A New York State Administrative Law Judge has upheld the denial by the Department of Taxation and Finance of the site preparation credit component of a brownfield redevelopment tax credit because the taxpayer expensed the costs for federal income tax purposes. Matter of Coltec Industries, Inc., DTA No. 825211 (N.Y.S. Div. of Tax App., Dec. 31, 2014). 

Facts. Coltec was the sole member of an LLC that manufactures industrial seals and sealing components. The LLC had entered into a Brownfield Site Cleanup Agreement for remediation of a brownfield site, known as the Gylon site, located in Palmyra, New York. In December 2008 the LLC received a Certificate of Compliance for completing the remedial program at the Gylon site. Coltec then claimed a brownfield redevelopment tax credit for costs that the LLC incurred as part of its remediation of the Gylon site. 

Background. In 2003, the New York State Legislature enacted a Brownfield Cleanup Program (“BCP”), to encourage the cleanup and decontamination of sites known as brownfields, which were defined broadly as properties that were or might be contaminated by hazardous waste, pollutants, or other contaminants. ECL 27-1405(2). The BCP provided a redevelopment tax credit, ranging from 10% to 22% of covered costs, as a financial incentive to clean up the sites. The tax credit has three components: (i) a site preparation credit component, for costs incurred to prepare the site for cleanup and redevelopment, excluding the cost of acquisition of the property; (ii) a tangible property credit component, for the costs of erecting buildings; and (iii) an on-site groundwater remediation credit component. Tax Law §§ 21(a) and (b). 

Site preparation costs are defined as “all amounts properly chargeable to a capital account . . . paid or incurred in connection with a site’s qualification for a certificate of completion . . . and all other site preparation costs . . . incurred in . . . preparing a site for the erection of a building or a component of a building . . . ” Tax Law § 21(b)(2). 

Issue. On its New York State return for 2008, Coltec claimed a total of $2.7 million in brownfield redevelopment tax credits. The dispute concerned only the site preparation credit component, of approximately $800,000. On its federal tax return, Coltec had deducted the site preparation costs on line 26 (other deductions), in accordance with Internal Revenue Code § 198 as then in effect. On audit, the Department denied the site preparation credit, arguing that costs expensed under IRC § 198 are, by definition, not chargeable to a capital account as required by Tax Law § 21(b)(2), and arguing that because Coltec had elected to deduct the site preparation costs at the federal level, the expenditures were disqualified from being chargeable to a capital account. Coltec argued that the term “properly chargeable to a capital account” requires only that the costs relate to the acquisition improvement or construction of a capital asset, which are all costs that are capital in nature.

Decision. The ALJ found that, because a tax credit was involved, the taxpayer has a burden to show that its interpretation of the statute is the only reasonable one, and that Coltec failed to meet this burden. While the brownfield credit was designed to provide an incentive to clean up hazardous sites and to offset a taxpayer’s costs relating to that cleanup, the ALJ agreed with the Department that the credit was not intended to provide a double benefit that would result from allowing Coltec to treat the costs as deductible expenses and also claim a credit for the same costs. 

The ALJ also looked to the treatment of other credits, such as the investment tax credit and the empire zone investment credit, which require that the qualified property be depreciable under IRC § 167. Tax Law § 210(12)(b) (i). If a taxpayer elects to expense the cost of an asset under IRC § 179, that cost is not eligible for the investment tax credit or the empire zone investment credit. Since the tangible property credit component of the brownfield redevelopment credit contains the same “depreciable” requirement, the ALJ found that the site preparation credit component of the brownfield cleanup credit should be treated the same, and that costs that had been expensed were not “properly chargeable to a capital account” and thus not eligible for the credit. 

Additional Insights

Coltec had reduced its federal taxable income by claiming a deduction for the site preparation expenses, and there is no indication in the decision that Coltec had added back or otherwise not claimed that deduction in computing its New York State entire net income. Therefore, the ALJ found that allowing a credit for those same site preparation expenses would amount to a double benefit, and that such a benefit had not been contemplated by the Legislature in granting brownfield credits. However, it is not clear how this situation should best be remedied by a taxpayer, since the decision notes that the federal deduction was claimed in accordance with the IRC, and the brownfield credit legislation does not mandate that a taxpayer add back to income any deductions claimed for federal purposes.