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I own a house in New Jersey that I live in. It used to have a 1000 gallon oil tank buried on the property to fuel my hot water heating boiler. In 2009 I had the tank removed and I converted my heating fuel to gas in hopes that it would be gone before it started to leak. But I was too late. Removing the tank was relatively cheap. But remediation will cost almost $50,000.

The state is so determined to get these underground oil tanks removed that the DEP will pay around $2,500 for you to remove one, and an almost $50,000 grant for any remediation needed. The amount of the grant cannot exceed the actual documented cost of the remediation. And if I have too much money (I don't) I would not qualify for the grant. Now, a little over 4 years later, the state has come up with the money and just sent me the check for about $2,500, with about $47,000 more to come as I submit the proper bills. Now that check was issued, not by the DEP, but by the New Jersey Economic Development Authority, whatever that means.

Am I going to have to pay Federal income tax on this money? Perhaps I will get some 1099 form for it? Or since the money just passes through me to the remediation contractor, is it handled some other way?

Similarly for my state income tax?
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Hey JD,

Hopefully Ira will soon be here to help you. He is kinda the New Jersey tax pro. If not, we have several other tax pros who hopefully will weigh in for an answer. Bit I must admit JD .. you do come up with some doozies ;)

Rich
Arizona
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Hopefully Ira will soon be here to help you. He is kinda the New Jersey tax pro. If not, we have several other tax pros who hopefully will weigh in for an answer. Bit I must admit JD .. you do come up with some doozies ;)

I hope Ira or someone can help. I spent a coupla hours with google on the Internet and got nowhere.

The closest I could find is that the NJEDA finances some of its expenses with tax-exempt bonds. It is mainly an agency to finance economic growth, like giving subsidies to developers of industrial parks and the like. I assume they are the paying agent for the DEP because the DEP does not have a charter or a budget for making payments to residential homeowners, but they do have a charter that allows them to reduce environmental contamination due to leaking oil tanks.
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Hopefully Ira will soon be here to help you. He is kinda the New Jersey tax pro. If not, we have several other tax pros who hopefully will weigh in for an answer. Bit I must admit JD .. you do come up with some doozies ;)

I don't have a quick answer. My first reaction would be to treat this as a recovery. See IRS Pub. 525.

NJ is trickier since it generally does not allow any deductions. You can offset losses against gains of the same type in the same year as the income is reported. Since most of the remediation expenses were probably paid before the reimbursement, you don't have the offset. On the other hand, the remediation program is for reimbursement of costs incurred in the public good, so I would expect that any payments would be tax-exempt. You might find more information by researching the legal history of The Brownfield and Contaminated Site Remediation Act, N.J.S.A.58:10B-1 et seq.

Ira
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I don't have a quick answer. My first reaction would be to treat this as a recovery. See IRS Pub. 525.

Thanks for the publication reference.

I started reading it, and it does not seem to me that it has to do with recovery, since that seems to have to do with deductions I may have taken in the past, and that retroactively, because of a subsequent payment from someone, that I should not have taken. (Not illegal, just that I now have to pay the tax due.)

But in my case, while the tank was taken out four years or so ago, I did not expense the remediation, since the remediation was not done. And I did not deduct it then because not only did I not pay it, I did not know it was deductible in any case.

The nearest thing that seems to apply is on page 28 of the 2012 instructions under "Other Income." "Casualty Insurance and other reimbursements. "You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. See Publication 547."

I guess I will have to read 547 to see if a leaking in-ground oil tank is a casualty loss or not. The oil had definitely reached the water table, the remediation is legally required, and I would otherwise have to pay it from other funds.
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I guess I will have to read 547 to see if a leaking in-ground oil tank is a casualty loss or not. The oil had definitely reached the water table, the remediation is legally required, and I would otherwise have to pay it from other funds.

The oil tank probably isn't a casualty loss because it (probably) wasn't sudden/unexpected but due to gradual deterioration. Nevertheless, I don't think that will affect impact of the reimbursement on your tax return. (That is, I expect you will find that you can ignore the reimbursement.)

