Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Are you performing a Voluntary Action Program Clean Up?

Are you cleaning up contamination for a release from a petroleum underground storage tank (BUSTR)?

If you answered yes to either of these questions you may qualify for a significant federal tax incentive which allows you to deduct the clean up costs incurred this year as well as years past. Under the tax incentive, certain environmental cleanup costs at targeted sites may be fully deducted by eligible taxpayers in the year in which they are incurred, rather than having to be capitalized and spread over a period of years.  

What types of expenses could be deductible?

• Site assessment and investigation;
• Site monitoring;
• Cleanup costs;
• Operation and maintenance costs;
• State voluntary cleanup program oversight fees; and
• Removal of demolition debris.

Amended Returns to Capture Costs Spent in Previous Years

Even if you incurred such expenses in years past, but failed to take advantage of the tax incentive you may still be entitled to the deduction.   The excerpt below is from the U.S. EPA tax guide describing the potential to amend prior year returns:

"The Brownfields Tax Incentive is not frequently used, despite its great potential to support property cleanup and reuse. A key reason for the limited use of the incentive may be uncertainty over its availability over an extended period of time. The tax provision has never had long-term authorization and Congress allowed the provision to lapse five times since it was first introduced in 1997. However, retroactive reauthorizations allowed coverage to be available throughout the entire time period from the incentive’s introduction in 1997 until today. In December 2010, the incentive was reauthorized for two years and is retroactive to January 1, 2010. The incentive will remain in effect through December 31, 2011.

Site owners may want to consult their state program or a tax attorney to determine activities that may be considered qualified expenditures. If a taxpayer decides to claim the incentive in future years because cleanup was completed during one of the periods in which the incentive’s authority lapsed, an amended tax return can be filed up to three years after the original return was filed. An amended tax return must be filed within two years if a refund is sought.

Requirements to Qualify for the Tax Incentive

1. Ownership- The property must be owned by the taxpayer incurring the eligible cleanup expenses, and be used in a trade or business or for the production of income.
2. Contamination- Hazardous substances or petroleum contamination must be present or potentially present on the property.
3. Brownfield Property- Taxpayers must obtain a statement from a designated state agency (typically, the state’s environmental agency overseeing the state’s voluntary cleanup program (VCP)) that confirms the site is a brownfield and therefore eligible for the tax incentive. Participation in a state VCP satisfies this requirement.  In Ohio, the VCP is known as the Voluntary Action Program (VAP).

U.S. EPA Resources on Available Federal Tax Incentives

The federal tax incentive for clean up of brownfield properties is not the only tax incentive that may be available for brownfield redevelopment projects.  U.S. EPA has released its 2011 Tax Guide which summarizes a variety of tax incentives for various brownfield and renewable energy projects.  Possible tax incentives include:

• Brownfield Expensing Tax Incentive:
• New Markets Tax Credits
• Low Income Housing Tax Credit
• Historic Rehabilitation Tax Credit:
• Energy Efficiency Tax Credits:
• Renewable Energy Tax Credits

U.S. EPA Brownfield's Tax Incentive Web Page also contains additional resources which describe various tax incentives for brownfield clean up and revitalization.

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I was interviewed for a story on the local NPR station in Cleveland about a Northeast Ohio company that nearly went bankrupt because of confusion over Ohio's brownfield tax abatement law.  The title of the story was "How a Poorly Worded Tax Rule Nearly Bankrupted Ohio's Oldest Company." Listen to the whole story by clicking here.

After reviewing the issue in preparation for the interview, it became readily apparent this was a law in serious need of a re-write.  A company's future shouldn't hinge on a vague tax exemption law.  I also learned that it was probably time to revisit some of the policy decisions made when writing the brownfield tax exemption law.

