Gray Chemical Company

SUBJECT: Gray Chemical Company
Engagement: Issues and Conclusions

Facts: Gray Chemical Co. manufactured pesticides that were hazardous to the environment. Over a period of time, the toxic chemicals contaminated the land and water around the company’s plant. The EPA cited Gray for violations in the year 2000. The court found Gray Co. guilty of violating EPA standards and fined them $15 million dollars. The court also ordered the company to cleanup the land and set up equipment to monitor water quality. In 2002, Gray incurred legal expenses of $8 million along with $2 million to remove and dispose of the contaminated soil, and another $1.5 million to buy and install water quality monitoring equipment. The equipment cost $20,000 to run during 2002.
Issues: (1) Which of the costs, if any, are deductible in 2002?
(2) What happens to the costs that are not deductible?
Authority: Section 162 (a) of the Internal Revenue Code allows a deduction ...