Removal of Gas Tanks

[RNuse09]

Hello,

I have a client who owns a gas station and removed the gas tanks from the ground because he is no longer going to sell gas. It is a big expense so it seems very high to be a repair but it does not make any sense to me to depreciate it either considering there is no future benefit. Any thoughts? I'm leaning towards repairs.

[Burke]

I would think it comes under the rules for demolition, meaning it is capitalized to the land basis. Neither depreciation nor an expense at this time. Will be realized when the land is sold.

[TXEA]

From the tangible property regulations - -

Removal Costs

Under the final rules for removal costs, if a taxpayer disposes of or partially disposes of a depreciable asset and has taken into account the adjusted basis of the asset or component of the asset in realizing gain or loss, the costs of removing the asset or component do not have to be capitalized under Sec. 263(a). If a taxpayer disposes of a component of a unit of property and the disposal is not a disposition for federal tax purposes, the taxpayer must deduct or capitalize the costs of removing the component, based on whether the removal costs directly benefit or are incurred by reason of a repair to the unit of property or an improvement to the unit of property.

------Reg. 1.263(a)-3(g)(2)

Of Note...

[see Reg. §1.263(a)-3(k)(7)]: Addresses the removal and replacement of a tank by example.

[Burke]

I got a headache just reading this section. The way I interpret this is, if the old tanks were disposed of (meaning they were sold) and the basis used to adjust gain or loss, then there would be no capitalization. In the example given in the quoted Code subsection (.....#7) the tanks were removed, replaced with improved ones, and the use continued as before and all costs were capitalized, including removal, installation & permit costs, etc, etc. In the OP situation, it is not clear what happened with the tanks once they were dug up. Generally, if the property in question is destroyed or demolished, the costs are capitalized to the land. Is that your take on it?

[TXEA]

Headache for sure

Burke -

I am still grappling with this regulation. The term "disposes of" is a broad term, and I do not think it means just means "they sold it". So, in the case of digging up a tank, let's assume the tank was not fully depreciated and has a basis of $5,000. I would guess (although I don't know) that used gasoline tanks have little to no value. If the tank was scrapped (completely disposed of) then I think we need to consider whether there was an adaptation, betterment, or restoration.

I am not sure of the answer here, so a question back to you: The regulations provide many examples of disposal as including scrapped. Do you think if we just recognized a loss that we would have a disposal that resulted in gain or loss for tax purposes? Also, do we have an adaptation, betterment, or restoration?

Consider the following:

From TD 9689 - Guidance Regarding Disposition of Tangible Personal Property:

A. Definition of disposition

The final regulations retain the definition of “disposition” for MACRS property that is set forth in the 2013 proposed regulations. A disposition occurs when ownership of the asset is transferred or when the asset is permanently withdrawn from use either in the taxpayer’s trade or business or in the production of income. A disposition includes the sale, exchange, retirement, physical abandonment, or destruction of an asset. A disposition also includes the retirement of a structural component (or a portion thereof) of a building only if the partial disposition rule (discussed in II.C) applies to such structural component (or a portion thereof). Finally, the manner of disposition (for example, abnormal retirement or normal retirement) is not taken into consideration in determining whether a disposition occurs or gain or loss is recognized.

The final regulations also provide that if a taxpayer properly includes an item in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87–56 (1987–2 CB 674) or classifies an item in one of the categories under section 168(e)(3) (other than a category that includes buildings or structural components; for example, retail motor fuels outlet and qualified leasehold improvement property), each item is the asset provided it is not an improvement or addition to an existing asset.


I am still spending at least an hour or two a day on these regulations, and I still don't completely understand them.

[Burke]

Burke -

I am still grappling with this regulation. The term "disposes of" is a broad term, and I do not think it means just means "they sold it". So, in the case of digging up a tank, let's assume the tank was not fully depreciated and has a basis of $5,000. I would guess (although I don't know) that used gasoline tanks have little to no value. If the tank was scrapped (completely disposed of) then I think we need to consider whether there was an adaptation, betterment, or restoration.

I am still spending at least an hour or two a day on these regulations, and I still don't completely understand them.

I agree that the definition of disposal also means destroyed or scrapped. And if a gain or loss is recognized for tax purposes, then it appears it does not have to be capitalized under these new regs. This is different from real property in which demolition costs are capitalized to the land. When the reference is made as to whether there was an adaptation, betterment, or restoration, I am assuming it is the land being considered? And it could very well be considered any one of the three. I don't think those attributes can be ascribed to the tanks themselves. The tanks would have been separate, tangible depreciable property to begin with, not land improvements. Looks like I am going to have to do some more studying as well.

[DaveO]

So if I read everyone's comments correctly; If you remove and replace the tanks you deduct the removal along with the installation of the new tanks. If you remove and don't replace (in this case preparing to sell the property to be used for other than a gas station) then you must capitalize?

[FEDUKE404]

Another issue

Burke is indeed correct. . .what a mess.

The "tax person" can see the tank removal as the simple cessation/disposition of a depreciable asset.

OTOH, there are situations (think EPA/OSHA/whatever) where the tank MUST be removed due to contamination potential, whether past/present/future.

That second scenario can certainly add a new spin to things, especially if removal of surrounding soil et al is also a requirement.

Good luck. Tylenol helps. Some good Kentucky bourbon may help more.. .

FE

[Snaggletooth]

Maybe Missing Something

We may (or may not) be missing something. Is there not a specific deduction allowed for compliance with regulatory EPA standards? I'm thinking there is, and if so it is quite possible the specified deduction would "trump" the necessity of capitalization.

Clearly, the tanks must be removed for the property to be salable at a decent price. The regulations are so onerous that the responsibility of a leaking tank imbues to any new buyer.

[Burke]

This is a resurrection of a thread that appeared a year ago. I would have to review those cites again to provide any clarity on this issue.

[DaveO]

I did uncover some information relating to leaking tanks. The removal, if done at the direction of a state or federal environmental agency, would seem to make the process deductible. In this case it is a precondition of the sale of the land. The gas station itself has no real value as the new owner plans to scrape it off and build something new. When the sale closes I will treat it as an addition to the basis.

[Roland Slugg]

The OP did not say the tanks were leaking, so I assume they are/were not. The OP also did not say, but I'm guessing there may be federal, state or local laws requiring the removal of underground gasoline storage tanks that are no longer used for the purpose intended ... perhaps after a stated period of time such as one year.

Code §280B(1) denies a deduction and §280B(2) requires the capitalization of costs to demolish a building ... not personal property.

The best reference I can find is Rev Rul 98-25. That Rev Rul makes it quite clear that the costs of removal and disposition are deductible as current expenses under Code §162.

The costs are certainly not "repairs." The storage tanks are depreciable business property, and their sale or disposition is reportable on F-4797, resulting in an ordinary loss equal to their basis, plus the costs to remove and dispose of them, less their selling price or salvage value.

[Burke]

Ruling 98-25 applied specifically to waste treatment storage tanks; the removal, disposal and replacement with new tanks containing the same waste which had been stored previously in the old ones. Since they would never be used again, they had no useful life and the whole process and cost of new tanks were treated as an ordinary and necessary business expense. But I tend to agree with the others, that removal and disposal of gas tanks by govt mandate (involuntary conversion of 1245 property) is also such an expense under 263. The replacement of a gas tank with a new one which would be continued to be used in the future would be a depreciable asset, and therefore capitalized.

[Snaggletooth]

Scrap Metal

Let us not forget that the old tanks DO have scrap metal value, in many cases several hundred dollars.