The Internal Revenue Service (IRS) and Treasury Department have issued new proposed regulations (Proposed Regulations) defining the types of facilities that qualify as "solid waste disposal facilities" eligible to be financed with tax-exempt private activity bonds issued by a state or local government. The Proposed Regulations replace the proposed regulations that were issued by the IRS and Treasury Department in May of 2004 but never finalized. The IRS and Treasury Department will consider any written or electronic comments on the Proposed Regulations that are timely submitted to the IRS, and a public hearing on the Proposed Regulations has been scheduled for January 5, 2010.


Under Sections 103(a) and 142 of the Internal Revenue Code of 1986, as amended (Code), state or local government may issue tax-exempt bonds to finance "solid waste disposal facilities" that are used in a private trade or business. Longstanding Treasury Regulations have generally defined "solid waste disposal facilities" as property used for the collection, storage, treatment, utilization, processing, or final disposition of "solid waste." For this purpose, "solid waste" was generally defined as garbage, refuse, and other discarded solid materials, but only if such material is useless, unused, unwanted, or discarded solid material that has no market value at the place where the property is located (No-Value Test). Those Treasury Regulations further provide that recycling facilities may qualify as solid waste disposal facilities, provided that solid waste constitutes at least 65 percent, by weight or volume, of the total materials introduced into the recycling process.

Starting in the late 1990's the IRS began challenging the tax-exempt status of certain tax-exempt private activity bonds issued to finance recycling facilities on the grounds that the materials being processed at such facilities did not qualify as solid waste. At issue in many of these cases was whether the materials being recycled actually had no market value at the place where the property was located. In an attempt to avoid difficult factual issues that were arising in applying the No Value Test to recycling facilities, the IRS issued proposed regulations in 2004 that would have eliminated the No Value Test, and instead would have defined solid waste by reference to the process being applied to the material in the purported solid waste disposal facility, subject to certain exceptions. The 2004 proposed regulations were roundly criticized as being unworkable and many commentators recommended that the IRS abandon the approach taken in the 2004 proposed regulations and return to a framework that defined solid waste solely on the basis of the characteristics of the material itself.

The Proposed Regulations

Solid waste disposal facility. The Proposed Regulations generally define a solid waste disposal facility as any facility that (i) processes "solid waste" in a "qualified solid waste disposal process," or (ii) performs a "preliminary function." As under existing law, it also includes property that is functionally related and subordinate to such facilities.

Definition of solid waste. Like the 2004 proposed regulations, the Proposed Regulations eliminate the No-Value Test but, in response to comments received, the Proposed Regulations provide a definition of solid waste based on the material itself rather than the process by which such material is to be disposed of or recycled. The Proposed Regulations define solid waste as garbage, refuse, and other solid material, derived from any agricultural, commercial, consumer, or industrial operation or activity that is either "used material" or "residual material" and that is reasonably expected to be introduced within a reasonable time in a "qualified solid waste disposal process" by the person who purchases or otherwise acquires such material. Thus, material that the acquiring party intends to store or resell to the general public is not solid waste under the Proposed Regulations.

Used material is defined as any material that has been used previously as an agricultural, commercial, consumer, or industrial product or as a component of any such product. The preamble to the Proposed Regulations provides that this definition is intended to be interpreted broadly to include popularly understood uses of materials but that such definition should not apply to smaller products purchased by manufacturers and incorporated by such manufacturer into a larger product. Residual material is defined as any residual byproduct or excess unused raw material that remains from the production of any agricultural, commercial, consumer, or industrial product, but only to the extent that it constitutes less than five percent of the total material introduced into the production process and has a fair market value that is reasonably expected to be lower than that of any product made in that production process. The preamble to the Proposed Regulations provides that this definition is intended to cover a wide range of products from waste coal to byproducts of typical agricultural operations, and is intended to encourage innovation in the full use of all resources.

Specific exclusions from the definition of solid waste. The Proposed Regulations exclude from the definition of solid waste: (i) virgin material; (ii) solids within liquids and liquid waste; (iii) precious metals; (iv) hazardous material; and (v) radioactive material. Virgin material includes all raw materials except to the extent such material becomes remainder material. Also, based on certain legislative history, the Proposed Regulations specifically exclude hazardous and radioactive waste from the definition of solid waste.

Qualified solid waste disposal process. The Proposed Regulations provide for three eligible types of solid waste disposal processes: a "final disposal process," an "energy conversion process," and a "recycling process."

A final disposal process includes the placement of solid waste in a landfill, the incineration of solid waste without capturing any useful energy, and the containment of solid waste with the reasonable expectation that the containment will continue indefinitely and that the solid waste has no current or future beneficial use.

An energy conversion process includes thermal, chemical, and other processes used to create and capture useful energy. An energy conversion process begins at the point of the first application of a process to create and capture useful energy and ends at the point at which the useful energy is first created or captured in the form of a first useful product (for example, the conversion of solid waste into useful steam energy).

A recycling process means a process for disposing of solid waste that reconstitutes, transforms, or otherwise processes the solid waste into a useful product. The recycling process begins at the point of the first application of a process to reconstitute or transform the solid waste into a useful product, such as decontamination, melting, re-pulping, shredding, or other processing of the solid waste to accomplish this purpose, and ends at the point of completion of production of the first useful product from the solid waste.

First useful product principle. The Proposed Regulations also provide guidance on the standard for determining the first useful product for purposes of the end point of an eligible energy conversion process and recycling process. The term useful product means a product that is useful for consumption in individual, commercial, industrial, or agricultural use and that could be sold for such use, whether or not actually sold. In the case of a continuous or integrated production process, the determination of when a useful product may result from such an integrated process may take into account operational constraints that affect the point in production when a useful product reasonably can be extracted or isolated and sold independently.

Mixed-input facilities. The Proposed Regulations clarify the scope of permitted mixed-input facilities by providing that 35 percent or less of material that is not solid waste may be introduced each year into an energy conversion process or a recycling process without disqualifying those processes.

Proposed Effective Dates

In general, the proposed regulations will apply to bonds that are sold on or after the date that is 60 days after the date of publication of final regulations under section 142(a)(6) in the Federal Register. In addition, issuers may apply the Proposed Regulations to bonds issued prior to such effective date..