Background: Taylor Companies was debating whether to move out of Ohio.  It decided to remain in Ohio, in part, due to incentives it would receive for building on a brownfield site.  The principle incentive being a 10 year tax exemption for the increase in value of the property post-clean up.  Here are some excerpts from the story on NPR: 

The abatement was 87% less than what he expected. See, Taylor’s lawyers interpreted the state statute to mean that the tax exemption would cover the increase in value from before they did any clean-up to the new value after the company built and moved into its nice new building on what had been a brownfield. But Shelley Wilson of the Ohio Department of Taxation says they were wrong...

Instead of comparing the value of the land from its polluted days to its clean state…which seems most logical, tax officials compare the value of the land from one year before the tax abatement to its value after the improvements were made. The problem is that cleaning up the land and constructing a building may take longer than that narrow one-year time-frame. In Taylor’s case, he had already made most of the improvements by the time the tax commissioner made his assessment of the change in the land’s value. Shelley Wilson of the office of taxation concedes Taylor’s reading of the statute was probably the intent of the law.

Basically, the Ohio Department of Taxation responded to the controversy by saying- it may be the intent of the law to compare value pre-clean up to post-clean up, but that is not how the Ohio Legislature wrote the law.

At issue is the statutory provision set forth in R.C. 5709.87 "Exempting increase in assessed value of realty cleaned of contamination."  The key language is as follows:

(C)(1)(a) Upon receipt by the tax commissioner of a certification for property under division (B) of this section, the commissioner shall issue an order granting an exemption from real property taxation of the increase in the assessed value of land constituting property that is described in the certification, and of the increase in the assessed value of improvements, buildings, fixtures, and structures situated on that land at the time the order is issued as indicated on the current tax lists.

The Ohio Department of Taxation looked at the bolded language and determined the valuation comes from when the tax exemption order was issued, rather than looking back at the value of prior to when clean up commenced.  Triggering the exemption based on when an order is issued by Taxation really puts the squeeze on businesses redeveloping brownfield properties. Unless they time everything perfectly, they can lose out on potentially millions in tax abatement. (see example below)

The Department states this interpretation is supported by a decision issued by the Ohio Supreme Court- Columbus City School District v. Wilkens.   Here is how Ohio EPA describes the process in its guidance document dealing with the brownfield tax exemption:

For example, if the covenant not to sue is issued by Ohio EPA in September, 2007, and the Tax Commissioner issues the tax exemption order in October, 2007, the property tax exemption granted will be for the increase in value of the land and buildings on the property from the value of the property as of January 1, 2006, the tax lien date for tax year 2006. Since real property taxes are collected a year in arrears (i.e., the 2006 taxes are based on a value as of January 1, 2006, but collected in 2007), the 2006 tax list would be the most current list available for the Tax Commissioner’s October 2007 exemption order. The tax exemption would begin for tax year 2007 which would affect taxes collected in 2008.

Even if businesses line up things in the right way, they are still dependent on two government agencies- Ohio EPA and the Ohio Department of Taxation- acting on a timely basis.  One Cincinnati company lost out on a potential tax exemption on a $4 million dollar increase in the value of its property simply because paperwork was not issued by the government agencies in a timely fashion.  See, Hamilton Brownfields Redevelopment LLC v. Zaino, Tax Commissioner of Ohio.  In that case the Board of Tax Appeals states: 

"The General Assembly has mandated the exemption period begin in the year in which the order is issued.  The statute provides no latitude to consider or alter the commencement of the exemption."

It is time to fix the language in the tax exemption statute.  The entire purpose of the tax abatement law is to provide an incentive to clean up brownfield sites.  If we want to encourage redevelopment of brownfields versus building on greenfield sites, incentives must be significant and effective to overcome the increased costs of building on brownfield sites. 

The best fix would be to simply take the tax valuation of the property that was issued immediately before the clean up was commenced (a date identified in the papers filed with Ohio EPA) and compare it to the valuation after clean up is completed. 

New Construction- In or out?

