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ClientAlert

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Number 934 September 21, 2009

Latham & Watkins

Finance and Tax Departments

Taxpayers mayelect to apply

these ProposedRegulations

now, before they

become final.

New Proposed Regulations on TaxExempt Financing of Solid Waste DisposalFacilities Welcome Guidance thatTaxpayers 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

financing for solid waste disposal

facilities quite a bit easier. Taxpayers

may elect to apply these ProposedRegulations now, before they become

final.

In the recent past, taxpayers desiring to

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) thenature 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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2 Number 934 | September 21, 2009

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, discardednewspapers 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 ofany 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. TheTreasury 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 energygeneration 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.

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 maynot 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 preliminaryfunctions, 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-exemptfinancing. 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

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are eligible for tax-exempt financing,

unless at least 65 percent of the input

(by weight or volume) is qualifying solid

waste. If the annual percentage of solid

waste used in the disposal process is

65 percent or more, all qualifying costsof the property can be financed on a

tax-exempt basis. The 65 percent to 35

percent ratio of qualifying input to non-

qualifying input must be satisfied each

year the bonds are outstanding.

If less than 65 percent of the input

material is qualifying waste, only a

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

illustrated in the Proposed Regulationsby an example in which 40 percent of

the input to an incinerator generating

steam for electricity is coal (presumably

not waste coal) and 60 percent of the

input is qualifying solid waste. In the

example, the taxpayer is permitted to

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,

all such costs would qualify.

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 thebonds cannot exceed 120 percent

of the average reasonably expected

economic lives of the financed

facilities;

Restrictions on acquisitions of existing

property;

Public approval requirements ( i.e., a

public hearing and approval from the

issuer of the bonds);

Bond volume cap each state has a

volume cap that limits the principal

amount of private activity bonds that

can be issued annually by that state;

and

Cap on bond-financed issuance costs

no more than 2 percent of the bond

proceeds can be used to finance the

issuance costs.

If you have any questions about this

Client Alert, please contact one of the

authors listed below or the Latham

attorney with whom you normally

consult:

Bob Goldman

(312) 876-7641

[email protected]

Chicago

Ursula Hyman

(213) 891-7906

[email protected]

Los Angeles

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