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 August 27, 2014, the Superior Court of New Jersey ruled in favor of Puritan Oil against a New Jersey property owner, finding that where the oil company had already taken steps to remedy contamination it caused on Plaintiff’s property, no further measure of damages was appropriate.  Favorito v. Puritan Oil Company, Superior Court of New Jersey, Appellate Division, Docket No. A-3426-12T1.

In 2005, Plaintiff Anthony Favorito purchased real estate as an investment from Defendant Jennifer Schwartz for $224,900.  Favorito was able to rent out the property for its fair market value.  Favorito later discovered that in 1988, underground gasoline storage tanks on a neighboring property had leaked causing hazardous substances to migrate into groundwater beneath Plaintiff’s property.  The neighboring tanks had been owned by Defendant Puritan Oil Company, Inc.  Plaintiff learned of the contamination in 2009 when he was contacted by Puritan’s agents, who advised him that wells needed to be installed on his property to periodically sample the ground water.

For its part, Puritan discovered the contamination in 1988 and began remedying its property.  It removed six underground storage tanks and all of the contaminated soil from its property and shut down the gas station.  Monitoring wells revealed that groundwater below Plaintiff’s property had been contaminated by petroleum and in 1996, two underground wells were installed on Plaintiff’s property which were removed in 1999.  The New Jersey Department of Environmental Protection also placed a portion of Plaintiff’s property within a Classification Exception Area (CEA) suspending the groundwater’s classified use while the area is remediated.

Municipal water is supplied to Favorito’s property and thus, groundwater contamination impacting onsite wells was not at issue.  Plaintiff sued Puritan Oil, Schwartz and the real estate agent and agency involved in the sale.  Plaintiff settled with all of the Defendants except Puritan Oil.  In his complaint, Plaintiff alleged that Puritan Oil violated the New Jersey Spill Compensation Control Act as well as committed a nuisance and trespass.  Plaintiff argued that he was entitled to the difference between what he paid for the property in 2005, and what the property was in fact worth at that time, given its contaminated condition, which an appraiser estimated to be $98,000.  Plaintiff did not state that he was seeking damages for the stigma that may be associated with the property after it is remedied or any other measure of damages.

The trial court granted Puritan Oil’s motion for summary judgment and found that Plaintiff’s damages were limited to either the cost of cleaning up the property or the difference between the fair market value of the property in its contaminated state, and in an uncontaminated one.  As Puritan was cleaning up the Property, Plaintiff was not entitled to the difference in value.

On appeal, Plaintiff reasserted his claims for nuisance and trespass and requested that the court award $126,900 in damages – the difference between what he paid for the property and what it was worth, as damages for having monitoring wells on his property and having a portion of the property in a CEA, which limits the use of groundwater and will require him to disclose this classification to potential buyers.  The appellate court refused to consider the claim for additional damages for the monitoring wells and CEA since they had not been raised at the lower court level, and affirmed the trial court’s finding that a party may receive the difference between the value of the land before and after the harm or at the party’s election, the cost of restoration, not both.  Since Plaintiff chose to have his property restored, he could not also seek another measure of damages.

Furthermore, the Appellate Court stressed that Favorito had never claimed that he had been deprived of any use of his property.  He had been able to rent out the premises for fair market value, was supplied with municipal water, and had not contended that he, or his tenants,  experienced any discomfort or annoyance as a result of the contamination.  Based on these findings, the Court granted Puritan Oil’s motion for summary judgment.

The Appellate Division’s decision in Favorito underscores the need for proper due diligence prior to purchase, as well as for litigants to carefully consider their options early in order to avoid unknowingly waiving potential claims.  In the present case, Favorito failed to engage in a thorough inquiry of the property’s use prior to purchase.  Once Favorito had taken title, in accepting Puritan’s offer to enter onto the property to install groundwater wells, Favorito was deemed by the court to have “elected” to have the property remediated and to have effectively waived his potential claim for damages based on diminution in value.

A recent New Jersey Appellate Division case clarifies the process of valuing contaminated property in a condemnation action, and finds that where the cleanup has been completed, even if contamination remains at the property, the property owner is not required to escrow additional monies for any further cleanup.

