because that is what the current law and regulations require and not necessarily because the distinction makes any particular sense. The entire enterprise, however, may well be built on the false assumption that a payment is either punitive or compensatory. Any substantial mandatory payment has a punitive — that is, deterrent — effect. Similarly, any monetary fine has some element of compensation, and courts often set even criminal fines with an eye toward the magnitude of the loss. For tax theoreticians and policy makers, this suggests a fresh look at the entire area. For practitioners and the courts, it means that the case law is likely to be and to remain inherently inconsistent and occasionally arbitrary. Deductibility of Environmental Litigation Costs The simplest case is presented by the various criminal fines set forth in the environmental laws.9 These fines are the archetype for nondeductibility, and do not require much time. Without equivocation, these fines are not deductible. A more complicated problem is presented by the following scenario. A criminal defendant is convicted of an environmental crime and fined $ 25,000. The judge suspends the fine, however, and orders as a condition of probation a payment to a third party, either as reimbursement of expenses (e.g., a federal court orders payment to a state) or because the judge believes the money would be better spent in some other fashion. This scenario is common in the environmental sphere, and the deductibility of such payments has not been dispositively decided. In Spitz v. United States,10 the U.S. District Court for the Eastern District of Wisconsin held that a restitution payment paid by a defendant convicted of misappropriating funds to his victim as a condition of parole is deductible. The court reasoned that § 162(f) did not apply because the payment was not a penalty but instead was "payment of an amount due and owing."11 It also distinguished Tank Truck Rentals v. Commissioner,12 because restitution was not a fine specifically imposed by the state's legislature.13 In contrast, the reasoning in Spitz was specifically rejected by the Tax Court in Waldman v. Commissioner,14 In the criminal case underlying Waldman, the defendant was charged in state court with multiple counts of grand [20 ELR 10549] theft relating to a loan brokerage business. He pled guilty to one count, and was sentenced to a prison term of one to ten years. The state court stayed execution of his sentence on condition that he pay specified amounts of restitution to his victims. Thus, the deductibility of those payments was placed at issue. The Tax Court set forth the issue succinctly. "Where a payment ultimately serves each of these purposes, i.e., law enforcement (nondeductible) and compensation (deductible) our task is to determine which purpose the payment was designed to serve."15 The Tax Court then looked to the policies of the State of California. Because it found that the purpose of restitution under the California system was rehabilitation and deterrence of future criminality, the court held that the payments could not be deducted.16 While Waldman has the somewhat more persuasive authority of the Tax Court, its decision seems tightly tied to the specific policies of the state in question.17 Further, the federal laws on restitution in the criminal context have been in some flux, and the current policy behind restitution on the federal level seems much more compensatory than punitive.18 Civil fines present a more complicated analytical problem. Indeed, two of the eight examples the Internal Revenue Service (IRS) uses to explain § 162(f) involve environmental civil fines. First, the IRS makes it clear that simple fines imposed by the United States are not deductible: Example (2). Corp. was found to have violated 33 U.S.C. 1321(b)(3) when a vessel it operated discharged oil in harmful quantities into the navigable waters of the United States. A civil penalty under 33 U.S.C. 1321(b)(6) of $ 5,000 was assessed against N Corp. with respect to the discharge. N Corp. paid $ 5,000 to the Coast Guard in payment of the civil penalty. Section 162(f) precludes N Corp. from deducting the $ 5,000 penalty.19 Second, the IRS makes it clear that fines imposed by the states are also nondeductible: Example (7). S Corp. was found to have violated a law of State Y which prohibited the emission into the air of particulate matter in excess of a limit set forth in a regulation promulgated under that law. The Environmental Quality Hearing Board of State Y assessed a fine of $ 500 against S Corp. The fine was payable to State Y, and S Corp. paid it. Section 162(f) precludes S Corp. from deducting the $ 500 fine.20 The real problem is determining whether a specific payment is or is not a fine. Thus, courts have reached dramatically different results when analyzing similar provisions of the Clean Water Act.21 In True v. United States,22 the plaintiffs asserted that penalties imposed pursuant to § 311(b)(6) of the Clean Water Act23 were deductible. In general, § 311, dealing with oil and hazardous substance liability, sets a "no discharge" policy of immediate effect and prohibits any discharge in harmful quantities.24 The section holds owners or operators of discharging facilities liable for cleanup costs, subject to the defenses of act of God, act of war, negligence of the U.S. government, or act or omission of a third party.25 Section 311(b)(6) itself makes owners and operators liable for a civil penalty of up to $ 5,000 with no provision for any defenses but with the amount of the penalty to be determined by the Coast Guard, which is instructed to take into account ability to pay and gravity of the violation. Specifically, § 311(b)(6)(A) states: Any owner, operator, or person in charge of any onshore facility or offshore facility from which oil or a hazardous substance is discharged in violation of [§ 311(b)(3)] shall be assessed a civil penalty by the Secretary of the department in which the Coast Guard is operating of not more than $ 5,000 for each offense. . . . No penalty shall be assessed unless the owner or operator charged shall have been given notice and opportunity for a hearing on such charge. Each violation is a separate offense. Any such civil penalty may be compromised by such Secretary. In determining the amount of the penalty, or the amount agreed upon in compromise, the appropriateness of such penalty to the size of the business of the owner or operator charged, the effect on the owner or operator's ability to continue in business, and the gravity of the violation, shall be considered by such Secretary.26 It was under § 311(b)(6) that the district court imposed penalties and denied deductions. The plaintiffs appealed. The True court first looked to the policy behind § 162(f). It noted that before enactment of § 162(f), the U.S. Supreme Court had held that "taxpayers could not take deductions for fines paid for violations of state penal