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What’s that Smell? A Texas Landfill Case Helps Clarify the Meaning of “Taxpayer” under Section 468


The United States Tax Court’s decision in Gregory v. Commissioner, 149 T.C. No. 2 (July 11, 2017), clarifies whether cash-method taxpayers are included within the meaning of “taxpayer” as used in section 468 of the Internal Revenue Code of 1986, as amended (“Code”).  Section 468 of the Code allows landfill and mine owners to deduct a portion of future clean-up costs, even if such costs will not be incurred for many years.  Focusing primarily on statutory construction, the court concluded that deductions under section 468 of the Code are available to both accrual-method and cash-method taxpayers.

In relevant part, section 468 of the Code provides:

If a taxpayer elects the application of this section with respect to any mining or solid waste disposal property, the amount of any deduction for qualified reclamation or closing costs for any taxable year to which such election applies shall equal the current reclamation or closing costs allocable to— (A) in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and (B) in the case of qualified closing costs, the production from the reserve property during such taxable year.

Reclamation and closing costs of a landfill refer to the costs of cleaning and restoring a landfill site after it closes, including costs associated in complying with federal, state, and local regulations. Without tax deductions, compliance with these regulations can be extremely burdensome for a recently-closed business.  Section 468 of the Code seeks to alleviate some of that burden by allowing deductions when the landfill or mine is in operation and receiving income, rather than when the site is winding down and the deductions would be less beneficial.

Since 1988, the Gregory family had owned and operated Texas Disposal Systems Landfill, Inc. (“TDSL”), an S corporation for income-tax purposes. The company used the accrual method for accounting purposes and the cash method for tax purposes.  In 1996, TDSL made an election under section 468 of the Code and claimed the deduction for the first time.  TDSL’s 2008 tax return reported a deduction for estimated clean-up costs of slightly more than $100,000, and its 2009 tax return reported a slightly smaller deduction.  The IRS disallowed these deductions because TDSL was a cash-method taxpayer.  The question to the court was whether a cash-method taxpayer is included within section 468 of the Code’s meaning of “taxpayer” and therefore eligible to claim the deductions under that section.

The court primarily resolved this question using textual analysis of the statute. Section 468 of the Code does not explicitly limit the deductions to only accrual-method taxpayers, so the court looked to the Code’s general definition provisions for further guidance.  As defined by the Code, “taxpayer” means “any person subject to any internal revenue tax.”  Section 7701(a)(14) of the Code.  Also, “person” includes “an individual, a trust, estate, partnership, association, company or corporation.”  Section 7701(a)(1) of the Code.  Recognizing S corporations are required to pay Social Security and unemployment taxes, the court concluded that TDSL was a taxpayer for purposes of section 468 of the Code.

While holding that the term “taxpayer” in section 468 of the Code includes both cash-method and accrual-method taxpayers, the Tax Court further held cash-method taxpayers must also make an election under section 468 of the Code in order to currently deduct future estimated reclamation and closing costs before such costs are incurred. Here, TDSL did make the election, and so it was allowed to deduct its estimated reclamation and closing costs.

Taxpayers owning landfills or mining property may benefit from this opinion. The statute helps taxpayers comply with burdening environmental regulations by allowing them more freedom to match income and expenses.  This taxpayer victory could bring new optimism to those operating businesses that are expected to incur significant clean-up costs after closing their doors.

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