Ira
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IRS has published a coordinated issue paper on the subject of whether payments from the leaking underground storage tank trust fund benefitting corporate taxpayers are taxable income, or can be treated as non-shareholder contributions to capital. Not directly on point, of course, but perhaps bears on the analysis of whether reimbursements to individual taxpayers are includible in taxable income.

http://www.irs.gov/Businesses/Coordinated-Issue---Petroleum-...
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The oil tank probably isn't a casualty loss because it (probably) wasn't sudden/unexpected but due to gradual deterioration. Nevertheless, I don't think that will affect impact of the reimbursement on your tax return. (That is, I expect you will find that you can ignore the reimbursement.)

I think your conclusion is right because on page 2 of Pub 547, under Casualty is a sub paragraph Progressive deterioration that basically says that progressive deterioration is foreseeable, and not a casualty loss. However it goes on with an example of progressive deterioration:

"The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water does qualify as a casualty." [Emphasis mine.]

So the cost of a new oil tank (if I got one, which I did not), the cost of removing the old one, are both the result of progressive deterioration. But the damage to the water table, etc., seem to be like the rust damage to carpets and drapes in the previous example. At least I can interpret it so.

We will see, once the remediation is done and all the necessary money from the State of NJ is paid if I get a 1099G (or some such thing) or if it is silent. If I get no tax form from the state on this, I guess I am home free.
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So the cost of a new oil tank (if I got one, which I did not), the cost of removing the old one, are both the result of progressive deterioration. But the damage to the water table, etc., seem to be like the rust damage to carpets and drapes in the previous example. At least I can interpret it so.

Here's what I've had banging around in the back of my head, so I decided to run it up the flagpole....

How about the remediation payment by the state being a reduction in basis?

As has been noted, this can't fit into any definition of casualty loss I can think of. It seems to me that the remediation definitely increases the value of the property. Presumably even in New Jersey there would be some disclosure requirements about the potential purchase of a LUST site, so the ability to say "problem solved" to a potential purchaser is worth something.

If it's not obvious, this is a SWAG. Pros?

Phil
Rule Your Retirement Home Fool
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I managed to get the right person at the New Jersey Economic Development Authority (the agency that issues the check for the New Jersey Department of Environmental Protection). She says the grant IS NOT taxible. I should consider it as a refund for money already spent (even though it has not been spent yet; it will have been spent by the time the check is issued).

They will issue a 1099.

This was all on my answering machine.
I assume they must have some code on the 1099 indicating it is not taxible. I wonder which 1099 form it will be on. 1099-G? But those seem taxible.
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I managed to get the right person at the New Jersey Economic Development Authority (the agency that issues the check for the New Jersey Department of Environmental Protection). She says the grant IS NOT taxible. I should consider it as a refund for money already spent (even though it has not been spent yet; it will have been spent by the time the check is issued).

They will issue a 1099.

This was all on my answering machine.
I assume they must have some code on the 1099 indicating it is not taxible. I wonder which 1099 form it will be on. 1099-G? But those seem taxible.


If it's reported on a 1099, you can assume for now that it will be taxable at the federal level. I suspect the "non-taxable" answer was only with regard to NJ income tax as I doubt a state employee would give any advice about federal tax issues.

If you remember, let us know how (if) the payment is reported to you on a 1099.

Ira
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If you remember, let us know how (if) the payment is reported to you on a 1099.

My money's on Box 7 of an MISC. That seems to be the most popular one for causing maximum grief.

Phil
Rule Your Retirement Home Fool
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I managed to get the right person at the New Jersey Economic Development Authority (the agency that issues the check for the New Jersey Department of Environmental Protection). She says the grant IS NOT taxible. I should consider it as a refund for money already spent (even though it has not been spent yet; it will have been spent by the time the check is issued).
They will issue a 1099.
This was all on my answering machine.
I assume they must have some code on the 1099 indicating it is not taxible. I wonder which 1099 form it will be on. 1099-G? But those seem taxible.

==============================
I think where you might have an out is in Code Section 126(a)(10), which states:

§ 126 Certain cost-sharing payments.

(a) General rule.
Gross income does not include the excludable portion of payments received under—
.......................................
(10) Any program of a State, possession of the United States, a political subdivision of any of the foregoing, or the District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.


Now the odd thing here is that most of the other programs specifically mentioned in the intervening subsections are administered by the Dept. of Agriculture. But (10) seems to be a catchall, not specifically related to farming. But it's certainly something to consider.

Bill
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(10) Any program of a State, possession of the United States, a political subdivision of any of the foregoing, or the District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.

It sure is restoring the environment...
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