laws even if the violations were not willfully or knowingly committed."27 The Supreme Court had reasoned that "such a deduction would severely frustrate public policy and reduce the 'sting' of the penalties where the fines had been levied for punitive purposes."28 In particular, the True court looked to the legislative commentary on § 162(f): In connection with the proposed regulations relating to the disallowance of deductions for fines and similar penalties (sec. 162(f) questions have been raised as to whether the provision applies only to criminal "penalties" or also to civil penalties as well. In approving the provisions dealing with fines and similar penalties in 1969, it was the intention of the committee to disallow deductions for payments of sanctions which are imposed under civil statutes but which in general terms serve the same purpose [20 ELR 10550] as a fine exacted under a criminal statute. The provision was intended to apply, for example, to penalties provided for under the Internal Revenue Code in the form of assessable penalties (subchapter B of chapter 68) as well as to additions to tax under the internal revenue laws (subchapter A of chapter 68) in those cases where the government has the fraud burden of proof (i.e., proof by clear and convincing evidence). It was also intended that this rule should apply to similar type payments under the laws of a State or other jurisdiction. On the other hand, it was not intended that deductions be denied in the case of sanctions imposed to encourage prompt compliance with requirements of law. Thus, many jurisdictions impose "penalties" to encourage prompt compliance with filing or other requirements which are really more in the nature of late filing charges or interest charges than they are fines. It was not intended that this type of sanction be disallowed under the 1969 action. Basically, in this area, the committee did not intend to liberalize the law in the case of fines and penalties."29 The True court then faced directly whether the penalty serves a purpose similar to a criminal fine or penalty. In the court's view, the essential issue was the purpose of the statute. Specifically, a penalty is criminal in nature and, therefore, not deductible if its purpose is to punish and/or deter, but a penalty is not criminal in nature and, therefore, deductible if it serves to encourage compliance with the law or if it is remedial or compensatory in nature.30 The True court concluded that § 311(b)(6), although clearly a civil penalty, was not criminal in nature. First, the funds are deposited in a revolving fund for the purposes of administering the act and financing oil spill cleanups.31 Second, the penalty provision imposes strict liability. Because strict liability involves the shifting of fault to the one most able to bear the cost and insure against the risk, it has been held that the Clean Water Act is a means of transferring the risk from the public to the operator of the facility causing a harmful discharge.32 Accordingly, § 311(b)(6) was found to be remedial in nature, and therefore the penalty imposed was deductible. In contrast to True, however, the U.S. Claims Court found in Colt Industries, Inc. v. United States33 that civil penalties imposed under § 309(d) of the Clean Water Act34 and under § 113(b) of the Clean Air Act35 were not deductible. The facts of Colt were relatively straightforward. In 1979, Colt Industries, Inc., through its affiliated subsidiary, Crucible, Inc. (Crucible) , manufactured basic steel and fabricated steel products at mills and plants in Midland, Pennsylvania. Crucible's operations were subject to regulation under several environmental protection laws and regulations, including the federal Clean Air Act and the federal Clean Water Act. On June 16, 1978, the Environmental Protection Agency (EPA) requested the Justice Department to seek an injunction requiring Crucible to comply with emission regulations. EPA also recommended that civil penalties of $ 25,000 per day of violation of the Clean Air Act be sought. EPA further recommended that civil penalties be assessed for violations of permissible discharge levels allowed in the 1974 permit. Violations of the permit, under Clean Water Act § 301(a),36 made Crucible liable for civil penalties of up to $ 10,000 per day. By February 27, 1979, EPA had recalculated the appropriate civil penalty following Crucible's settlement offer. EPA summarized the elements of the recalculated civil penalty as follows:
On June 25, 1979, the U.S. District Court for the Western District of Pennsylvania signed the consent decree and entered judgment. On July 16 and July 24, 1979, Crucible paid $ 800,000 to the Pennsylvania Clean Air Fund and another $ 800,000 to the Pennsylvania Clean Water Fund. Attached to each check was a stub that stated "E.P.A. Penalty." Although the $ 1.6 million in payments were denominated as "civil penalties" in the EPA consent decree, Crucible asserted that the payments did not constitute a "fine or similar penalty" under § 162(f). Crucible first argued that the payments were a remedial or compensatory payment in restitution of the economic benefit gained from its alleged noncompliance with environmental laws and regulations. Second, Crucible argued that it agreed to and made the payments in order to obtain a permit to construct a furnace facility, and permission under the EPA consent decree to continue its operations at the Midland plant until the furnace facility could be installed and compliance with pollution control laws achieved. The Claims Court first examined what made a civil fine "similar" to a criminal fine. It concluded that [i]f a civil penalty is imposed to enforce the law and to punish violations of the law, the penalty is "similar" to a fine and therefore not deductible. If, however, the civil penalty is imposed to encourage prompt compliance with a requirement of the law, or as a remedial measure to compensate another party for expenses incurred as a result of the violation, it is not "similar" to a fine under I.R.C. § 162(f) and therefore deductible.37 In analyzing the violations at hand, the court looked to the legislative history of the statutory provisions at issue and focused on the attention paid to punitive rather than to remedial purposes. Apparently engaging in a comparative analysis, it concluded with respect to § 113(b) that "[t]he facts regarding the punitive nature of the civil penalty provisions outweigh the references in the [legislative history] to a 'remedial' or 'deterrent' purpose."38 The Claims Court's analysis of § 309 of the Clean Water Act was even murkier. On the one hand, it stated that "[t]he legislative history of the Clean Water Act does not provide significant insight into the question regarding the punitive nature of section 309(d) of the Act, 33 U.S.C. § 1319(d)."39 On the other, it concluded with no further analysis that [t]he legislative history mentions the overall objective of