The Tax Cuts and Jobs Act of 2017 makes it harder to take tax deductions for some payments to governmental entities.  The change may impact settlements between private entities and federal, state and local environmental agencies.  In most cases, it will not affect environmental settlements between private parties.

Section 162(f) of the Tax Code has long prohibited deductions for fines and penalties paid to the government.  The new law makes the tests for deduction of certain payments to a governmental agency more stringent.  The amended Section 162(f) substantially limits the tax deduction available for (1) any settlement or other payments, (2) made to or incurred at the direction of a governmental entity, (3) related to a violation of any law or governmental investigation or inquiry into the potential violation of any law.

There is an exception to this rule, which allows a deduction for the following payments: (1) restitution, including remediation of property; or (2) an amount paid to come into compliance with a violated law or involved in an investigation or inquiry.  To be deductible, the payment has to be expressly identified under a court order or settlement agreement as a restitution or compliance payment.  This exception does not apply to amounts paid “as reimbursement to the government for the costs of any investigation or litigation.”

Under the statute, the limitation applies only to payments made to, or at the direction of, a governmental entity.  A deduction, therefore, remains available for remediation expenses paid to private parties without governmental direction.

Finally, a new provision under Sec. 6050X requires government agencies involved in settlements to report to the Internal Revenue Service (IRS) the portions of the settlement payment that are and are not deductible under Section 162(f).

Our tax and environmental groups can advise on the implications of the new law, including factoring into negotiations the potentially higher tax cost of government settlements and ensuring that the settlements reached are well-drafted and as tax-efficient as possible.

On March 21, 2013, the New Jersey Appellate Division upheld the validity of the New Jersey Department of Environmental Protection’s (DEP) controversial “Waiver Rule.”  The Waiver Rule generally allows the DEP to waive regulatory requirements under certain conditions.  The Waiver Rule was proposed by the DEP in March 2011, and was finalized in March 2012 with an effective date of August 1, 2012.

The Waiver Rule contains several conditions that must be met before the DEP will waive a regulatory requirement.  First, the waiver request must fall within at least one of four bases for obtaining a waiver: (a) the applicant faces conflicting rules; (b) strict compliance would be unduly burdensome; (c) a waiver would yield a net environmental benefit; or (d) a public emergency warrants the waiver.  Second, the waiver cannot fall within any of thirteen categories of DEP rules that cannot be waived (e.g., federal requirements cannot be waived).  Finally, the DEP applies several additional specific criteria in reviewing waiver requests.  The court indicated that one of the most significant of these additional criteria was to ensure that waivers are consistent with the DEP’s core mission.

A number of environmental groups challenged the legality of the Waiver Rule, claiming that the Waiver Rule was invalid because it exceeded the DEP’s authority and failed to provide adequate standards governing the implementation of the Waiver Rule.

The Appellate Division upheld the Waiver Rule.  The court first noted that it was required to defer to the DEP’s interpretations of the various statutes for which it is responsible.  Next, the court held that under those environmental statutes, the DEP has inherent authority to waive the requirements of its own regulations, provided that it does so in limited and well defined situations. This authority exists where waivers do not violate a statutory requirement or federal law and comport with the agency’s core mission.  Additionally, the agency must issue properly adopted regulations and provide clear standards for how the agency will issue waivers.  The court determined that the Waiver Rule met these requirements.  An appeal to the New Jersey Supreme Court is expected.

The court did invalidate the Waiver Rule guidance documents issued by the DEP.  Before the Waiver Rule became effective in August 2012, the DEP established several  guidance documents ostensibly governing the implementation of the Waiver Rule.  These  guidance documents were available on the DEP’s Waiver Rule webpage.  The court held that the DEP’s Waiver Rule guidance documents were invalid because they were effectively agency rules that had not been issued in compliance with the rulemaking requirements of the Administrative Procedures Act.  Nevertheless, the Waiver Rule remains in effect because the court found that the rule itself was detailed enough to stand on its own without the guidance documents.

