Alert > Tax / Environmental and Natural Resources
New California Statute Exempts CERCLA Settlement Funds From California Taxes
On April 12, 2010, Governor Arnold Schwarzenegger signed legislation that will exempt from California taxation escrow accounts that contain settlement funds used to perform cleanup actions pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The bill, entitled the Conformity Act of 2010, brings California in line with the federal government in making tax free the income on certain escrow accounts and settlement funds created for the purpose of remediating CERCLA hazardous waste sites.
CERCLA Settlement Funds and Federal Law
Private parties who perform cleanup actions at CERCLA hazardous waste sites often use escrow accounts to manage third party settlements and other funds that are used to pay for the cleanup action. Traditionally, these accounts were subject to federal and state income tax and there was no effective way to generate a fair return that would avoid the federal and state tax on the income from such accounts. As a result, the funds available to perform the clean up were reduced.
Congress addressed this issue at the federal level when it passed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). TIPRA amended Section 468B(g) of the Internal Revenue Code (IRC) to provide that an escrow account, settlement fund or similar fund created after May 17, 2006, is to be treated as beneficially owned by the United States and exempt from taxation under the IRC if the settlement fund: (1) was established pursuant to a consent decree entered by a judge of a United States District Court; (2) was created for the receipt of settlement payments for the sole purpose of resolving claims under CERCLA; (3) is controlled (in terms of expenditures of contributions and earnings) by the government or its agency or instrumentality; and (4) provides that upon termination, any remaining funds will be disbursed to such government entity and used in accordance with applicable law. The TIPRA amendment reflects Congress’ concern that the usual rule — subjecting such settlement funds to income taxation — might prevent parties from entering into prompt settlements with the Environmental Protection Agency for the cleanup of Superfund sites and reduce the ultimate amount of funds available for the sites’ cleanup. In short, the tax exempt status of CERCLA settlement funds is aimed at encouraging dispute resolution.
California Now Conforms to Federal Law
With the passage of the Conformity Act of 2010, the California Revenue and Taxation Code has been amended to incorporate the TIPRA amendment to 468B(g) of the IRC. The result is that most CERCLA settlement funds are now exempt from California in addition to federal tax.
Practical Details and Implications
Only CERCLA settlement funds that are exempt from federal tax will be exempt from California tax, and the California exemption applies only for tax years beginning on or after January 1, 2010. Estimated state tax payments due for 2010 need not be made and, if already made, should be refunded upon filing of the California tax return with respect to the CERCLA settlement fund. For those parties contributing to or considering creating a CERCLA settlement fund, the new legislation may result in significant tax savings, further encourage settlement, simplify tax preparation and ease compliance with tax regulations, to the overall benefit of CERCLA settlement fund contributors.
For more information on this alert, please contact the lawyers listed below:
Jim Dragna, Partner
jim.dragna@bingham.com, 213.680.6436
Jeffrey L. DuRocher, Partner
jeff.durocher@bingham.com, 213.229.8445
Jennifer MikoLevine, Associate
jennifer.mikolevine@bingham.com, 213.680.6771
Circular 230 Disclosure: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on opinions of counsel that meet specific requirements set forth in the regulations, including a requirement that such opinions contain extensive factual and legal discussion and analysis. Any tax advice that may be contained herein does not constitute an opinion that meets the requirements of the regulations. Any such tax advice therefore cannot be used, and was not intended or written to be used, for the purpose of avoiding any federal tax penalties that the Internal Revenue Service may attempt to impose.
© 2010 Bingham McCutchen LLP One Federal Street, Boston, MA 02110-1726 ATTORNEY ADVERTISING
To communicate with us regarding protection of your personal information or to subscribe or unsubscribe to some or all of Bingham McCutchen LLP’s electronic and mail communications, notify our privacy administrator at privacyUS@bingham.com or privacyUK@bingham.com (privacy policy available at www.bingham.com/privacy.aspx). We can be reached by mail (ATT: Privacy Administrator) in the US at One Federal Street, Boston, MA 02110-1726 or at 41 Lothbury, London EC2R 7HF, UK, or at 866.749.3064 (US) or +08 (08) 234.4626 (international).
Bingham McCutchen (London) LLP, a Massachusetts limited liability partnership regulated by the Solicitors Regulation Authority (registered number: 00328388), is the legal entity which operates in the UK as Bingham. A list of the names of its partners and their qualifications is open for inspection at the address above. All partners of Bingham McCutchen (London) LLP are either solicitors or registered foreign lawyers.
Bingham McCutchen LLP, a Massachusetts limited liability partnership, is the legal entity which operates in Hong Kong as Bingham McCutchen LLP. A list of the names of its partners practicing in the Hong Kong office and their qualifications is open for inspection at the address above. Bingham McCutchen LLP is registered with the Hong Kong Law Society as a Foreign Law Firm and does not practice Hong Kong law. Bingham McCutchen LLP operates in Hong Kong in formal association with Roome Puhar, a Hong Kong partnership which does advise on Hong Kong law.
This communication is being circulated to Bingham McCutchen LLP’s clients and friends. It is not intended to provide legal advice addressed to a particular situation. Prior results do not guarantee a similar outcome.