Expenses for environmental remediation deductible?

Depends. The company's costs may no longer be currently deductible, either. The general provision that governs deductibility is Section

162, which permits a deduction for all ordinary and necessary business expenses incurred during the tax year. However, even if an expenditure would otherwise be deductible under Section 162 as a current business expense, Sections 263 and 263A will nonetheless force the taxpayer to capitalize that expense into the basis of any capital asset to the extent that such cost was incurred in acquiring or permanently improving that capital asset. As developed under the case-law, if the environmental problems occurred after the company first acquired the property, the amounts are deductible as current expenses; however, if the problems occurred prior to the time the company acquired the property, then the expenditures will, generally, have to be capitalized under Section 263 into the basis of the property which means, if the property is raw land rather than improvements (usually the case in this instance), that those amounts aren't recoverable until the property is sold. Section 198, prior to its sunset, fixed this issue by making most of such expenses currently deductible (by giving a deduction for nondepreciable amounts otherwise required to be capitalized, and restoring otherwise capitalized depreciation deductions). Unfortunately, Section 198 is currently not in force, which means that the general rules under Section 162 apply. In your case, however, you're being asked to contribute money toward those expenses in your role as a (former) shareholder. If you were a current shareholder, those amounts would undoubtedly be treated as additional capital contributions and capitalized into the basis of your stock. In that case, you would recover these additional amounts for tax purposes when you either received non-dividend distributions in excess of your basis, or when you sold the stock. That being the case, under the rule of Arrowsmith v. Commissioner, 344 U.S. 6 (1952), you would analyse it in an analogous manner - since the additional payments you're being required to make now would have reduced the amount of capital gain you would otherwise be required to recognize upon sale of your stock had you made the payments while you owned the stock, those payments, if made now, when you are no longer a shareholder, should have the same general effect for tax purposes in the year paid. In other words, if you make a payment now, when you are no longer a shareholder, that payment should be reported as a capital loss for the year in which paid, with the same short- or long-term character as the gain you reported when you disposed of all of the remaining stock you used to own in the company. So, to get to the conclusion in a round-about manner, any payments you make should be currently deductible (provided you no longer own any of the stock, legally or equitably) as a capital loss, and will be either long-term or short-term to the same extent that your original gain or loss on final disposition of all of your stock was long-term or short-term.

Best to consult legal counsel here. For as I remember it, they can't DO that. IOW, common stock is non-assessable.

right, Stu? Seth?

ChEAr$, Harlan Lunsford, EA n LA

I am currently a shareholder. I am being forced to contribute to the fund as part of them buying my stock. So I guess I could contribute while I am an owner and factor it into the basis, or contribute it after and call it a capital loss. Same effect either way, right? The way the agreement is written, I get interest paid to me quarter on my balance (ordinary interest income?) and any residual funds when the environmental liability has past. (capital gains?) Do you see any problems there? If the interest is a problem, I am sure we can change it so that interest stays in the account. I appreciate your help.

Generally. There might be some sort of operating agreement whereby the stockholders agree to make additional capital contributions if the corporation (assuming that's what it is) needs it. In any case, if it's a corporation the cost is probably a capital contribution rather than a deductible expense. The OP will get the benefit of the additional cost when he sells. Stu

That was my take in general: common stock is mostly non-assessable (and in the cases where it is, you can always walk away from it instead of paying the assessment; I'm thinking of things like co-op apartments). However, the Superfund environmental laws came later and can be significantly nastier. I think there's some requirement that the person must have had some sort of control over the company, though; if Microsoft software were declared toxic waste, I don't think they could come after every little shareholder to pay for the cleanup. misc.legal.moderated would be a better place to discuss that issue. Seth

Therefore, does Seth and Stu concur that OP needs legal counsel? ChEAr$, Harlan

Only if he wants to know his rights and doesn't want to get cheated. Stu

If the amount is significant, yes.

Seth