There was another sigh of relief for developers in New Jersey as legislation to further extend the Permit Extension Act of 2008 passed both houses last week, keeping project approvals alive as developers wait for further improvement in the economy. The bill has now been sent to Governor Christie who is expected to sign it this week.

On September 6, 2008, Governor Corzine signed the Permit Extension Act of 2008 into law. The act aimed to alleviate some of the economic distress on the real estate market by extending certain development permits through July 1, 2010. The process of renewing permits is often costly and time consuming, and in some cases impossible due to changes in law. An automatic extension allows developers to save money and conserve resources they would otherwise need to expend on permit renewals.

The act was amended in 2010 to further extend those permits through December 31, 2012.   Bill A1338/S743, passed by the Assembly last Monday and by the Senate on Thursday, will extend the permit expiration date to December 31, 2014. Additionally, the bill will also amend the definition of "extension area" to include designated areas within the Highlands and Pinelands, excluding areas designated as Planning Area 4B (Rural/Environmentally Sensitive) and Planning Area 5 (Environmentally Sensitive), unless designated as a growth center in an endorsed plan.

 

There are almost 50 days left until the NJ Department of Environmental Protection’s Waiver Rule takes effect on August 1, 2012.  That is unless the NJ Senate decides to follow in the path blazed by the Assembly last month to derail the rule by approving a resolution directing NJDEP to amend or withdraw the Waiver Rule as inconsistent with the legislative intent of the statutes cited by NJDEP as support for the rule.  An identical Senate resolution was approved in committee but then pulled from the Senate agenda at the end of May.  The regular legislative session is nearing its end, but a resolution technically could be heard either beforehand or during a special session over the summer.

The Waiver Rule was adopted on March 8, 2012 pursuant to Governor Christie’s Executive Order No. 2 issued on his very first day in office and allows NJDEP to waive any of its rules where (1)  the rule conflicts with another NJDEP rule or a rule of another state or federal agency in a way that makes compliance with both rules impossible or impracticable; (2) strict compliance with the rule would result in actual and exceptional hardship or excessive cost where there is a cheaper alternative that is as or more protective of the public or the environment;  (3) there will, despite the waiver, be a net protection of the natural resource or other environmental good that is protected by the rule being waived; or (4) an authorized federal or state official declares a public emergency justifying the waiver.

Environmental special interest groups oppose the rule as a broad attack on environmental regulations by providing NJDEP the ability to waive any of its rules for reasons that are easy to assert, including economic hardship.  Business and industry trade groups welcome the rule as much needed relief from years of technical Catch-22’s that have led to protracted and expensive development delays even where every effort to comply with NJDEP’s often inconsistent maze of rules has been undertaken. 

Aside from the legislative efforts to derail the waiver rule, 27 environmental and labor groups filed a lawsuit in the NJ Appellate Division in March, just after rule adoption, seeking expedited review from the court, arguing that the rule should be invalidated on constitutional grounds, including alleged violations of separation of powers and due process.

By most accounts, it is unlikely that there will be either a legislative or court resolution  before August 1 when DEP will begin to accept waiver applications.  While DEP is not expected to grant waivers lightly, there are certain types of cases that DEP itself is anxious to use the waiver rule to resolve, for example, where its land use and site remediation groups are deadlocked due to inconsistent rules that make it impossible for the remediating party to move forward.

In the Matter of Crompton Colors, Inc., No. A 0778 09T1 (App. Div. 10/27/11), the NJ Appellate Division ruled that a property owner is entitled to have an administrative hearing regarding the rescission of a no further action letter (“NFA Letter”) by the DEP.  In this case, a subsidiary of Hartz Mountain Industries, a former landlord of an industrial tenant named Crompton Colors, Inc., appealed DEP’s rescission of an NFA Letter issued in 2002 and the denial of its request for a hearing to contest the decision. 

