Relevant Facts
Mr. Smith bought a gas station which had no known groundwater or soil contamination issues at the time of purchase. Sometime after operated the gas station an issue of groundwater and soil contamination was determined to potentially exist. In response to the potential groundwater and soil contamination issues Mr. Smith elected to form a new corporation (XYZ) and performed a 351 transfer of the gas station and accompanying liabilities to the new corporation. It is assumed that the basis of the gas station exceeds the liabilities transferred.
Tax Issue
What is the basis for the land transferred to XYZ Corporation by Mr. Smith?
Conclusion.
The basis for Mr. Smith is the cost of the land as separated from the gas station and is likely based on property tax evaluations as previously determined for depreciation of gas station assets. XYZ Corporation will have a basis in the land equal to that of Mr. Smith’s basis until such time as remediation is completed. Once remediated the land will increase in basis in the amount of non-depreciable cost of remediation.
Support
According to 26 U.S.C. § 362(a)(1), the …show more content…
Smith is separate entity that has taken ownership of the land and assumed liabilities associated with the land. In United Dairy Farmers, Inc., v. United States of America the courts determined that that remediation of preexisting environmental issues constitutes a capital expense that should generally be added to the basis of the property. However, certain assets created in the remediation that have determinable life, such as structures built, can be considered separately and depreciated over the course of the assets life (Internal Revenue Service, 2015). This was confirmed in Rev. Rul. 94-38, 1994-1 C.B. 35 in which cost associated with construction of a water treatment facility required to remediate environmental liabilities of land were not deductible but rather had to be capitalized separate from the
Mr. Smith bought a gas station which had no known groundwater or soil contamination issues at the time of purchase. Sometime after operated the gas station an issue of groundwater and soil contamination was determined to potentially exist. In response to the potential groundwater and soil contamination issues Mr. Smith elected to form a new corporation (XYZ) and performed a 351 transfer of the gas station and accompanying liabilities to the new corporation. It is assumed that the basis of the gas station exceeds the liabilities transferred.
Tax Issue
What is the basis for the land transferred to XYZ Corporation by Mr. Smith?
Conclusion.
The basis for Mr. Smith is the cost of the land as separated from the gas station and is likely based on property tax evaluations as previously determined for depreciation of gas station assets. XYZ Corporation will have a basis in the land equal to that of Mr. Smith’s basis until such time as remediation is completed. Once remediated the land will increase in basis in the amount of non-depreciable cost of remediation.
Support
According to 26 U.S.C. § 362(a)(1), the …show more content…
Smith is separate entity that has taken ownership of the land and assumed liabilities associated with the land. In United Dairy Farmers, Inc., v. United States of America the courts determined that that remediation of preexisting environmental issues constitutes a capital expense that should generally be added to the basis of the property. However, certain assets created in the remediation that have determinable life, such as structures built, can be considered separately and depreciated over the course of the assets life (Internal Revenue Service, 2015). This was confirmed in Rev. Rul. 94-38, 1994-1 C.B. 35 in which cost associated with construction of a water treatment facility required to remediate environmental liabilities of land were not deductible but rather had to be capitalized separate from the