compliance with federal pollution legislation, and . . . suggests the civil penalty provision has a punitive objective. The Committee states that the "threat of sanction must be real, and enforcement provisions must be swift and direct." In light of this enforcement scheme, the argument that the civil penalties should be deductible hardly seems plausible.40 The Claims Court then simply dismissed the argument that the amount of the fine included factors mitigating the harm to the environment as well as punitive factors. In the Claims Court's view, EPA's use of mitigation as a factor was entirely improper.41 Similarly, the court gave the True decision short shrift. In essence, the court distinguished True because it construed a different section of the law.42 The balance of Colt was devoted to explaining that § 309 is not compensatory in nature. The court noted that payment of the fine did not allow Crucible to continue its emissions, and that no allegation was made that the business or property of the United States or the Commonwealth of Pennsylvania were damaged. The Claims Court did not explain, however, why either of these points is telling. First, even in the purely compensatory sphere of tort law, a privilege to continue the tortious conduct generally does not exist. Second, because governments can, and often do, act as general guardians of common resources — as, for example, in public nuisance cases or parens patriae antitrust actions — it is not generally dispositive that land owned specifically by a government is affected.43 On appeal, the Federal Circuit affirmed. Like the Claims Court, the Federal Circuit looked to the intent of the lawthat assessments intended to punish were not deductible.44 The court then noted that Colt's arguments were unacceptable because they would require a determination of the purpose of the specific civil penalty payment in order to ascertain its deductibility.45 Notwithstanding its stated objection, the court then went on to do just that, finding that since the amount paid by Colt was set to return Colt to the status quo, and not based on harm to the government, it was punitive, and therefore not deductible. The flaws in both Colt opinions make their analyses suspect.46 Nonetheless, Colt may have reached what will later be the consensus opinion. In short, a review of § 162(f) precedent demonstrates that there are no bright lines. As a general rule, each statutory fine is analyzed based on its own legislative history and apparent purpose. Since all fines have some remedial aspect, and since legislative history rarely speaks with one voice, solid predictions are hard to come by. Federal law is not the only place where such ambiguities arise. For example, under the Massachusetts Superfund law,47 a potentially responsible party (PRP) that fails to clean up a site may be liable to pay up to three times the costs incurred by the state as it steps in.48 But whether that payment is in any sense a fine is unclear. Section 162(f) prohibits deductibility for a payment made to a government for the violation of any law. Although this issue has never been tested in Massachusetts, it is at least arguable that the PRP has not violated any law, it has simply exercised one of the two options the statute makes available for cleaning up a state Superfund site. This position is not without support. Recently, the IRS addressed whether a nonconformance penalty assessed by EPA under § 206(g) of the Clean Air Act49 constitutes a "fine or similar penalty" for purposes of I.R.C. § 162(f), and was therefore nondeductible. The Administrator of the EPA argued that based on the Clean Air Act and its legislative history, provisions imposing a nonconformance penalty serve both a punitive and a remedial purpose.50 To the extent a nonconformance penalty is compensatory and thus remedial, the Administrator suggested that it is a deductible business expense. To the extent it is related to the degree of nonconformity and is an incentive for nonconforming manufacturers to comply with emission stan- [20 ELR 10552] the Administrator argued that it is punitive and thus a nondeductible penalty under § 162(f). The IRS disagreed. After a review of the relevant provisions of the Clean Air Act and its legislative history, the IRS concluded that a nonconformance penalty is not paid for a violation of the law, but rather is one of two lawful alternative means by which a certificate of conformity is issued based on the lawful payment of a nonconformance penalty.51 Therefore, the § 162(f) deduction disallowance was not applicable to any portion of a lawfully paid nonconformance penalty. Similarly, in S&B Restaurant, Inc. v. Commissioner,52 the defendant agreed to make monthly payments to the Pennsylvania Clean Water Fund in order to continue to discharge sewage waste into an underground waterway until it could be connected to a planned municipal sewage treatment facility. The court found that the monthly payment corresponded to the charges that would have been made to the municipal facility had it been in operation, that the state would have attempted to block an attempt by the defendant to build its own facility, and that the state understood that no practical environmental harm would result from the defendant's continued discharge.53 The court allowed deduction of the monthly payments, stating that such allowance could not be viewed as encouraging violations or reducing the effectiveness of Pennsylvania's pollution control laws.54 The court specifically noted, however, that it was deciding only the question of whether § 162(f) precluded deduction of the payments, not whether deduction was permissible on general § 162(a) grounds.55 One portion of almost every consent decree or administrative consent order provides for stipulated " penalties" for failure to meet certain deadlines or to comply with specified procedures. While they may be called penalties — a denomination that private practitioners probably should resist — their status is still unclear. First, strictly speaking, they are not imposed for violations of law. They are instead imposed only for violations of a negotiated agreement, albeit one entered by an agency or court.56 Second, more broadly, § 162(f) was intended primarily to codify the existing common law doctrine that allowing deductions is against public policy. In that context, stipulated penalties in a consent decree are more like contractual liquidated damages than punitive fines. Frequently, consent decrees provide for grace periods or are calibrated to the length of delay in missing a deadline, both attributes more common to contractual "penalty" provisions than to statutory fines. One possible basis for suit under federal and many state laws is the recovery for damages to natural resources. If the criminal penalty represents one extreme of the spectrum, natural resources damages is the other. Both by its name and its purpose, these damages are entirely