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

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

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
consult:
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
bob.goldman@lw.com
energy conversion process on a tax-
Chicago
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
ursula.hyman@lw.com
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
include:
• 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
facilities;

3 Number 934 | September 21, 2009

Latham & Watkins | Client Alert

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4 Number 934 | September 21, 2009