Evergreen Corporation is a corporation located in California, using equipment that was purchased in the early 1970s. At that time, the primary insulation material used in the machines was asbestos. In 1986, the Occupational Safety and Health Administration lowered the standard for concentrations of allowable airborne asbestos fibers in the workplace. In addition, California requires employers to monitor airborne concentration levels to ensure that they do not exceed permissible exposure levels.

To comply with these requirements and to provide its workers with a safe workplace, Evergreen institutes an asbestos abatement program. After careful study, Evergreen determines that the major asbestos problem occurs during ordinary repairs and maintenance of the equipment. Initially, Evergreen institutes a program of continuous monitoring and encapsulation during repair and maintenance periods. However, Evergreen finds that this is inadequate because

(a) it does not ensure that all parts of the plant are in compliance,

(b) repairs and maintenance costs are increasing dramatically, and

(c) the extra down time during maintenance and repairs reduces production to a level that is financially unprofitable.

During the current year, Evergreen begins removing the asbestos insulation from the machinery and replacing it with an alternative, environmentally friendly insulation material. The new insulation material is about 15% less efficient than the asbestos material and results in no energy or other cost savings. The cost of replacing the insulation in 1 machine is about $13,000. The annual repair and maintenance cost of 1 machine averages $45,000. Each machine has an estimated fair market value of $600,000.

Evergreen believes that it should be able to expense the cost of removing the asbestos insulation and replacing it with the alternative insulation. Read and analyze the following authorities, and determine whether Evergreen can deduct the asbestos removal costs:

• Sec. 263.
• Reg. Sec. 1.162-4.
• Reg. Sec. 1.263(a)-1.
• Indopco Inc. v. Comm., 112 S. Ct. 1038 (1992).
• LTR 9240004.
• Rev. Rul. 94-38

As a reminder, the memo to the file should contain a brief statement of the facts, a statement of the issue(s), your conclusion(s) and recommendations, and an analysis that will include the sources (e.g., code, regs, etc.) you used in reaching your conclusion(s). Also, it will be beneficial for you to use the IRAC method to ensure that you addressed each portion, but not required.