In 2003, in the Suydam Investors case, the New Jersey Supreme Court set forth the process for valuing contaminated property in a condemnation matter: the property is valued as if the contamination has been remediated, with a portion of the condemnation award necessary to fund the cleanup being escrowed.  This rule avoids a “double-take,” in which the condemning authority pays less for a property because it is dirty, but then gets the property cleaned-up by forcing the former owner to pay for the cleanup.

In Borough of Paulsboro v. Essex Chemical Corp., decided July 16, 2012, the Appellate Division was asked to decide whether the Suydam methodology applied where the NJDEP approved the cleanup and capping of a landfill.  Paulsboro was condemning a 67 acre property owned by Essex Chemical.  Located on the property was a seventeen acre landfill which was capped with a 40-foot high mound of gypsum.  The landfill closure was approved by the NJDEP, and the only remaining obligations were maintenance and monitoring requirements associated with the cap.  Those obligations were assumed by BP, which leased the landfill for a solar power facility.

Paulsboro argued that under Suydam, the entire condemnation award should have been put into escrow to pay for the removal of the landfill.  Essentially, they argued that property with a closed landfill was not the same as a “clean” property, and therefore they should be able to use the condemnation award to pay for the landfill’s removal.  The Appellate Division, however, held that the critical issue was whether Essex Chemical had any further liability for cleaning up the landfill.  If Essex Chemical did have further cleanup liability, then Suydam would apply to avoid the “double-take” problem.  In this case, however, because the NJDEP approved the landfill closure and Essex Chemical had no further cleanup liability, the Suydam formula did not apply.  Therefore, the fair market value paid by Paulsboro was immediately available to Essex Chemical and did not need to remain in an escrow account to pay further cleanup costs.

While the presence of a landfill on the condemned property is potentially a more significant concern, the reasoning of the case should apply to more typical cleanup cases where a property might have a conditional No Further Action letter from the NJDEP or a conditional Response Action Outcome letter from a Licensed Site Remediation Professional.  In the typical conditional closure, contamination remains on-site but is subject to the implementation of institutional or engineering controls such as a deed notice or an asphalt cap over the contaminated soils.  With such a conditional closure, the property owner generally faces no additional remediation liability for the property.  If that property is then condemned, Suydam would not apply and the condemnor would need to pay the property owner the full fair-market value of the property with no monies set aside for further cleanup at the property.

On July 16, 2010, the New Jersey Department of Environmental Protection (“NJDEP”) Commissioner, Bob Martin, published a List of Policy Priorities and a Vision Statement (see links below) in written form that will serve as a guide for the NJDEP to be more efficient and consumer friendly. The goals of these two documents are to define the strategic vision of the NJDEP for the next four years and to provide the foundation for structural changes that will make the NJDEP an effective organization in the future. For persons who are involved in the investigation or remediation of contaminated sites in New Jersey, they are familiar with the NJDEP’s administrative processes, which sometimes can be unacceptably long. With the implementation of New Jersey’s License Site Remediation Professional (“LSRP”) program, which we have detailed in prior posts, NJDEP attempted to expedite the site remediation regulatory process. As the LSRP Program is extremely new, NJDEP seems to be auditing a high percentage of the cases within this program. However, the 2010 Vision Statement and Priorities List spans the entire NJDEP, not just the Site Remediation Program. Although Commissioner Martin acknowledged NJDEP’s core mission of protecting the environment, he emphasized the importance to be much more effective and institute a balanced implementation and enforcement of environmental laws and regulations. Commissioner Martin commented on the importance of understanding and appreciating the impact NJDEP’s actions have on economic growth and environmental protection in New Jersey. Commissioner Martin stated that “protecting the environment should drive economic growth, not impede it.” In addition, he suggested the introduction of a “new culture” within NJDEP, with customer service, flexibility and effective use of performance metrics as key components. The Vision Statement recognizes NJDEP staff as its most important asset, while simultaneously requiring them to change how they perform their functions.

NJDEP staff have been instructed to base its decisions on science, facts and data with a focus on cost/benefit analyses. NJDEP will be utilizing new technologies to streamline operations and improve service. The communication between NJDEP and the regulated community must be constant and transparent, so that decisions are fully and clearly understood. To bolster the commissioner’s claims that NJDEP will work more closely and effectively with the regulated community, on August 17, 2010, NJDEP established a process to allow LSRPs and remediating parties to meet with experienced NJDEP staff to ask site specific technical questions. This service is being offered for new cases (initiated after November 4, 2009) that have opted into the LSRP Program. The technical consultation sessions will be held in face to face meetings to discuss technical issues related to a remediation of a site. This new service is part of NJDEP’s “compliance assistance” approach and will allow LSRPs and remediating parties to move forward with confidence. Although the Commissioner’s efforts to reform the NJDEP are commendable, time will tell whether NJDEP will recognize the real world impacts its decisions have on the regulated community and whether NJDEP will truly modify its behavior.