compensatory. Whether the government is acting in a proprietary capacity or as parens patriae is only a theoretical gloss. There should be little doubt of the deductibility of these payments. Enforcement and Oversight Costs The deductibility of governmental enforcement and oversight costs still appears to be an open question that depends largely on the perceived public policy implications. There are some points clearly favoring deduction. First, the amount is clearly set to compensate and not to punish or deter. Second, the amount must be documented by the claiming agency. Finally, no relationship exists between the magnitude of the costs to be deducted and the nature of the defendant's actions. On the other side of the balance is one glaring point: deductible enforcement and oversight costs frustrate the congressional intent that EPA be fully reimbursed for all appropriate actions. Every dollar "paid" to EPA would diminish other general tax payments. The result would be, in effect, a transfer of general tax revenues from the rest of the government to EPA. In addition to the substantive costs of settling setting an environmental case, a PRP must also consider whether the legal fees incurred — often substantial — are also deductible. The Internal Revenue Code does not have any specific provisions on the deductibility of such fees. Thus, whether they are deductible depends on several factors. First, to be deductible, legal fees must be reasonable in amount.57 Second, it is important to understand precisely who has benefitted from the legal expenses and in what capacity. To be deductible, the legal expenses must be those of the [20 ELR 10553] taxpayer and not someone else. Thus, a corporation cannot deduct fees incurred only for the benefit of its stockholders.58 But legal expenses for defending criminal charges against employees arising out of business activities are deductible by the corporation because such expenditures are deemed to benefit the corporation.59 Accordingly, when a closely held corporation is sued along with its owner, the expenses of defending the owner may depend on the plaintiff's theory. For example, if the owner is sued as an "operator" under § 107 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLAR),60 the expenses may fall within the "benefit of the corporation" rule; if sued on a "piercing the corporation veil" theory, however, they may not.61 Until 1963, deductions from an unsuccessful defense of a criminal action were generally not allowed for public policy reasons. In Tellier v. Commissioner,62 however, the Supreme Court held that amounts expended for legal services in defense of criminal charges arising out of a taxpayer's trade or business are deductible regardless of outcome. The Tellier Court specifically held that expenses for an unsuccessful criminal defense of a securities dealer convicted of mail fraud and violation of the Securities Act of 1933 were deductible: There can be no serious question that the payments deducted by the respondent were expenses of his securities business under the decisions of this Court, and the Commissioner does not contend otherwise. In United States v. Gilmore, . . . we held that "the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was 'business' or 'personal' within the meaning of § 162(a). . . . The criminal charges against the respondent found their source in his business activities as a securities dealer. The respondent's legal fees, paid in defense against those charges, therefore clearly qualify under Gilmore as "expenses paid or incurred . . . in carrying on any trade or business" within the meaning of § 162(a). . . . Only when the allowance of a deduction would "frustrate sharply defined national or state policies proscribing particular types of conduct" have we upheld its disallowance. Commissioner v. Heininger. . . . Further, the "policies frustrated must be national or state policies evidenced by some governmental declaration of them." Lilly v. Commissioner. . . . The present case falls far outside that sharply limited and carefully defined category. No public policy is offended when a man faced with serious criminal charges employs a lawyer to help in his defense. That is not "proscribed conduct." It is his constitutional right.63 After Tellier, the IRS announced that it would no longer contest on public policy grounds a deduction for legal expenses incurred in the unsuccessful defense of an antitrust prosecution.64 It also indicated its view that the decision in Tellier had done away with the earlier doctrine denying a deduction for legal expenses incurred in an unsuccessful defense of a civil action brought by the federal government based on an international tort. The Tellier approach has since been confirmed. In Johnson v. Commissioner,65 the Tax Court found that when income that constitutes community property is derived from an illegal scheme of a taxpayer's spouse, the taxpayer must deduct 50 percent of the spouse's legal defense costs. Similarly, in Kent v. Commissioner,66 the taxpayer was a charter boat captain who was arrested for smuggling marijuana. The court held that I.R.C. § 212 allowed him to deduct legal expenses paid by an unknown third party on his behalf. Although the captain was not in the trade or business of smuggling for profit, the legal expenses arose as a direct result of that activity. Tellier definitively resolved the deductibility of legal expenses for criminal defense in a business setting. But if criminal conduct is unrelated to business, the deduction will be denied. Thus, in Nadiak v. Commissioner,67 the defendant, a commercial airline pilot, sought to deduct legal expenses for the successful defense of an assault charge brought by a friend of his former wife. Rejecting his contention that the expenses were business-related because conviction would have meant loss of his pilot's license and his livelihood, the Second Circuit noted that the claim originated in a personal relationship and was to be so characterized.68 Other Environmental/Tax Issues Remediation Costs: Timing Issues Unlike the other costs and expenses associated with environmental litigation, the critical issue for remediation costs or, for example, Resource Conservation and Recovery Act (RCRA) corrective actions,69 is not whether they are deductible but the timing of the deductions. In a typical remediation settlement, the parties acceptresponsibility for remediation of a site, agree to perform a certain remedy (often selected by the government), and put up some or all of the projected costs. Those funds are then held in trust during further investigation of the site, contracting, and performance of the remedy. That process often takes years. During that time, the actual cost of the remedy remains unknown.69 Settlements of legal disputes are governed by I.R.C. [20 ELR 10554] § 461, as revised in 1984, and § 468. While a general discourse on the timing of deductions is beyond the scope of this