A video featuring U.S. Department of Labor Secretary Hilda Solis’ speech about the proposed Spring 2010 Regulatory Agenda also is available at this link. There are 78 rules being proposed for the Spring 2010 regulatory agenda being dubbed as “Plan, Prevent and Protect.”

Assistant Secretary Joe Main will be hosting an interactive web chat on Wednesday, April 28, 2010, at 10 a.m. ET to discuss Tportion of the semi-annual regulatory agenda.

The Regulatory Agenda will also be available on MSHA’s Website as of April 27, 2010.

Note that input received during the course of this web chat is not part of the formal rulemaking process.

How to Participate in the Web Chat (static particpation):

• Enter your question directly into the live chat window found on the interactive page.
• Use the hashtag #DOLREGS on Twitter
• E-mail us at open@dol.gov

You can also use the interactive page to enter your questions.

The Webinar is currently scheduled to last approximately 1 hour and 15 minutes. Attendees are asked to arrive approximately 5 minutes ahead of time so the meeting can begin promptly at 2 p.m.

The fee to join the Webinar is $29 per person for IMA-NA members, and $49 per person for non-members. Click here to register for the event.

Nearly 50 of the National Stone, Sand & Gravel Association’s (NSSGA) members took to the halls of Capitol Hill, holding hundreds of meetings on Sept. 23 as part of the “Aggregates In Action” Fall Fly-In. According to the NSSGA, these grassroots leaders from the aggregates industry delivered strong and clear messages to legislators and their staffs on the need to pass a multi-year highway authorization, overly aggressive U.S. Mine Safety and Health Administration (MSHA) enforcement, and opposition to the Clean Water Restoration Act and card check. The fly-in was especially timely, coming on the same day that a House vote to extend SAFETEA-LU was being passed. Attendees, in conjunction with NSSGA’s many coalition partners, were able to help persuade a majority of Republicans to vote for the extension over the objections of their leadership.

Dr. Gregory Wagner, deputy assistant secretary for policy at MSHA, addressed fly-in participants on Sept. 22. NSSGA members and state association partners voiced their concerns regarding overly aggressive enforcement actions by MSHA inspectors and suggested constructive ways that industry and regulators can work together to continue improving safety for aggregate workers. That evening, Sen. Johnny Isakson (R-Ga.) spoke at the welcoming reception and discussed his work with NSSGA on the minerals definition issue.

Later in the week, NSSGA President and CEO Joy Wilson met with Senators Byron Dorgan (D-N.D.), Sherrod Brown (D-Ohio), Bob Casey (D-Pa.) and Ted Kaufman (D-Del.), pressing them to reauthorize the highway program sooner than the 18-month extension favored by the Senate. The Democratic senators assured NSSGA of their support for reauthorization, but stated that the main dilemma they faced was the timing on finding the necessary funding. They predicted that Congress would not likely enact either a user fee increase or increases in alternate financing mechanisms before the 2010 midterm elections.

For nearly a decade, the federal government has attempted to define what waters of the United States fall under regulatory purview of the Clean Water Act of 1972 (CWA). The term used in the act, “navigable waters,” apparently lacked clarity for regulators who have traditionally sought to broadly enforce the CWA.

When their ever-expanding definitions became too expansive, litigation typically followed. In 2001, the U.S. Supreme Court noted that isolated ponds and wetlands were not subject to federal water pollution regulation in the landmark Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers. Five years later (in Rapanos v. United States), a split U.S. Supreme Court determined that CWA enforcement was too broad, but couldn’t agree on jurisdictional limitations. A year later, the Corps and the Environmental Protection Agency attempted to define regulated waters using the “significant nexus” definition.

The Clean Water Restoration Act (CWRA, S.787) purports to “restore the original intent of Congress” by clarifying the definition of regulated waterways. However, removing the word “navigable” from the definition does much more than “restore” the Clean Water Act — it greatly expands it. If the CWRA passes, it would expand regulated waters to include ‘all interstate and intrastate waters and their tributaries, including lakes, rivers, streams (including intermittent streams), mudflats, sandflats, wetlands, sloughs, prairie potholes, wet meadows playa lakes, natural ponds, and all impoundments of the foregoing.”

What does this mean for aggregate producers? Incidental water bodies used for every day functions in an aggregates operation, such as wash ponds, fines management, and dust suppression could be subject to the CWRA. Reclamation plans could also be affected if they would impact these bodies of water.

The CWRA would add an additional layer to the ever-growing number of regulations and permitting challenges facing producers. And, as with all regulations, the costs are not insubstantial. In testimony submitted to the House Committee on Small Business, the National Stone, Sand & Gravel Association reports that a study of the Clean Water Act Section 404 permitting process (The Economics of Environmental Regulation by Licensing: An Assessment of Recent Changes to the Wetlands Permitting Process, 42 Nat. Resources J. 59, Winter 2002) found that it takes an average of 313 days and $28,915 to obtain a nationwide general permit. Individual permits from the Corps average 788 days and $271,000 to receive.

Small producers are already struggling with challenging business conditions. Foisting additional permitting costs and restrictions could force some of these companies out of business or into a fire sale. Neither is good for an already fragile economy.

What Congress is proposing is not restoration; it’s reformation, and it is likely to have unanticipated and harmful consequences for many U.S. businesses, including small aggregate operators.

Mike Davis, deputy assistant secretary for Operations of MSHA, accepted NSSGA’s invitation to address and visit with “Aggregates in Action” fly-in attendees at 4 p.m. on Sept. 22 in Washington, D.C. The NSSGA is urging members and state association executives to attend the fly-in and the special meeting with Davis so that aggregates industry voices can be heard.

