Recent Decision Presents Valuable Case Study In the Legal Considerations Attendant to Shutting Down Business Operations

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In deciding to continue or cease business operations at a particular location, a business owner needs to be fully informed as to how his actions will impact the company’s rights and obligations under the laws governing his business, such as environmental and real property tax laws.  In this way, the business owner can ensure that his decisions are made with the best interests of the company in mind.  The recent New Jersey Appellate Division decision, Pan Chemical Corp. v. Hawthorne Borough, provides valuable insight as to some of the critical considerations that must be evaluated.

In Pan Chemical, the plaintiff operated a manufacturing facility in Hawthorne, New Jersey. The property consisted of 7 buildings used in the manufacture of industrial coatings, color dispersions, inks and nail polish.  Several underground storage tanks leaked contamination onto the property and the New Jersey Department of Environmental Protection (“NJDEP”) required Pan Chemical Corporation (“Pan Chemical”) to install groundwater monitoring wells to address the contamination.

Subsequently, Pan Chemical acquired a new facility in Carlstadt, New Jersey. Rather than move its entire operations to the Carlstadt facility, Pan Chemical partially closed down operations at the Hawthorne facility. This was done in order to avoid having to comply with New Jersey’s Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. (“ISRA”), which requires businesses that are “industrial establishments” to comply with its requirements whenever there is a cessation of the business operations. ISRA compliance typically requires the performance of an environmental assessment of the property to determine if contamination exists and, if so, the cleanup of the contamination.

By leaving behind more than 10% of its staff and keeping open only certain buildings at the property, Pan Chemical was able to avoid ISRA compliance when it relocated and deferred the cleanup to a later time. Ultimately, Pan Chemical sold the property in 2005 in an “as is” condition and thereby shifted the cost of the cleanup to the purchaser.

Pan Chemical also filed tax appeals against the Borough of Hawthorne for the years 2000 through 2005 with the expectation of realizing significant property tax reductions based upon the “non-operational” status of its facility. The Tax Court found that significant reductions in assessments were in order due to the disrepair of the buildings, the need for substantial environmental remediation and the property’s “closed” condition.

The Borough appealed the Tax Court decision arguing that because the property was still “in use” for ISRA purposes, this fact should be determinative for property tax purposes as well. The Borough contended that its original higher assessment on the Pan Chemical property was appropriate and supported by the marketplace.

On appeal, the Appellate Division disagreed with the Tax Court’s granting of tax relief to Pan Chemical. The Appellate Division recognized that a windfall could result if the taxpayer was able to maintain that operations were continuing for the purposes of ISRA, but argue that the property was no longer “in use,” warranting cleanup cost deductions and negative value adjustments, for real property tax valuation purposes.

In deciding this matter, the Appellate Division relied on the seminal case of Inmar Associates, Inc. v. Carlstadt, 112 N.J. 593 (1988), which involved tax assessment challenges by owners of environmentally contaminated properties. One property, which was still in use during the tax year in question, was operated by GAF Corporation. The other property, where operations had ceased prior to the relevant tax assessment date, was owned by Inmar Associates, Inc.

The Court there granted tax relief for the Inmar property but not for the GAF property. The New Jersey Supreme Court reasoned that the GAF property was still occupied and in use at the time of the assessment date; whereas the Inmar property was not then in use. As a result, the Court concluded that “when the property is in use, normal assessment techniques will remain an appropriate tool in the appraisal process.”

The Appellate Division, recognizing that Pan Chemical could not have it both ways, stated:

[Pan Chemical] wanted their property to be deemed ‘in use’ during the years on appeal for the sole purpose of avoiding the costly cleanup mandated by ISRA. Now, [Pan Chemical] wants the property to be deemed ‘not in use’ over the same period of time in order to claim a reduced tax liability.

The Pan Chemical court concluded that the Borough’s use of the statutory definition of “closed” as used in ISRA was appropriate. Thus, the Appellate Division held that the Borough conducted a “reasonable approximation of fair value” in completing its valuation of the Pan Chemical property. Accordingly, the matter was remanded back to the Tax Court with direction to utilize the recognized standards of valuation for operational facilities.

While there may be a distinct and significant dollar cost advantage to delaying the cessations of operations on the environmental front, such a decision must be weighed in light of its impact upon what would otherwise have been a strong case for tax relief. There is no right or wrong way to approach these issues. Obviously, the individual circumstances and financial considerations controlling at the time will dictate the appropriate action. There are, however, approaches that a business owner can employ to cease operations, manage its environmental cleanup obligations and thereby leave open the prospect that it can also, at the same time, advance a meritorious tax appeal.

For example, the owner/operator could obtain a fixed price contract from an environmental consultant capping the cost of cleanup.  By so doing, the owner could limit its cleanup exposure and then better assess the situation. The possibility of closing down operations without delay, thus maximizing the prospect for real tax relief, might then become a viable alternative. Only when the full measure and impact of such decisions are considered may the true merits of a company’s comprehensive strategy be properly evaluated.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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