WASHINGTON — In a turnaround over a controversial test, the Internal Revenue Service has withdrawn seven notices that had threatened the tax-exempt status of 12 solid-waste bond issues sold for Atlanta-based Georgia-Pacific LLC over a nine-year period.

The notices, which were signed by Tyler Woolson, senior vice president and chief financial officer for Georgia-Pacific, stated that the IRS' Office of Appeals has withdrawn earlier proposed adverse determinations that warned the bonds were taxable. The notices, which indicate the bonds will remain tax-exempt, were filed this week with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system.

The disclosures cover bond issues sold from 1995 to 2004 by seven separate issuers, including Oregon. They reflect solid-waste rules issued by the IRS last September and mark the apparent end of a dispute between market participants and the IRS over the "no-value" test for bond-financed solid-waste disposal facilities.

Existing regulations, which were published in 1972, define solid waste as property that has no market value on the date the bonds are issued. But the updated rules proposed last year — which generally were well-received by the muni community — would abandon the no-value test. The Treasury Department conceded the test was "unadministrable" when it released the proposed regulations.

That test came into play in several IRS audits of solid-waste deals, usually with the IRS contending that materials coming into a facility had value because the facility paid for them and that, as a result, they could not be solid waste that is processed in a bond-financed facility. But issuers and their attorneys argued the facility was merely paying for the transportation, handling, and delivery of the material, not the material itself. They insisted the materials should qualify as solid waste for tax purposes.

The IRS withdrawal of the adverse determination notices reflects the new proposed rules, which cannot be complied with yet, but will be retroactively effective when issued as final rules.

"I think it reflects a recognition by Appeals or the IRS that, basically, the terms of engagement have changed," said Charles Henck, a partner at Ballard Spahr LLP here. "Insofar as I know, the facilities that were challenged … were exactly the kind of facilities that would be OK under the proposed regs."

Treasury officials have said they hope to finalize the proposed rules quickly, possibly by the end of June, according to the department's most recent priority guidance plan.

Georgia-Pacific spokesman James Malone said the appeals office had reversed the IRS' previous decisions on the company's bonds based on the new proposed regulations. The bonds were issued to finance "capital investments at six manufacturing facilities," he added.

Malone would not say whether the most recent IRS action resolves all pending audits for Georgia-Pacific.

Henck said the IRS withdrawal of the notices makes sense.

"If the IRS encountered a transaction which in their view was not permitted under the existing regs but would absolutely be permitted under the proposed regs, it wouldn't make any sense to affirmatively ... go after the transaction under the existing regs because eventually the matter would be dropped because the proposed regs become final and the issuer or borrower elects to have them apply," he said.

The Treasury had proposed eliminating the no-value test in rules it had proposed in 2004, but those rules were eventually abandoned after strong criticism from market participants on several points.

Several muni issuers in recent years have entered into closing agreements with the IRS after being challenged on the no-value test in audits of solid-waste bonds.

In each case, the issuers agreed to pay the federal government in return for protecting the tax-exempt status of their bonds. Bond lawyers this week said those payments cannot be refunded, regardless of the IRS turnaround on the test in the new proposed rules.

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