Article, broadly speaking, a settlement is deductible when (1) all events have occurred that fix the fact and amount of the obligation (the obligation must have "accrued"),70 and (2) actual payment has been made. In environmental cases, these requirements raise certain issues. Turning to the "accrual" test, the key issue arises with settlements in which one or more non-de-minimis settlers simply assume joint and several liability for cleanup. In many respects the timing for depositing payments into an escrow fund is under the control of those parties. While prudence often necessitates early and substantial payments to forestall problems of business failure, many of those funds are not actually required for immediate payment.71 Thus, it is not clear whether the obligation has "accrued." The two leading cases on this issue are United States v. General Dynamics Corp.72 and Hughes Properties, Inc.73 In General Dynamics, an accrual-basis taxpayer self-insured its employee medical plan. Nonetheless, it was not permitted to deduct the amount in reserve accounts reflecting liabilities for medical care provided to employees who had not yet filled out their reimbursement forms. The "all events" test remained unsatisfied because the last event necessary to fix liability had not yet occurred.74 In contrast, the Supreme Court in Hughes Properties considered the case of a casino that operated a slot machine. Payout on the machine depended on the amount the machine was played. Thus, the Court agreed that even if no payout occurred in a particular tax year, the liability was fixed as of the last play in that tax year.75 Where does this leave settling parties? Their best argument—particularly when the government agency has settled on a proposed remedy—is to argue that at least some portion of the liability is fixed. In other words, the investigation required and the uncertainties only help to define the ceiling amount of the cleanup. An irreducible fixed minimum is clearly determined. While this position seems strong, so did the position of General Dynamics. Further, the government's estimates of cleanup costs based on its preferred remedy are often very low. However, soon after a settlement, realistic estimates of cleanup costs—for which some cash escrow is prudent—may far exceed any number initially suggested by the agency. The second aspect of timing relates to economic performance; that is, the payment must be "made" to be deductible. IRS recently clarified this analysis when it proposed regulations for § 461 on June 7, 1990. In general, under either I.R.C. § 461 or § 468B, the payments must be irrevocable and under the control of someone other than the taxpayer. This raises two problems. First, the settling party often retains a reversionary right in any funds remaining after the cleanup. While this right is not likely to have much value, companies may be reluctant to transfer money into a long-term escrow for costs not yet incurred without some assurance that any surplus will be returned. This is particularly true when the site committee offers the alternatives of full payment of estimated costs up front or of posting a letter of credit. Some companies would prefer to put up the money and get a return on the interest rather than to pay letter of credit fees. Then the IRS may not regard the payments as irrevocable.76 A second problem arises with the requirement that the payment money must be beyond the control of the taxpayer. In many CERCLA cases, the settling taxpayer either is a trustee of the cleanup trust fund or is a PRP committee member with the power to give directions to the trustees. Treasury Regulation § 1.461-2(c) (and Proposed Treasury Regulation § 1.461-6(c)) specifically notes that "transfer to an account which is within the control of the taxpayer" is not a transfer sufficient to meet the test.77 Indeed, to the extent that a PRP-led cleanup is deemed an obligation to provide property or services, the proposed regulations provide that economic performance occurs only as the taxpayer incurs the costs in connection with the liability.78 A somewhat related problem arises when not all PRPs settle. Under those circumstances, a third-party contribution action is commonly brought. Because the purpose of such an action is to diminish the third-party plaintiff's liability, it is possible that the "all events" test is not satisfied. This possibility is strengthened when the escrow or trust is not irrevocable. A facility owner subject to an environmental lawsuit has an additional issue to resolve. In general, an expenditure to purchase an asset having a useful life in excess of one year, or which secures "a like advantage to the taxpayer which has a life of more than one year," is a capital expenditure and cannot be deducted as current expenses. I.R.C. § 263 provides that no deduction is available for permanent improvements made to increase the value of property.79 Instead, the rules on depreciation govern deductibility. Thus, the key question is whether an expenditure is a "repair" qualifying for current deduction or a capital improvement. This distinction has always been hazy. In theory, repairs do not add to the value of a property or prolong its life substantially. Capital improvements, however, add value, prolong life, or change use. Thus, the distinction may be easier to state than to apply. In Midland Empire Packing Co. v. Commissioner,80 the taxpayer deducted as a repair an expenditure for a concrete lining in its basement to oilproof [20 ELR 10555] the basement against an oil nuisance created by a neighboring refinery. In holding the expenditure a repair, because it was necessary to maintain normal output, the Tax Court stated: The basement was not enlarged by this work, nor did the oilproofing serve to make it more desirable for the purpose for which it had been used through the years prior to the time that the oil nuisance had occurred. The evidence is that the expenditure did not add to the value or prolong the expected life of the property over what it was before the event occurred which made the repairs necessary. It is true that after the work was done the seepage of water, as well as oil, was stopped, but, as already stated, the presence of the water had never been found objectionable. The repairs merely served to keep the property in an operating condition over its probable useful life for the purpose for which it was used. The [taxpayer] here made the repairs in question in order that it might continue to operate its plant. Not only was there danger of fire from the oil and fumes, but the presence of the oil led the Federal meat inspectors to declare the basement an unsuitable place for the purpose for which it had been used for a quarter of a century. After the expenditures were made, the plant did not operate on a changed or larger scale, nor was it thereafter suitable for new or additional uses. The expenditure served only to permit [the taxpayer] to continue