WASHINGTON — The Treasury Department may not modify a planned test of proposed solid-waste bond rules criticized by market participants, but could provide a remediation process for issuers that run afoul of the test, department officials indicated yesterday.

At a public hearing held on the rules by the Internal Revenue Service, Charles Henck, an attorney with Ballard Spahr LLP who spoke on behalf of the National Association of Bond Lawyers, told Treasury and IRS officials that the so-called 65% test for facilities that handle a combination of solid waste and other materials could prove unduly harsh to those that are forced to deal with unforeseen circumstances in a single year.

Under the proposed test, if 65% of the input to a mixed-use facility is solid waste, all the costs of the facility can be considered part of the solid-waste process and, as a result, be financed with tax-exempt bonds. However, the 65% ratio must be met each year.

NABL argued in a comment letter submitted to the Treasury last month that the test should be applied on an average annual basis, because facilities that normally exceed that margin could run into trouble from a single bad year stemming from unusual circumstances, such as a labor strike or a natural disaster.

“A single aberrant year shouldn’t cause a problem,” Henck, the only witness at the hearing, told federal officials.

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

“There’s already has a pretty high margin for error in it,” he said. “Why isn’t that high margin for error sufficient with an annual test?”

Aviva Roth, an attorney in the IRS’ associate chief counsel’s office who played a key role in writing the rules, suggested instead that the department establish a streamlined process for issuers to follow if they experience an atypical year.

“If the regs could somehow provide some type of remedial action that would be more automatic,” she said, thinking out loud, “something you could do when the year came and you were at 50% and you sent the letter, and there was some sort of streamlined process.”

Henck said such a process would be an improvement, but made clear he favors adopting an average annual test.

Meanwhile, there seemed to be consensus between Henck and agency officials that the Treasury should scrap a provision in the proposed rules that would stipulate residual material, a type of solid waste, must constitute less than 5% of all the material made in the production process.

Several groups told the Treasury in comment letters that this test would exclude all sorts of material that is widely considered solid waste.

Henck said yesterday that the problem isn’t the number, but the existence of any specific percentage. “Frankly … the 5% test simply [should] be eliminated, and we can’t think of any particular percentage that will work,” he said. “Waste is what it is, and whether it’s 50% or 70% or 10% of what comes from the process, it’s still waste.”

Cross asked Henck whether the entire concept of residual material needs to go, or if the problem is just the test. Henck told him that the concept would be “quite workable” without the percentage limit.

Henck also criticized the fact that the proposed rules ban all hazardous waste from being considered solid waste. He argued that establishing a widespread ban misinterprets the legislative intent of Congress. Further, federal laws on solid waste do not delve into whether the material was dangerous or not, he said, adding that a ban “simply isn’t a justified conclusion.”

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