A wastewater plant built by a pharmaceutical company with exempt facility bonds does not violate tax laws or rules because the waste’s acidity level has to be neutralized before it can be sent to a public treatment facility, the Internal Revenue Service ruled.
The ruling was made in a technical advice memorandum from the IRS office of chief counsel that was dated March 15 but not made public until late last week.
The TAM was issued as part of an audit of the pharmaceutical company by a field agent with the IRS’ tax-exempt bond office, but the public document was redacted and did not identify any of the parties involved.
TAMs differ from private-letter rulings. An issuer typically seeks a PLR before it issues bonds to clear up an uncertainty about a tax requirement. A TAM, however, stems from an ongoing audit when the issuer ends up in a dispute with the IRS agent over an issue and they seek technical advice from IRS attorneys to resolve the matter.
As with a PLR, the IRS specifically states that a technical advice memorandum applies to specific facts and circumstances and should not be used or cited as precedent in future tax matters. However, also similar to a PLR, bond attorneys often look to such rulings for insight into the service’s thinking on various issues, especially on tax matters with little guidance.
Charles Henck, a partner at Ballard Spahr LLP who represented the borrower before the IRS in this case, said he is pleased with the TAM, which supports the views of most bond lawyers.
“This confirms what I think most of us believed the rules were ... that there’s no requirement, for example, that the collection facilities be owned by the same entity that owns the secondary facility,” he said.
Henck declined to identify the parties involved.
The field agent conducting the audit originally had concerns that the bond-financed facility was privately owned while the wastewater treatment facility was publicly owned.
The specific question posed to the IRS attorneys was whether the processing the private facility does before shipping the waste to the public wastewater treatment plant sufficiently qualifies as “necessary” — a key component of the tax code’s definition of a sewage facility.
The agency lawyers were asked if some additional relationship, such as common ownership or geographic proximity, would be required for the facility to qualify as a bond-financed sewage facility.
A wastewater treatment facility that meets the tax law’s definition of a sewage facility is an exempt facility that can be financed with private-activity bonds.
In this case, the pre-treatment facility built by the pharmaceutical company was designed to store and neutralize the wastewater, which included organic pollutants, produced by its manufacturing plant.
The facility includes equalization tanks, a concrete containment dike, a pH neutralization system, mixing equipment, an air scrubber, and a building containing laboratories, office space, and various industrial facilities.
The facility was built with bond proceeds loaned to the pharmaceutical company by an unnamed issuer. The bonds are payable from and secured by loan payments made by the company to the issuer.
The facility serves two functions. First, it collects wastewater produced by the pharmaceutical plant in tanks and equalizes the pressure, which reduces the impact of the wastewater on the public treatment facility by controlling peak discharge flow rates.
It then neutralizes the pH level of the wastewater to an acceptable level under the permit the company has with the municipality operating the public facility.
After the wastewater is collected, equalized, and neutralized, it is shipped to the public treatment plant.
IRS attorneys determined the private pretreatment of the wastewater constitutes a necessary part of the process, in part because the wastewater needs to be neutralized before being sent to the public facility.
If the pH is not neutralized, the bacteria the public facility uses to break down organic matter and destroy pathogens could be harmed.