the use of the plant, and particularly the basement for its normal operations.81 On the other hand, in Mount Morris Drive-In Theatre Co. v. Commissioner,82 a taxpayer cleared land to build a drive-in theater and installed a drainage system after the threat of litigation by an adjacent landowner. The court held that the cost of the drainage system must be capitalized as part of the cost of the theater because it was part of the process of completing the taxpayer's basic investment for its intended use. The court reasoned that the drainage system "added to the value of the [taxpayer's] land for the use to which it had been put."83 The context of environmental litigation raises a variety of problems. Is a RCRA corrective action84 more like a repair because it keeps the operation open, or is it more like a capital improvement? Must a long-term lessor of a CERCLA facility capitalize all costs contributed to the cleanup of a site for which it is deemed an operator? At what point does modification of a water treatment system move from repair to capital investment? The answers to these and similar questions will be fact-dependent. That does not mean, however, that the environmental practitioner can postpone consideration of the problem. From a tax perspective, a water treatment facility might be better owned by a municipality than by the plant owner. Similarly, a CERCLA cleanup might best be accomplished if the property is conveyed to an unrelated third-party corporation. Interest on Remediation Fund Deposits It is common at Superfund sites for some substantial portion—or all—of the projected remediation funding to be deposited up front. These funds remain on deposit for months and years, and earn interest. From the taxpayer's viewpoint, these deposits are committed to the cleanup, and the interest earned is not available to pay resulting taxes. This only intensifies the taxpayer company's interest in trying to arrange matters so that earned interest is not income. This initial impulse appears difficult to pursue. One avenue that no longer appears available is to structure the depository entity as a social and welfare organization pursuant to I.R.C. § 501(a)(4). In 1979, the IRS ruled that an organization formed to prevent, contain, and cleanup oil and other liquid spills in a city port area is a § 501(c)(4) organization.85 The organization's membership included business firms, primarily oil and chemical companies, but because the organization cleaned up spills of both members and nonmembers, the IRS found that the organization was acting to prevent deterioration of the entire port community and not merely to prevent damage to its members' facilities. Benefits to the members were incidental. Contrasted with that ruling is the case involving plumbers in New York City who formed an organization to repair cuts made in city streets by its members in the course of their plumbing activities. Because the organization's primary purpose was to relieve its members of the obligation to reimburse the City for repairs made by City employees in such street cuts, the organization was not exempt under I.R.C. § 501(c)(4). All members enjoyed economic benefits to the extent they used and paid for restoration benefits. Although the public benefited because the streets were more quickly repaired, the primary benefit was to the plumbers.86 The issue moved a step forward, however, in 1989. In a letter ruling to the Union Chemical Site Trust Fund,87 the IRS took the position that a trust fund holding remediation funds was a grantor trust. The IRS explained that the activities at issue were more similar to those of the litigants in Contracting Plumbers than to those of the oil spill cleanup organization described in Revenue Ruling 79-316.88 The taxpayers were notified by EPA of their potential liability for the site's restoration. Although the grantors did not admit liability, the IRS emphasized that they signed a consent order that directly caused the creation of the fund. The IRS also focused on the fact that the grantors controlled the fund. PRPs determine who the trustees will be through their control of the executive committee, which has the power to substitute trustees without cause. Further, as is usual, the grantors retained the power to amend the trust instrument. Finally, at the termination of the trust, which was within a definite time, the PRPs received the remaining trust corpus in relationship to the amount they contributed. The IRS concluded that there were significant similarities between the PRPs subject to the Letter Ruling and the litigants in Contracting Plumbers. Specifically, the private economic benefit to the grantors prevailed over the community benefit, since the fund was not operated exclusively to promote social welfare. A second possible categorization is an association taxable as a corporation. Typical participation agreements have many attributes of a corporation. The PRPs form the organization and contribute money to it; each member has a vote in proportion to the amount of money contributed, much like stockholders; and the members elect an executive committee which functions much like a board of directors. The purpose of the group is to accomplish a specific objective, which will require hiring consultants, contractors, and others. At the end of the project, the group will be dissolved, and any money remaining will be distributed pro rata to the members. Although not necessarily incorporated into state law, the regulations under I.R.C. § 7701 clarify that associations of taxpayers may be subject to corporate-level taxation. For example, Treasury Regulation § 301.7701-2(a) provides that the major characteristics of a corporation are (1) associates; (2) an objective to carry on business and divide the gains therefrom; (3) continuity of life; (4) centralization of management; (5) liability to creditors limited to property of the entity or enterprise; and (6) free transferability of interests. An unincorporated organization, however, must have more corporate characteristics than noncorporate characteristics before it can be classified as an association. Typical PRP organizations fail that test. Almost by definition, the PRPs do not intend to make a profit or divide any gains from the operation. Instead, they are really engaged in an elaborate system to share expenses.89 Although the arrangement is an association and has some continuity of life,90 it often does not have any real limited liability or free transferability of interests. The interests of the members are not freely transferable and cannot be assigned except to a successor corporation. Further, any limitations on liability are largely illusory. Thus, the PRP arrangement might be classified as an association because it has more corporate than noncorporate characteristics. But if there is no objective to carry on a business with the intention of sharing the profits or gains therefrom, it should not be classified as