HIGHLIGHTS:

  • Two recent developments have the potential to significantly impact 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 U.S. Department of Justice (DOJ) that limits the use of agency guidance documents in affirmative civil enforcement cases brought by DOJ.
  • The other is a little-known provision buried in the recent Tax Cuts and Jobs Act that 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."

Two recent developments have the potential to significantly impact 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 U.S. 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 Dec. 22, 2017.

DOJ Policy Change

On Jan. 25, 2018, the Associate Attorney General issued a memorandum limiting use of agency guidance documents in affirmative civil enforcement casesbrought by DOJ. In a move that could have wide-ranging impact 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."

This move follows on the heels of a memorandum issued by the Attorney General to all DOJ componentson Nov. 16, 2017, prohibiting the creation of guidance that effectively binds private parties without undergoing the rulemaking process, a practice the Attorney General indicated had occurred in the past. Additionally, DOJ will no longer issue advisory letters or similar documents that purport to create rights or obligations binding on persons outside the Executive Branch, including private parties, state and local governmental entities or tribal entities. Rather, notice and comment rulemaking must be undertaken or, if a guidance is issued, specific requirements must be followed, including a prohibition on the use of words such as "must," "shall," "required" or "requirement."

Together, these documents will change the way DOJ enforces many federal laws and regulations. While environmental enforcement is not the only area impacted by these statements, it certainly is an area where guidance documents are regularly relied upon by agencies such as the U.S. Environmental Protection Agency (EPA). This effect may be particularly noticeable in connection with claimed violations under CERCLA (Superfund), the Clean Water Act and the Clean Air Act. Enforcement under these statutes relies heavily on thousands of pages of EPA guidance documents, often dating back decades. For example, the current EPA website identifies more than 200 Superfund Cleanup Policies and Guidance documents promulgated since 1983 to be used in enforcement cases.1Additionally, the Superfund Program also publishes a website entitled Superfund Policy, Guidance and Laws2containing detailed statements about every aspect of the Superfund program, from site assessment to remedial design. Similar guidance documents are relied upon in Clean Air Act enforcement proceedings, including, for example, what is considered the best available control technology (BACT)3, which is integral to determining if a violation of new source review regulations occurred. In the Clean Water Act context, EPA relies upon guidance for everything from jurisdictional determinations to technical guidance for appropriate sediment testing and comparisons.4It remains to be seen whether DOJ's announced unwillingness to rely upon EPA guidance documents in subsequent civil enforcement actions will restrain such use by EPA, but presumably it be more difficult for DOJ to use affirmative civil litigation to enforce settlement documents, consent decrees and unilateral administrative orders issued by EPA relying on such guidance documents.

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.

P.L. 115-97 also added new Section 6050X to the tax code, which obligates the governmental entity involved in the enforcement proceeding to file an information return for all cases in excess of $600, specifying the amounts that fall into the two exceptions as specifically described in the settlement agreement or order. The form of return will be specified in regulations to be adopted, but the changes were effective immediately (as of President Trump's signature on Dec. 22, 2017). To date, EPA has not publicly commented on the changes or how they will be implemented, but they surely will impact how settlements are negotiated. The simple fact that these amounts must be specified in the settlement agreement or court order in order to be deductible will give rise to an entirely new avenue of negotiation between the government and regulated entities. Ironically, how to deal with this new requirement would have previously been most likely addressed in an EPA-issued guidance document, but with the current limitations on the use of guidance, that seems uncertain.

Like much of the new tax law,these changes appear to be good news for businesses, but much uncertainty remains as to how they will be implemented given the breadth of the change to current practice. In the meantime, regulated entities subject to ongoing enforcement investigations would be wise to start tracking the costs they incur in responding to such investigations immediately.