Hartz purchased the property located in Bloomfield, NJ in 1965 and leased to Peerless Bindery.  The property consisted of a warehouse and an office building.  In 1990, the buildings were demolished and a 10,000 gallon heating oil underground storage tank was removed.  According to the Report submitted by Hartz to DEP, petroleum product was encountered in the soil and floating on the groundwater.  The impacted soil was subsequently excavated and the floating oil was removed.  Although groundwater monitoring wells initially did not detect any contamination, a second round of sampling revealed slight exceedences for petroleum constituents.  At that point, additional soil was removed from this area and residual petroleum in fill material was left in place and covered with the newly constructed warehouse concrete slab.

The property was subdivided into two lots in 1991.  One lot was occupied by the new warehouse that was leased by a predecessor of Crompton Colors and the second lot was leased to a daycare center.  A Remedial Action Work Plan was submitted to DEP in January of 1996, which was found by DEP to be unacceptable.  Hartz then submitted a Remedial Investigation Report that discussed the results of the supplemental soil and groundwater sampling, which showed elevated levels of semi volatile organic compounds that are typical of urban fill material.  As the contamination was detected in an area that is located up-gradient from the former tank, the report concluded that the contaminants were unrelated to the tank.  The DEP issued an NFA Letter with respect to the former tank but required further investigation to confirm that the source of the contamination was from an off site source.  Hartz did not implement the requested additional investigation.  The environmental documents referenced the street address as 60 West Street, which represented the original address of the undivided property.  However, after the property had been subdivided, the warehouse facility was known as 50 West Street.

In 2001, the Industrial Site Recovery Act (“ISRA”) was triggered when Crompton Colors ceased operations at the warehouse.  Crompton Colors filed the appropriate paperwork using the 50 West Street address relying on the prior tank NFA letter.  However, DEP responded that the site known as 50 West Street was not eligible for an expedited review because it had not been previously issued an NFA Letter.  Crompton Colors then prepared and submitted a Preliminary Assessment, along with revised paperwork with the correct lot number requesting DEP issue an NFA.  Crompton Colors did not disclose, however, the presence of soil and groundwater contamination that had been identified in the 1996 NFA Letter.  In 2002, DEP issued the NFA Letter for the Crompton Colors’ ISRA case.

In 2004, DEP was under pressure to re-evaluate closed cases in response to a situation where a daycare facility began operating at a former thermometer manufacturing facility where significant mercury contamination was discovered.  As a result of this incident, DEP mapped all known childcare centers and schools within a 500 foot radius of contaminated sites and re-examined all open and closed DEP cases within the radius to determine whether any of these properties could adversely impact the childcare facilities.  As a result of the childcare center being located at the Bloomfield property, DEP reviewed the 2002 NFA determination and concluded that the contamination not addressed by Hartz in 1996 was located at 50 West Street.  Therefore, DEP rescinded the NFA Letter issued in 2002 and directed Hartz and Crompton’s successor, Chemtura, to investigate potential vapor intrusion concerns at the childcare center.

Hartz argued that DEP did not have the basis to reopen the case or the authority to require a vapor intrusion study and requested an administrative hearing.  DEP rejected the claims that the contamination was from an off site source as they concluded that the nearest potential off site source was more than a ½ mile away in a down-gradient location.  The DEP also denied the request for a hearing, stating that DEP was merely requesting Hartz to submit documentation and perform studies Hartz should have done as part of its original application in 2002. 

The Appellate Division stated that the revocation of the NFA was a rescission of the permission DEP provided Hartz in 2002 to convey the property free and clear of any remedial obligations under ISRA.  The Court found that the directives to perform environmental studies fell in the purview of N.J.S.A. 13:1K 13.1b, which expressly provides that DEP is required to give a recipient of an order requiring abatement of a violation notice of its rights to a hearing.  Although Hartz will now be afforded the opportunity to participate in an administrative hearing, it must present evidence that challenges DEP’s conclusion that the contamination that triggered the “reopener” is not from an off site source.  As the DEP is typically given significant discretion over technical determinations, Hartz will be hard pressed to show DEP acted in an arbitrary and capricious manner and have DEP’s decision over turned.