an association taxable as a corporation.91 As a result, the likely classification for most standard depository entities is as a grantor trust. Under I.R.C. § 674, a grantor is treated as the owner of any property held in trust if the beneficial enjoyment of the principal or income therefrom is subject to a power of disposition exercisable by the grantor or a nonadverse party. Since the amounts contributed by the defendants under the three governing documents are subject to distribution pursuant to the instructions of an executive committee, and all members have contributed proportionately to their allocated responsibility, there are no "adverse" interests involved in the power of disposition. Further, under I.R.C. § 677, a grantor is treated as the owner of any portion of a trust whose income, without the approval or consent of any adverse party, is in the discretion of the grantor or a nonadverse party, and may be distributed to the grantor or used for his benefit or held or accumulated for future distribution to the grantor or used for his benefit. If either or both § 674 and § 677 apply to such an arrangement, then the defendants will have created a nonentity for tax purposes. A so-called grantor trust has reporting responsibilities only. Each grantor must report directly on its own tax return all income, deductions, and credits, as if there were no trust. In short, in most situations arising under CERCLA, and similar state legislation, the income earned is apportioned among the contributors. This analysis was recently strengthened by the Proposed Treasury Regulations. Proposed Treasury Regulation § 1.461-2(f) governs treatment of money or property transferred to an escrow or trust. It specifically states that the income to the fund must be included in a taxpayer's gross income.92 On the other hand, taxes paid on the income are considered transfers to the fund if it otherwise qualifies, and may be deductible. Many tax issues are lurking in cases labeled as environmental. Once these issues are identified, the prudent environmental attorney can begin to plan to minimize an unpleasant surprise to the client. 1. 26 U.S.C. § 162(a)(1982) (emphasis added). 2. Welch v. Helvering, 290 U.S. 111, 114 (1933). 3. Lilly v. Commissioner, 343 U.S. 90, 93 (1952); see also Commissioner v. Heininger, 320 U.S. 467 (1943). 4. 12 T.C.M. (CCH) 806 (1943). 5. Id. at 808. 6. I.R.C. § 162(f). 7. Treas. Reg. § 1.162-21 (1986) (emphasis added). 8. See also § 726 of the Bankruptcy Code, which has developed a decisional case law on fines, penalties, and forfeitures. 9. E.g., Resource Conservation and Recovery Act § 3008(d), 42 U.S.C. § 6928(d), ELR STAT. RCRA 021; Comprehensive Environmental Response, Compensation, and Liability Act § 109, 42 U.S.C. § 9609, ELR STAT. CERCLA 031; Federal Water Pollution Control Act §§ 309, 311, 33 U.S.C. §§ 1319, 1321, ELR STAT. FWPCA 035, 039. 10. 432 F. Supp. 148 (E.D. Wis. 1977). 11. Id. at 149-50. 12. 356 U.S. 30 (1958). The Supreme Court found that violations of highway weight limitation laws were not deductible. Even though such violations were, in practice, unavoidable — and occasionally unintentional — it found that deduction would frustrate state policy. See id. at 33-34. 13. Spitz, 432 F. Supp. at 150. In Tank Truck Rentals, the Court adhered to its earlier statement in Lilly v. Commissioner, 343 U.S. 90 (1952), that a public policy requiring denial of deductions must be "evidenced by some governmental declaration. . . ." Id. at 97. Accordingly, Lilly permitted makers of eyeglasses to deduct the kickbacks they paid to doctors notwithstanding their concealment from the customer. 14. 88 T.C. 1384 (1987), aff'd, 850 F.2d 611 (9th Cir. 1988). 15. Id. at 1387. 16. The court had little difficulty with the fact that the payments went to private parties and not to the government. Id. at 1389. In essence, because the liability originated with the sentencing court, the fact that the government did not "pocket" the money was irrelevant. See Stephens v. Commissioner, 93 T.C. 108 (1989); see also Bailey v. Commissioner, 756 F.2d 44, 47 (6th Cir. 1985). 17. See, e.g., In re Pellegrino, 42 Bankr. 129 (Bankr. Conn. 1984) (Connecticut restitution in the criminal context of alternative fines is punitive). 18. See United States v. Tiller, 602 F.2d 30 (1979); United States v. Jimenez, 600 F.2d 1172, cert. denied, 444 U.S. 903 (1979); United States v. Ramirez, 555 F. Supp. 736 (E.D. Cal. 1983). 19. Treas. Reg. § 1.162-21(c) (1986). 20. Id. 21. Federal Water Pollution Control Act, 33 U.S.C. §§ 1251-1387, ELR STAT. FWPCA 001-065. 22. 603 F. Supp. 1370, 16 ELR 20344 (D. Wyo. 1985). 23. 33 U.S.C. § 1321(b)(6), ELR STAT. FWPCA 040. 24. FWPCA § 311(b)(1), (3), 33 U.S.C. § 1321(b)(1), (3), ELR STAT. FWPCA 039-040. 25. Id. § 311(f), 33 U.S.C. § 1321(f), ELR STAT. FWPCA 041. 26. 33 U.S.C. § 311(b)(6)(A), ELR STAT. FWPCA 040. 27. 603 F. Supp. at 1372, 16 ELR at 20345. 28. Id. The district court cited Tank Truck Rentals, 356 U.S. at 36, and Hoover Motor Express Co. v. United States, 356 U.S. 38 (1958). 29. 603 F. Supp. at 1373, 16 ELR at 20345 (emphasis in original) (citing S. REP. NO. 437, 92d Cong., 1st Sess. 73 (1971), reprinted in 1971 U.S. CODE CONG. & ADMIN. NEWS 1825, 1918, 1979-1980). Strictly speaking, of course, the report is not legislative history because it was written after the statute was enacted. Nonetheless, its use in the analysis of the True opinion means that it cannot simply be dismissed. See also Adolf Meller Co. v. United States, 600 F.2d 1360, 1363 (Ct. Cl. 1979) (report is of value because committee recommended reenactment without charge). There is some useful language in the actual legislative history, albeit somewhat less pointed. S. REP. NO. 552, 91st Cong., 1st Sess. 273 (1969), reprinted in 1969 U.S. CODE CONG.& ADMIN. NEWS 1645, 2027, 2310. 30. 603 F. Supp. at 1374, 16 ELR at 20345. 31. Id.; see also United States v. Texas Pipe Line Co., 611 F.2d 345, 10 ELR 20184 (10th Cir. 1979). 32. Ward v. Coleman, 423 F. Supp. 1352, 1357, 7 ELR 20134, 20136 (W. D. OKLA. 1976), rev'd, 598 F.2d 1187, 9 ELR 20331 (10th Cir. 1979); rev'd sub nom. United States v. Ward, 448 U.S. 242, 10 ELR 20477 (1980). 33. 11 Cl. Ct. 140, 17 ELR 20962 (1986), aff'd, 880 F.2d 1311, 19 ELR 21450 (Fed. Cir. 1989). 34. 33 U.S.C. § 1319(d), ELR STAT. FWPCA 037. 35. 42 U.S.C. § 7413(b), ELR STAT. CAA 014. 36. 33 U.S.C. § 1311(a), ELR STAT. FWPCA 025. 37. 11 Cl. Ct. at 144, 17 ELR at 20964. 38. Id. (citing H.R. REP. NO. 294, 95th Cong., 1st Sess., reprinted in 1977 U.S. CODE CONG. & ADMIN. NEWS 1077). 39. Id. 40. Id. at 145, 17 ELR at 20964. 