The commencement of the tax exemption is not the only flaw in this law.  There is also confusion regarding the extent of the tax exemption as it applies to new construction.  As noted in Ohio EPA's guidance document:

The Department of Taxation interprets the exemption granted under ORC 5709.87 as limited to the increase in value of the land and the existing buildings on the NFA property, and not of new structures constructed at the NFA property.

Taxation has made it even a bit more complicated than simply limiting it to existing buildings at the property.  Taxation has gone on to limit improvements to existing buildings that were not features of the building prior to the clean up.  For example,

• If you replace an old swimming pool with a new swimming pool, the increased value attributable to the new pool is exempt.
• However, if the building never had a swimming pool, it would be considered a new improvement and not exempt.

(See, Seven Seventeen HB Philadelphia v. Franklin County Board of Revision)

Unfortunately, Ohio is blessed with thousands of brownfield sites.  If we are going direct development towards these sites, we need strong incentives.  Costs of cleaning up a brownfield can run into the millions of dollars. 

Is it really good policy to restrict the tax exemption in such a fashion?

We also need the law to be clear on its face.  Lets hope the last part of the NPR story is correct and the Ohio Legislature takes up fixing the brownfield tax exemption law soon. 

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Any business spending money on an environmental investigation or on clean up at property they own examine closely a federal tax incentive which is set to expire December 31, 2009.  The incentive allows environmental clean up costs to be fully deductible in the year they are incurred, rather than having to be capitalized and spread over a period of years. 

Some businesses may not look closely at that tax incentive because they don't think they own a "brownfield" property.  Many conjure images of falling down and abandoned manufacturing buildings when they think of a brownfield.  However, the incentive, known as the Federal Brownfields Tax Incentive, is very broad and inclusive as to what constitutes eligible properties.  Properties in full productive use with contamination can be eligible.

Until 2000, the Federal Brownfield Tax Incentive did include restrictions on which properties could be eligible.  The law included requirements on specific land use, geographic and contamination requirements for determining eligible properties.  However, most of these limitations were removed in 2000. 

Section 198 of the Internal Revenue Code contains the requirements for expensing environmental remediation costs.  Section 198 defines "qualified contaminated site" as the following:

The term "qualified contaminated site" means any area-

(A) which is held by the taxpayer for use in a trade or business or for the production of income, or which is property described in section 1221(a)(1) in the hands of the taxpayer, and

(B)  at or on which there has been a release (or threat of release) or disposal of any hazardous substance.

(Note: sites on the National Priorities List are excluded from eligibility)

The two requirements set forth in Section 198 are not very limiting, potentially allowing any property to be eligible that is held by a business upon which contamination is present.  Any business looking to qualify their property as eligible must obtain a statement from the designated state agency (typically the State EPA where the property is located) that there has been a release, threat of release, or disposal of a a hazardous substance at or on the property. 

Clean ups at former gas stations or  those involving underground storage tanks containing gasoline now also potentially qualify.  In 2006, the tax incentive was further expanded to include contamination from petroleum products (e.g., crude oil, crude oil condensates, and natural gasoline). 

What types of expenses are deductible? Generally speaking, any expenses incurred in connection with abatement or control of hazardous substances, including:

• Site assessment and investigation;
• Site monitoring;
• Clean up costs;
• Operation and maintenance costs;
• State voluntary cleanup program oversight fees; and
• Removal of demolition debris

While the incentive was extended at least three times since 1997, it is set to expire on December 31, 2009.  If the incentive provides advantages to your business it may make sense to consider managing your clean ups in the remaining months to maximize its benefits before it expires.  Also, note that it is possible previously filed tax returns can be amended to include deductions for past clean up expenditures.

U.S. EPA has a very useful fact sheet and answers to frequently asked questions on their website that provide further guidance on the incentive. 

[Disclaimer: You should consult your environmental counsel, CPA and tax counsel to determine whether your specific circumstances would qualify for the Federal Brownfield Tax Incentive]

[Photo: everystockphoto.com/Here in Van Nuys]

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