The Tax Court has ruled that cash-method taxpayers are allowed to make an election under Code Sec. 468 to currently deduct estimated reclamation, closure and post-closure costs with respect to mining and solid waste disposal property before they are paid. Contrary, to the IRS’s position, the election is not limited to accrual-basis taxpayers.
The text of Code Sec. 468 allows a “taxpayer” to make the election. The text makes separate references in various places to amounts “incurred” and to amounts “paid” and contains no express or contextual limits on the election to a taxpayer on the accrual method. Furthermore, although a definition of taxpayer is not provided in Code Sec. 468, the term is defined in Code Sec. 7701(a)(14) to mean any person who pays any type of federal tax whether or not that person is on the accrual or cash-basis method. Congress could have and should have used the term “accrual-basis taxpayer” if it intended to limit the election to accrual-basis taxpayers. Moreover, the IRS has failed to issue any regulations that might have validly limited the election to accrual-basis taxpayers.
The IRS argued that Code Sec. 468 does not apply to cash-basis taxpayers because a list of exceptions in Reg. §1.461-1(a)(1), which allows cash-basis taxpayers to deduct various costs before being paid, does not include a reference to Code Sec. 468. However, this argument was rejected because the list was not intended to be an exclusive enumeration of exceptions. In addition, the fact that prior cases cited by the IRS dealing with Code Sec. 468 only involved accrual-basis taxpayers did not mean that the provision only applied to accrual basis taxpayers because that issue was not before these courts. In addition, the legislative history of the provision was ambiguous concerning congressional intent. A concurring judge, however, believed that the legislative history supported the conclusion that the election was only intended for accrual-basis taxpayers but did not believe that the legislative history could reverse the clear meaning of the statute.
COMMENT: The Tax Court noted that Code Sec. 468A also allows a “taxpayer” to make the a similar election to deduct nuclear decommissioning costs with no express or implied limitation to accrual-basis taxpayers. The issue of a cash-basis taxpayer qualifying to make this election, however, was not before the court.
B. Gregory, 149 TC —, No. 2, Dec. 60,964
Code Sec. 468
CCH Reference – 2017FED ¶21,921.60
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CCH Reference – TRC ACCTNG: 12,212