41. Id. 42. The court's analysis of True is almost unintelligible. In addition to noting that True analyzed § 311, not § 309, the Claims Court distinguished Crucible's penalties because they were not "imposed regardless of fault." In fact, of course, they were imposed regardless of fault. As the Claims Court itself noted, no intent element is required for assessment of a civil penalty under § 309. Further, EPA's own analysis showed that only 3 percent of its calculation of the appropriate fine was related to "recalcitrance." From a precedential point of view, it would have been better — and more honest — for the Claims Court simply to have disagreed with True as was its prerogative than to have engaged in drawing such an insubstantial "distinction." 43. See Department of Energy v. Seneca Oil Co., No. 87-1890 (10th Cir. June 28, 1990) (claim by DOE for recovery of overcharges made by an oil company is not a fine, penalty, or forfeiture under § 726 of the Bankruptcy Code because it constituted restitution even though the money went to the government and not to the overcharged purchasers). 44. 880 F.2d at 1313, 19 ELR at 21451. 45. Id. at 1314, 19 ELR at 21451. 46. See Note, Deductions of Civil Penalties Under Section 162(f): Colt Industries, Inc. v. United States, 43 Tax Law. 823 (1990). 47. MASS. GEN. L. ch. 21E (1983). 48. Id., § 5. 49. 42 U.S.C. § 752(g), ELR STAT. CAA 036. 50. General Counsel Mem. 39,739 (IRS Aug. 15, 1986). 51. Id. 52. 73 T.C. 1226 (1980). 53. The court rejected the defendant's contention that I.R.C. § 162(d) requires institution of a legal proceeding, stating that such a rule might encourage taxpayers to "pay early and get the deduction." 73 T.C. at 1234. 54. See also Grossman & Sons, Inc. v. Commissioner, 48 T.C. 15 (1969) (compensatory payments under the Federal False Claims Act deductible); Rev. Rul. 66-330, 1966-2 C.B. 44, declared obsolete by Rev. Rul. 83-122, 1983-2 C.B. 271; True v. United States, 629 F. Supp. at 881. But see Treas. Reg. § 1.162-21(c) (1986) (Ex. (2)); Gen. Couns. Mem. 39,739 (Aug. 15, 1986) (nonconformance penalty under Clean Air Act deductible). 55. 73 T.C. at 1230-31; see United Draperies, Inc. v. Commissioner, 41 T.C. 457 (1964), aff'd, 340 F.2d 936 (8th Cir. 1965) (deduction denied for kickbacks that were not "ordinary"). In S&B Restaurant, the Tax Court in dicta questioned whether United Draperies survived. 73 T.C. at 1231; see also Barone v. Commissioner, 85 T.C. 462, 468 n.6 (1985). 56. One commentator has stated, "The legislative history of the Superfund Amendment and Reauthorization Act of 1986 . . . considers the nature of the penalty provisions required in remedial action decrees, in terms which could be read to support the notion that the Congressional intentwas indeed to impose 'penalties' for schedule violations." Anderson, Hausman & Steinberg, Implementing Superfund Settlements: Tax & Organizational Issues, CHEM. WASTE LITIGATION REP. 226, 230 n.9 (1989). With all due respect, this appears to be an overly broad reading of the legislative history. 57. See Commissioner v. Lincoln Elec. Co., 176 F.2d 815, 817-18 (6th Cir. 1949), cert. denied, 338 U.S. 949 (1950). Compare Treas. Reg. § 1.212-1(d)(1986) (expenses deductible under § 212 "must be reasonable in amount and must bear a reasonable and proximate relation to the production and collection of taxable income. . . ."). Courts will on rare occasions disallow some portion of a deduction for legal fees because they are found to be unreasonable. E.g., Harvey v. Commissioner, 171 F.2d 952, 955 (9th Cir. 1949). 58. E.g., High Frequency Corp. v. Commissioner, 167 F.2d 583 (2d Cir. 1948). 59. Larchfield Corp. v. United States, 373 F.2d 159, 167 (2d Cir. 1966); B. T. Harris Corp. v. Commissioner, 30 T.C. 635, 642 (1958); San-Knit-Ary Textile Mills, Inc., v. Commissioner, 22 BTA 754 (1931). It is worth noting that in some cases, these payments may be deemed to be income to the employee. Glimco v. Commissioner, 397 F.2d 537, 539-40 (1968). 60. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075. 61. See also 26 I.R.C. § 262 (1982). 62. 383 U.S. 687 (1966). 63. Id. at 689, 694 (citations omitted) (emphasis in original). 64. Rev. Rul. 66-330, 1966-2 C.B. 444; Rev. Rul. 64-224, 1964-2 C.B. 52. In Rev. Rul. 83-122, 1983-2 C.B. 271, the IRS announced that Rev. Rul. 66-330 and 64-224 were absolute. 65. 72 T.C. 340C (1979). 66. 51 T.C.M. (CCH) 1605 (1986). 67. 356 F.2d 911 (2d Cir. 1966). 68. Id. at 912; see also Messina v. United States, 202 Ct. Cl. 155 (1973); Slawek v. Commissioner, 54 T.C.M. (CCH) 438 (1987); Gilliam v. Commissioner, 51 T.C.M. (CCH) 81 (1980); Freund v. Commissioner, 10 T.C.M. 514 (1951) (contempt of court); Meredith v. Commissioner, 47 T.C. 441 (1967) (contempt of court); Priv. Ltr. Rul. 85-05-003 (Sept. 14, 1984) (deduction denied for defense of illegal campaign contribution charges). 69. RCRA § 3008, 42 U.S.C. § 6928, ELR STAT. RCRA 020-021. 70. Treas. Reg. § 1.461-1(a)(2)(1967). 71. Indeed, in many CERCLA settlements the large settlers have control of a substantial pool of funds from de minimis settling parties. These funds are often sufficient for one to two years of preliminary work and cleanup activity. 72. 481 U.S. 239 (1987). 73. 476 U.S. 593 (1986). 74. See also World Airways v. Commissioner, 564 F.2d 886 (9th Cir. 1977). 75. But see Prop. Treas. Reg. § 1.461-4(g)(8) (Ex. 5), 55 Fed. Reg. 23245 (June 7, 1990). 76. See Treas. Reg. § 1.461-2(c); Prop. Treas. Reg. § 1.461-4(g), 55 Fed. Reg. at 23243. 77. See I.R.C. § 461(b)(2); see also Poirier & McLane Corp. v. Commissioner, 547 F.2d 161 (2d Cir. 1976), cert. denied, 431 U.S. 967 (1977); Specialized Servs., Inc. v. Commissioner, 77 T.C. 490 (1981). It seems unlikely that I.R.C. § 468B yields any advantage in this analysis. See Prop. Treas. Reg. § 1.461-6(c), 55 Fed. Reg. at 23247. 78. Prop. Treas. Reg. § 1.461-4(d)(4), (6) (Ex. 2), 55 Fed. Reg. at 23241, 23242. 79. See Treas. Reg. § 1.263(a)-2 (1987). 80. 21 T.C. 619 (1954). 81. Id. at 621. 82. 238 F.2d 85 (6th Cir. 1956). 83. Id. at 86. 84. RCRA §§ 3004(a), 3008(h), 42 U.S.C. §§ 6924(u), 6928(h), ELR STAT. RCRA 016, 021; see also 55 Fed. Reg. 30798 (July 27, 1990). 85. Rev. Rul. 79-316, 1979-2 C.B. 228. 86. Contracting Plumbers Coop. Restoration Corp. v. United States, 488 F.2d 684 (2d Cir. 1973), cert. denied, 419 U.S. 827 (1974). 87. Denial of Recognition Letter (May 12, 1989). 88. Supra note 85. 89. Compare Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 519 (7th Cir. 1980). 90. Continuity of life, for purposes of the regulations, means that the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member will not cause a dissolution of the organization. The mere fact that the project will end and the organization will dissolve when the site is cleaned up and the consent decree is terminated does not mean this arrangement has a limited life. The bankruptcy, resignation, or expulsion of any defendant member generally does not terminate the participation agreement or trust agreement. 91. In any event, structure as a corporation might affect the timing of deductions for the underlying funds, since they might be deemed capital contributions. 92. Prop. Treas. Reg. § 1.461-2(f)(2)(ii), 55 Fed. Reg. at 23240. 20 ELR 10547 | Environmental Law Reporter | copyright © 1989 | All rights reserved |