Manufacturers of the equipment assert that their equipment meets standards set forth by such organizations as ISO and SAE (MSHA is under no obligation to recognize either standards). Further, manufacturers assert that the retrofitting of such machines with increased fall protection (stairs or hand rails, or anchors for tie-off points) could undermine its structural integrity and, in some cases, could negatively impact product warranty. 

The mine operator is always responsible for ensuring their equipment is in compliance. The home page on MSHA’s Web site provides a list of equipment that has been preapproved by the MSHA technical support division. If equipment is not on that list, mine operators run the risk of purchasing products that are not MSHA compliant.   

NSSGA says its Safety and Health committee is looking into the matter, and that any questions regarding this matter should be directed to Joseph Casper at (703) 526-1074, jcasper@nssga.org

by George Schutzer and Ora Sheinsen

Federal and state agencies often threaten companies with lawsuits or penalties for alleged violations of environmental laws and regulations. Companies frequently settle with the agencies in the form of various types of payments and penalties, often including Supplemental Environmental Projects (SEPs), which reduce the monetary payment or penalty. SEPs are environmentally beneficial projects that a company is not otherwise required to perform, but agrees to undertake in order to settle an enforcement action.

Companies can often benefit from implementing a SEP, thereby reducing the total actual cost to the company. One benefit that many SEP participants expect is either an immediate tax deduction for expenses associated with the SEP or the ability to capitalize the cost of the expense and claim tax deductions over a period of time. As discussed in more detail below, these deductions are receiving increased scrutiny from the Internal Revenue Service (IRS).

Lately, the IRS is placing environmental settlements under increased scrutiny based on a concern that corporations are improperly deducting portions of settlements, including the costs involved in funding SEPs. While some environmental settlements are deductible as ordinary and necessary business expenses, the IRS does not allow deductions for amounts paid as a fine or similar penalty for violation of any law. In recent years, the IRS has paid more attention to whether payments made instead of penalties in environmental cases should be considered non-deductible under Section 162(f) of the Internal Revenue Code.

The IRS does not want businesses to dull the sting of a fine by getting the tax benefit of treating it as a deductible business expense. Since many federal and state environmental penalties — for  example, the Federal Clean Air and Water Acts and their state analogues — are intended to be punitive, the IRS has singled out such penalties (and amounts paid in lieu of paying such penalties) under environmental regulations for particular scrutiny. In addition to disallowing deductions for amounts paid as part of punitive penalties, the IRS has determined that taxpayers cannot receive the tax benefits of including those amounts in the basis of the assets under Section 263A of the Internal Revenue Code or property under Section 1012.

In line with this reasoning, the Tax Court denied a deduction for a taxpayer’s $8 million contribution to an environmental endowment fund when the contribution was given with the understanding that a proposed criminal fine would be reduced by the same amount. In a memo issued in 2006 for a different case, the IRS concluded that a portion of the costs incurred for the performance of a beneficial environmental project (BEP) was comparable to a non-deductible fine or penalty and prohibited the taxpayer from deducting the costs of the project or including the costs in the basis of the assets produced.

Following these cases and memos, the IRS recently issued directives instructing IRS agents to audit amounts paid pursuant to settlements with the Department of Justice under the False Claims Act and the Environmental Protection Agency for SEPs and BEPs. As a result, IRS auditors are now aggressively identifying and examining the tax treatment of environmental settlement payments. One IRS directive on the subject notes that “in most cases, a portion of the proposed civil payment was reduced for agreeing to perform a SEP, experience has shown that, generally, most defendant/taxpayers deduct the entire amount of the SEP as either a Section 162 business expense or capitalize [sic] such costs with related depreciation deductions.” The directives mandate audits for SEPs in excess of $1 million.

The IRS has noted that SEPs are often proposed and implemented by a corporation as part of a larger settlement project, and often result in a reduction of the total penalty payment. The IRS requires its examiners to determine any reduction in penalty resulting from the inclusion of a SEP in the total settlement package, and to disallow any deduction for the amount of the reduction in penalty attributable to including the SEP in the settlement.

IRS examiners are using press releases on the Department of Justice Web site and news articles to identify settlements with federal and state agencies. In addition, the IRS directs examiners in charge of cases to request from the target corporation and the relevant internal government agencies draft settlement proposals, draft penalty exposure calculations, and the complete correspondence file for the case, which suggests that companies should exercise caution when exchanging potential settlement positions, as the calculations can be used later by the IRS to deny deductions of portions of the settlement amounts.  

In light of the IRS’s activity in this area and the guidelines given to its auditors, corporations should consult knowledgeable tax counsel in advance of completion of an environmental settlement agreement on the tax consequences of the settlement structure. Especially in cases involving SEPs, corporations may need to consider the tax consequences in order to determine whether the SEP actually offers additional value. Corporations may also consider seeking explicit language in settlements with federal and state agencies specifically addressing the characterization of penalties under the agreement. In cases where actual penalties are incurred, the settlement agreement should specifically state that there was a penalty assessed, and the amount paid. At minimum, accounting departments should consult closely with attorneys handling any environmental settlements to determine the tax status of those settlements. Corporations entering into settlements with significant amounts involved may also want to consult with the IRS in advance to determine how payments under a settlement will be treated.

George Schutzer is a partner with Patton Boggs in the firm’s Washington, D.C., office, focusing on tax, business, and political law. He can be reached at 202-457-5273 or at gschutzer@pattonboggs.com.

Ora Sheinson is an associate with Patton Boggs in the firm’s Newark,N.J., office, focusing on environmental litigation, environmental compliance counseling, and industrial crisis management. He can be reached at 937-848-5600 or at osheinson@pattonboggs.com.