June 16, 2016
In a recent article by Brian Dove originally published on the National Real Estate Investor Blog (http://nreionline.com/real-estate-services/managing-unexpected-costs-and-coverage-pitfalls-environmental-exposures ), Brian was very thorough and careful to discuss the copious quantities of environmental exposures which exist across the spectrum of real estate investing; but one thing left out of that discussion was the possible upside opportunity associated with a special tax provision, which was originally implemented to ameliorate the burdens levied upon owners and investors from a contamination or pollution clean-up. A possible bright spot in an otherwise dreary practice area might provide solace to those who are faced with the daunting task of cleaning up old contamination – particularly pertinent if the current owners didn’t cause the contamination.
Internal Revenue Code section 172(f) provides for a special 10 year carry back period for losses associated with a “specified liability loss” (SLL) which, among other unrelated categories, includes remediation costs associated with the clean-up of pollution or contamination and for costs incurred in the reclamation of land. The traditional period for which Net Operating Losses (NOL) can be carried back is only two years (and 20 years carry forward). But the very technical provisions relating to SLL losses provides for a much more liberal timeframe. This additional period could provide a material benefit to those who incur losses over several years as they make significant investments in order to clean up a contaminated real estate parcel. Absent the special provisions of 172(f), they might otherwise be unable to carry back the losses to obtain a cash refund.
Upon completion of a project (or even before incurring the expenses) it is a best practice to review and organize the expenses related to an SLL project so that a taxpayer will be prepared to complete the necessary documentation and provide an accurate calculation of the costs associated with the clean-up. One of the key tenets of the SLL law is that the act (or failure to act) must have occurred 3 years prior to the deduction. So, losses generated timely to respond to contemporaneous spills are not included in the SLL rubric. I am not sure why letting an environmental disaster fester for three years was important to the extra distinction afforded the SLL law, but I would imagine that it was to provide incentive to improve the outcome for older or historical contaminations. I believe the possibility that a violation would be ignored for a period of time solely so that the 170(f) look back period would become available is a perversion of the public policy intent, but that is the law as it is written.
As the oil and natural gas boom of recent memory fades faster than plummeting oil prices, there is a greater likelihood that decommissioned drilling equipment and platforms will begin to litter the landscape. The SLL provisions also apply to “dismantling of a drilling platform” which might be more prevalent in the near future, if oil prices don’t recover. One of the other mandates (both legislated and interpreted by the courts) is that the costs must be in “satisfaction of a liability under a Federal or State law…” Therefore, it is also important to assess the legal rationale which gave rise to the remediation or dismantling. It is not simply sufficient that the taxpayer incur the costs to remediate if they were not required or mandated to do so under a state or federal statute. Again, doing the right thing is not rewarded by SLL but the act of being forced to clean up or remediate is going to ultimately result in a preferential tax outcome if required to do so under statutes or consent decrees type enforcements.
The key take away from this brief missive is that not all environmental clean-up or remediation events are treated the same and it is possible to receive favorable tax treatment for losses if properly documented and reported in the appropriate manner. Therefore, it is important to seek competent tax advice when faced with significant liabilities associated with a remediation.
Patrick Rowland is Director of Tax & Business Services at Marcum LLP. Marcum LLP is one of the largest independent public accounting and advisory services firms in the United States. Headquartered in New York City, Marcum LLP offers the resources of 1,300 professionals, including more than 160 partners, in 23 full-service offices in major business markets throughout the U.S., Grand Cayman and China.