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I don't have a quick answer. My first reaction would be to treat this as a recovery. See IRS Pub. 525.

Thanks for the publication reference.

I started reading it, and it does not seem to me that it has to do with recovery, since that seems to have to do with deductions I may have taken in the past, and that retroactively, because of a subsequent payment from someone, that I should not have taken. (Not illegal, just that I now have to pay the tax due.)

But in my case, while the tank was taken out four years or so ago, I did not expense the remediation, since the remediation was not done. And I did not deduct it then because not only did I not pay it, I did not know it was deductible in any case.

The nearest thing that seems to apply is on page 28 of the 2012 instructions under "Other Income." "Casualty Insurance and other reimbursements. "You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. See Publication 547."

I guess I will have to read 547 to see if a leaking in-ground oil tank is a casualty loss or not. The oil had definitely reached the water table, the remediation is legally required, and I would otherwise have to pay it from other funds.
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