Click on the below links to view the List of Priorities and the Vision Statement. and

On June 5, 2008, new legislation was introduced to address the overburdened New Jersey Department of Environmental Protection (“DEP”)’s current staff and budget constraints by expediting its report review process. Introduction of the Bill, sponsored by Senator Bob Smith, followed hearings before the State Senate Environment Committee and Assembly Environment and Solid Waste Committee at which the DEP recommended many of the proposed reforms set out in the Bill. An updated version of the Bill was issued on January 26, 2009, which was considered by the State Senate Environment Committee on February 2, 2009. The Bill proposes changes to the DEP Site Remediation Program that include the creation of a Licensed Site Professional (“LSP”) program. The LSPs are environmental consultants with specified education and experience who perform investigations and remediation at sites in New Jersey.

The Bill identifies who may become LSPs, establishes their qualifications, licensing procedures, a code of conduct and defines their role in the remediation process. In addition, the Bill establishes a separate Site Remediation Professional Licensing Board (“Board”), which is tasked with creating standards for education, training and experience that will be required of any person who applies for a license or a license renewal. The Board conducts examinations to certify that an applicant possesses sufficient knowledge of the state regulations, standards and requirements applicable to site remediation and the applicant is qualified to obtain a license or a license renewal. 

Since it will take some time for this legislation to be fully developed and implemented, after enactment of the Bill, it will provide for temporary licensing of LSPs . The Bill anticipates the applications for temporary LSP licenses will be submitted to the DEP within three (3) months of its effective date. Those seeking a temporary LSP license must have the same qualifications as a full LSP, as well as one of several professional certifications (i.e., certified hazardous materials manager from the Institute of Hazardous Materials Management, a certified groundwater professional from the National Groundwater Association, a licensed professional engineer from the National Council of Examiners for Engineers). Further, an applicant for a temporary LSP license must show that they have existing current site remediation experience. 

Within ninety (90) days of the effective date of the Bill, any submissions concerning the remediation of a contaminated site must be signed and certified by an LSP. The LSP certification required under the Bill will state that the work was performed, that the LSP managed, supervised or performed the work and that the work and submission conform to the Technical Requirements for Site Remediation, N.J.A.C. 7:26E-1 et seq

The level of coordination between the LSP and the DEP depends on the ranking of the individual site. The Bill establishes a 4-tier classification system for remediation sites. 

Tier-1: A responsible party has been recalcitrant and has failed to complete the remedial investigation after an extended period of time. DEP would review and approve/disapprove all LSP submissions and select the remedial action. Financial assurance would be required in the form of a trust fund, with DEP to pre-approve any payments out of the trust fund.  

Tier-2: High priority sites for economic development; or within brownfield development areas (commercial or industrial sites that are vacant or underutilized and contaminated) or other economic development priority areas; or posing significant detrimental impact on the public or the environment; or effecting sensitive populations such as child care or school facilities; or subject of federal oversight. DEP would review and approve/disapprove all LSP submissions. 

Tier-3: Sites that are not Tier-1, Tier-2 or Tier-4 sites. DEP would review screening documents and certifications submitted by the LSP. 

Tier-4: Leaking unregulated heating oil tanks provided there are no immediate concerns such as impact on drinking water wells or vapor intrusion risks. DEP would review required checklists and certifications.

As Tier-1, Tier-2 and Tier-3 sites are more complex, they require the involvement of LSPs, while a Tier-4 site could also be managed by a person certified to perform services at a site of an underground storage tank such as a subsurface evaluator. However, any responsible party would be allowed to submit a Preliminary Assessment/Site Investigation for sites where a no further action letter is sought from DEP based on a showing that no contamination above prevailing standards exists. 

The proposed Bill is designed to streamline the DEP’s review of environmental reports, so that transactions are not delayed due to the lack of responsiveness from the DEP. We shall see whether New Jersey can join states like Connecticut and Massachusetts, where effective LSP programs are run.