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Number 934

September 21, 2009

Client Alert
Latham & Watkins
Finance and Tax Departments

New Proposed Regulations on Tax

Exempt Financing of Solid Waste Disposal
Facilities — Welcome Guidance that
Taxpayers May Apply Immediately
On September 15, 2009, the US The Treasury Department and the IRS
Treasury Department issued new now acknowledge that the no-value
Proposed Regulations outlining the rule cannot be administered. The
requirements for solid waste disposal Proposed Regulations eliminate the
facilities seeking to be financed on no-value rule, making it much easier
a tax-exempt basis. As noted in this to qualify a significant portion of a
Alert, the effect of the Proposed plant as a solid waste disposal facility.
Regulations should make access by Instead, the Proposed Regulations take
private companies to tax-exempt bond a different approach and focus on two
“Taxpayers may financing for solid waste disposal factors in defining a qualifying solid
elect to apply facilities quite a bit easier. Taxpayers waste disposal facility: (i) whether the
may elect to apply these Proposed material is “solid waste” and (ii) the
these Proposed Regulations now, before they become nature of the disposal process applied
Regulations final. to the solid waste.
now, before they In the recent past, taxpayers desiring to
become final.” use tax-exempt bonds to finance their Qualifying Solid Waste
solid waste disposal facilities have been
The Proposed Regulations define
discouraged by the requirement under
solid waste as garbage, refuse and
the existing Regulations that the solid
other solid material derived from any
waste have no value as of the issue
agricultural, commercial, consumer
date of the bonds (no-value rule). Over
or industrial operation or activity that
the years, markets have developed for
is intended to be introduced into the
the sale of solid waste, such as used
disposal process within a reasonable
tires, waste paper and cardboard.
time after acquisition. In other words,
These markets have made it extremely
material that is acquired with an intent
difficult for taxpayers to establish that
to resell or store it does not qualify as
the solid waste to be used in a facility
solid waste.
has no value. In that regard, the IRS
has challenged a significant number Solid waste must be either “used
of taxpayers using tax-exempt bonds material” or “residual material” and
to finance their solid waste disposal cannot be raw material (other than
facilities under the no-value rule. scraps), solids within liquids (such as
silt) or liquid waste, precious materials

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or hazardous or radioactive material. Identifying Qualifying Costs

Solid waste is “used material” if it has
previously been used as an agricultural, The Proposed Regulations apply rules
commercial, consumer or industrial similar to the existing Regulations in
product or as a component of any identifying costs that can and cannot
such product. Used tires, discarded be financed with tax-exempt bonds.
newspapers and magazines, and old In general, costs can be financed with
cardboard boxes certainly qualify as tax-exempt bond proceeds from the
used material. beginning of the disposal process
up to the point that the “first useful
Residual material is any residual product” is produced, whether or
byproduct or excess unused raw material not such product is actually sold for
(scrap) resulting from the production of use. For example, costs incurred with
any agricultural, commercial, consumer respect to an energy conversion process
or industrial product but only if such that produces useful steam energy
material (i) constitutes less than 5 from used tires would qualify for tax-
percent of the total material introduced exempt financing, but costs incurred
into the production process and (ii) has in turning the steam into electricity
a fair market value lower than that of and transmitting it to the grid may
any product made in the production not qualify. In determining the point
process. Tree bark derived from a at which the “first useful product” is
logging operation or waste coal from a produced, the Proposed Regulations
coal mining operation are examples of provide that operational constraints
residual material. that affect the point at which a useful
product can reasonably be separated
Qualifying Disposal Process from a continuous or integrated
production process will be considered.
The Proposed Regulations establish
three categories of qualifying solid Costs incurred for portions of a facility
waste disposal processes: (i) final that are functionally related and
disposal process, (ii) energy conversion subordinate to the solid waste disposal
process and (iii) recycling process. The facility, or that perform preliminary
Treasury Department has made it clear functions, also qualify for tax-exempt
that these categories are intended to be financing. For example, the cost of
applied broadly so as to accommodate a conveyor belt and storage bin for
future innovation and technology. Unless qualifying solid waste generally will be
otherwise restricted by the Proposed treated as part of the qualifying solid
Regulations, a solid waste disposal waste disposal facility.
process may employ any biological, For mixed-use facilities — facilities
engineering, industrial or technological that are used for both a qualified solid
method. waste disposal function and a non-
In this regard, the final disposal category qualified function — only the costs
is generally limited to use of a landfill, allocable to the qualified solid waste
incineration without useful energy disposal function qualify for tax-exempt
generation and permanent containment. financing. Taxpayers generally are
The energy conversion category permitted to allocate the costs between
includes any thermal, chemical or other a qualified solid waste disposal function
process that converts solid waste into and a non-qualified function using any
synthesis gas, heat, hot water, steam reasonable method.
or other useful energy. A recycling To the extent a qualified solid waste
process is defined as any process that disposal process uses both solid waste
reconstitutes, transforms or otherwise and non-solid waste materials, only a
converts solid waste into a useful percentage of the costs of the property

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are eligible for tax-exempt financing, • Restrictions on acquisitions of existing

unless at least 65 percent of the input property;
(by weight or volume) is qualifying solid • Public approval requirements (i.e., a
waste. If the annual percentage of solid public hearing and approval from the
waste used in the disposal process is issuer of the bonds);
65 percent or more, all qualifying costs • Bond volume cap — each state has a
of the property can be financed on a volume cap that limits the principal
tax-exempt basis. The 65 percent to 35 amount of private activity bonds that
percent ratio of qualifying input to non- can be issued annually by that state;
qualifying input must be satisfied each and
year the bonds are outstanding. • Cap on bond-financed issuance costs
— no more than 2 percent of the bond
If less than 65 percent of the input
proceeds can be used to finance the
material is qualifying waste, only a
issuance costs.
percentage of the costs equal to the
average annual percentage of qualifying
input (by weight or volume) qualifies
for tax-exempt financing. This rule is
If you have any questions about this
illustrated in the Proposed Regulations
Client Alert, please contact one of the
by an example in which 40 percent of
authors listed below or the Latham
the input to an incinerator generating
attorney with whom you normally
steam for electricity is coal (presumably
not waste coal) and 60 percent of the
input is qualifying solid waste. In the
Bob Goldman
example, the taxpayer is permitted to
(312) 876-7641
finance 60 percent of the costs of the
energy conversion process on a tax-
exempt basis. If only 35 percent of the
input to the incinerator had been coal, Ursula Hyman
all such costs would qualify. (213) 891-7906
Los Angeles
Other Requirements
In addition to the specific requirements
applicable to solid waste disposal
facilities in the Proposed Regulations,
tax-exempt bonds issued to finance
such facilities must meet a host of other
requirements applicable to “private
activity bonds” as defined in the Internal
Revenue Code. These requirements
• A maximum bond term — the
weighted average maturity of the
bonds cannot exceed 120 percent
of the average reasonably expected
economic lives of the financed

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