Recent Changes Expected To Affect Environmental Enforcement

Two recent developments have the potential to significantly affect governmental enforcement actions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund); the Clean Water Act; and the Clean Air Act among other environmental programs. One is a policy change implemented by the US Department of Justice (DOJ), and the other is a little-known provision buried in the recent Tax Cuts and Jobs Act, Public Law 115-97, signed into law by President Donald Trump on 22 December 2017.

DOJ Policy Change
On 25 January, the associate attorney general issued a memorandum limiting use of agency guidance documents in affirmative civil enforcement cases brought by DOJ. In a move that could have wide-ranging effects on civil environmental enforcement actions, the "department may not use its enforcement authority to effectively convert agency guidance documents into binding rules" and "may not use noncompliance with guidance documents as a basis for proving violations of applicable law."

The memorandum does permit the use of guidance for proper purposes to explain or paraphrase regulations or statutory legal requirements, but it may not be used to establish that a party violated the applicable statute or regulation. In short, "agency guidance documents cannot create any additional legal obligations."

Tax Reform Provision
Secondly, Section 13306 of the recent tax reform legislation, P.L. 115-97, revises the longstanding rule on the deductibility (or lack thereof) as a business expense of "any fine or similar penalty paid to a government for the violation of any law." Previously, it was well understood that such costs could not be deducted as business expenses under 26 U.S.C. §162(f) and many EPA settlement documents specifically included such a prohibition, including characterizing certain payments as falling within the prohibition.

However, this blanket rule was changed by Section 13306 of P.L. 115-97, which amended 26 U.S.C. §162(f) to provide two exceptions "for amounts constituting restitution or paid to come into compliance with law." "Restitution" includes remediation of property for damage or harm that was or may be caused by the violation of any law or the potential violation of any law. Amounts "paid to come into compliance" includes costs "otherwise involved in the investigation or inquiry" as well but shall not include "any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation."

The deduction applies only to cases that involve a government or governmental entity, which is defined to include certain regulatory boards or exchanges, or as identified in upcoming regulations. The conference report indicates this requirement was intended to preclude payments by one private party to another private party when such payments are memorialized in a court order, but presumably this provision would also preclude application to citizen suits, which are enforcement proceedings brought by members of the public for certain violations under environmental laws such as the Clean Water Act, the Clean Air Act, and the Resource Conservation and Recovery Act when the government has declined to act.

Lastly, the amounts must be identified as restitution or as an amount paid to come into compliance, as the case may be, in the court order or settlement agreement.

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