ABA, NABL Attorneys Seek Changes to Solid-Waste Rules

Two groups of tax attorneys last week urged the Treasury Department to modify its proposed regulations on bond-financed solid-waste disposal facilities to make sure they would cover all legitimate waste facilities.

The American Bar Association’s taxation section sent a 15-page letter outlining its concerns with the proposed rules, while the National Association of Bond Lawyers sent a three-page follow-up letter further clarifying a concern it had raised in previous comments and during a public hearing in January.

The Treasury Department proposed the rules in September.

The ABA lawyers said their primary goal is to ensure that no projects permitted under existing law and regulations are inadvertently prohibited by new rules and that the final rules are flexible enough to yield common-sense results as technological updates continue to change how waste is handled.

Specifically, the attorneys focused on a proposed 5% test, which would stipulate that tax-exempt bonds could not be issued to finance a facility if the residual material, a type of solid waste, constitutes more than 5% of all the material made in the production process.

That test “would exclude from the definition of solid waste certain types of agricultural waste and mining waste,” they warned.

The residual material left over from rice, sugar cane, and other major crop processing “significantly exceeds” the usable portion of the plants, and would not pass that test, the lawyers argued.

Other market groups, including NABL, also have argued against the test, saying it would exclude all kinds of material that are widely accepted to be solid waste.

In addition, the ABA attorneys asked the Treasury to clarify that animal manure is solid waste.

It is not clear from the current proposal whether manure, which is a significant waste product for industrial dairies and feedlots, is considered waste and this should be made explicit in the final rules, they said.

The definition of “first useful product” also should be tweaked, they said. That definition, which helps define when a waste or recycling process has ended and which parts of a facility can be financed with bonds, currently states that a product is useful if it can be sold for individual, commercial, industrial, or agricultural use, regardless of whether or not it actually is sold.

However, the ABA attorneys argued that the definition should take into account real-world limitations, such as geography. “A product created in rural South Dakota should not be treated as a first useful product because it could be sold if it had been created in suburban Chicago,” they wrote.

The definition also should be modified to make clear that the determination for what constitutes a useful product should be made exclusively on the date the bonds are sold.

Technological advancements could transform a product that has no use into one that could be sold, and without that flexible clarification, some bonds could cease to qualify as tax-exempt even if the bond-financed facility never changes.

Meanwhile, NABL decided to follow up on an exchange one of its members had with a Treasury official during a public hearing on the regulations in a letter sent to the department late Friday.

The group had argued in a 32-page comment letter in December that a proposed test for mixed-use facilities could yield unreasonably harsh outcomes for normally compliant facilities.

Under the test, if 65% of the input to the facility is solid waste, all the costs of the facility can be considered part of the solid waste process and financed with tax-exempt bonds.

NABL argued in their earlier comments and during a public hearing in January that the 65% limit should be applied on an average annual basis as opposed to year-by-year, on grounds that a normally compliant facility could experience a particularly bad year due to extenuating circumstances and  jeopardize the tax-exempt status of all of its bonds.

At the public hearing held in January, Charles Henck, an attorney with Ballard Spahr LLP who spoke on behalf of NABL, reiterated the point, arguing that the test could prove unduly harsh to facilities dealing with unforeseen circumstances.

“A single aberrant year shouldn’t cause a problem,” he said.

However, John J. Cross 3d, the Treasury’s associate tax legislative counsel, pointed out that the 35% margin under the test provides a “pretty high margin for error” and that rules on solid-waste facilities previously proposed in 2004 would have established an 80% test for mixed-used facilities.

In its follow-up letter, NABL said “the 35% figure should not be thought of as a margin of error.”

Many recycling operations normally require significant amounts of non-waste to produce marketable products, NABL said, arguing that the 35% figure reflects the reality of that industry, making it more than simply a margin for error.

If a facility typically incorporates large amounts of non-waste in its process, it has significantly less breathing room than the 35% figure suggests, the group said.

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