Federal deadline approaches for tank compliance.

If you own or operate an underground storage tank (UST), federal regulations require that by December 22nd of this year, all existing USTs must comply with mandated performance standards or upgrade requirements, depending on the age of the tank, or be closed in accordance with applicable closure requirements. We recommend that owners and operators of USTs understand the federal requirements and hire consultants to ensure compliance.

This article summarizes those regulatory requirements, discusses possible penalties for non-compliance, and addresses the tax treatment of certain UST-related activities.

The New UST System Performance Standards

For all USTs installed in the last 10 years, owners and operators must ensure that their USTs comply with the performance standards for new USTs by December 22, 1998. Under the regulations, an owner is anyone who owns an UST system used for storage, use or dispensing of any substance regulated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), or petroleum or petroleum products. An operator is any person in control of or responsible for the daily operation of an UST system.

The regulations generally require that any portion of the tank that is underground, as well as the piping that is in contact with the ground and routinely contains regulated substances, be protected against corrosion (i.e. must be constructed of fiberglass-reinforced plastic; steel that has been cathodically protected; or in the case of tanks only, a steel-fiberglass reinforced plastic composite).

In addition, specific spill prevention equipment is required to avoid spilling and overfilling associated with transferring substances to the UST unless the system is filled by transfers of not more than 25 gallons at a time. Finally, all tanks and pipings must be installed in accordance with a nationally recognized association or an independent testing laboratory, and the owner or operator must demonstrate compliance with the installation requirements.

Upgrading Requirements

For USTs installed prior to December 22, 1988, steel tanks must be upgraded, and metal pipings and spill and overflow prevention systems must meet the performance standards for new USTs discussed above. Specifically, tanks must be upgraded by adding an internal lining or by cathodic protection in accordance with a code of practice developed by a nationally recognized association or independent testing laboratory.

Closure Requirements

If an owner or operator has shut down its UST, either temporarily or permanently, or desires to shut it down before the end of the year, such closure must comply with the requirements set forth in the federal regulations. If the tank is temporarily closed, an owner or operator must continue operation and maintenance of corrosion protection and of a release detection system. If the tank is closed for three months or more, the owner or operator also must cap and secure all other lines, pumps, manways, and ancillary equipment and leave vent lines open and functioning. Finally, if the tank is closed for more than 12 months, it must be closed permanently if it does not meet the performance standards for new USTs (above) or the upgrading requirements (except for the spill and overflow prevention measures).

Owners and operators intending to close their tanks permanently must notify DEC at least 30 days prior to commencing closure activities or undertaking a change-in-service. To permanently close a tank, an owner or operator must empty and clean it by removing all liquids and accumulated sludges, and the tank must be either removed from the ground or filled with an inert solid material. A change-in-service occurs when an owner or operator continues to operate the tank, but instead of storing a regulated substance, replaces that substance with a non-regulated substance. As with closure, an owner or operator carrying out a change-in-service must empty and clean the tank by removing all liquid and accumulated sludge.

Prior to a closure or change-in-service, an owner or operator must conduct a site assessment to measure for the presence of a release where contamination would be most likely. The site assessment should be completed following notification of the intention to close or change the use of the tank, but prior to the completion of the closure or change-in-service. If contamination is found, corrective action must be undertaken in accordance with the regulations.

Finally, owners and operators of USTs must maintain records demonstrating compliance with the closure requirements for at least three years following the closure or change-in-service.

Enforcement

In the case of a violation of any requirement relating to the maintenance and operation of an UST, the Environmental Protection Agency will issue an order to the owner or operator of the UST. If the owner or operator fails to comply with such order, the statute provides for a civil penalty of not more than $25,000 for each day of continued non-compliance to be levied against the owner or operator. In addition, any owner who knowingly fails to notify or submits false information about an UST system will be subject to a civil penalty not to exceed $10,000 for each tank for which notification is not given or false information was submitted. Similarly, failure to comply with the requirements relating to release detection, prevention and correction requirements, or state program requirements will subject an owner or operator to up to $10,000 per day for each non-complying tank. These are stiff penalties, particularly when compared to the compliance costs.

Tax Treatment for UST-Related Costs

Earlier this year, the IRS announced tax benefits for certain UST-related activities. While tax treatment is complex and fact-specific, this article sets forth a general summary of the tax implications of certain UST-related activities. First, costs for the removal of USTs and remediation of any contaminated soil are deductible under Section 162 of the Internal Revenue Code, so long as the costs are incurred by the same taxpayer whose UST contaminated the property in the first place. However, such deductions are not available where the taxpayer incurs the costs while adapting the property to a new or different use, or where the tanks will be replaced. The costs of installing monitoring systems, wells or other capital assets for remediating contaminated areas must be capitalized, even when the tanks are replaced.

The IRS also determined that costs associated with new USTs filled with waste from old USTs are deductible as ordinary and necessary business expenses. Specifically, the IRS found that costs incurred to replace USTs containing waste by-products, including the costs associated with removing, cleaning and disposing of the old USTs, and the costs of filling and on-going monitoring of the new USTs, are deductible as ordinary and necessary business expenses.

Laura Vasaturo, Attorney in the Environmental and Land Use Practice Group, Robinson Silverman Pearce Aronsohn & Berman LLP