WASHINGTON — The Treasury Department took another crack at long-pending regulations for bond-financed solid-waste disposal facilities yesterday, issuing updated rules for the second time after the original ones proposed in 2004 were criticized.

Bond lawyers yesterday said the 35 pages of new proposed rules — which are to be used to determine whether solid-waste facilities can be financed with exempt facility private-activity bonds — are a significant improvement from the previous proposed rules.

“I think these are a huge improvement. There’s evidence of a lot of hard work from the folks who worked on them,” said Charles Henck, an attorney with Ballard Spahr LLP here. “They’re an improvement not only over the previously proposed regs, but they answer a lot of questions that had been raised on the regulations that they replace.”

“These regulations are full of bright lines and have flexible allocation rules, so they should be highly administrable,” said Jeremy Spector, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC. “In addition, their timing couldn’t be better given the [alternative minimum tax] relief provided by [the American Recovery and Reinvestment Act] for these financings in 2009 and 2010.”

The Treasury asked that public comments on the proposed rules be submitted by Dec. 15 and said it will be holding a public hearing on the proposals on Jan. 5.

Treasury officials said that, due to the public reaction five years ago, they decided to “propose extensive changes” to the 2004 regulations instead of including the changes in final rules.

Even though they are only re-proposed, the Treasury is giving the muni bond community the opportunity to apply them immediately and until 60 days after the publication of final rules rather than the existing regulations that have been in place since 1972.

The new proposed rules define solid waste generally as garbage, refuse, and other solid material derived from any agricultural, commercial, consumer, or industrial operation. The waste must be either used, or residual, material that is expected to enter a solid-waste disposal process within a reasonable time frame.

The fact that the Treasury decided to specifically define solid waste as a material is significantly more helpful than the 2004 proposed regulations, market participants said.

“There is a workable definition of solid waste,” Henck said. “There may be some clarification required, but that was one of the things that, frankly, was missing from the prior version.”

The 2004 proposed rules attempted to define solid waste by how it was processed — if a material is solid and introduced into a final disposal process, conversion process, recovery process, or transformation process, and did not fall into specific excluded categories, it qualified as solid waste. But the Treasury said it redefined because of market participants’ complaints.

The proposed rules still identify specific waste categories that cannot be considered solid waste. Specifically, the department states that virgin material, solids within liquids and liquid waste, certain precious metals such as gold and platinum, hazardous materials, and radioactive materials do not qualify as solid waste. Furthermore, any material acquired by a party that intends to store or resell it to the general public does not qualify as solid waste.

The new proposed rules , however, eliminate the so-called No-Value Test, as was proposed in 2004. The Treasury said the test, which is in the original 1972 rules and states that solid waste is property that has no market or other value at the place it is located, “is unadministrable.” The test and how it should be applied has been a point of contention numerous times between the Internal Revenue Service and the bond community.

“The long-running controversy with [the IRS] over whether certain waste materials have value is now over for transactions relying on these regulations,” Spector said.

The Treasury supplements its definition of solid waste by defining used and residual material. Used material is any material that has been used previously as an agricultural, commercial, consumer, or industrial product or component of a product. The definition is intended to be “interpreted broadly to encompass popularly understood uses of materials,” but should not be applied to small products incorporated into a larger product by a manufacturer, the Treasury said.

Residual material is defined as any residual by-product or excess raw material left over after the production of any agricultural, commercial, consumer, or industrial product — provided that the material constitutes less than 5% of all the material made in the production process, and its value is expected to be lower than the product. The Treasury noted that this definition is intended to encompass a wide range of products from waste coal to by-products from agricultural operations, and also should “further encourage innovation in the full use of all resources.”

The proposed rules define a solid-waste disposal facility as any facility that processes solid waste in a qualified disposal process, performs a preliminary function leading up to disposal, or is functionally related and subordinate to the processing or preliminary facility.

Specifically, the document identifies three eligible types of disposal processes: a final disposal process, an energy conversion process, and a recycling process. But the Treasury stated that in order to ensure the regulations remain flexible and encourage future waste-handling innovations, a solid-waste disposal function can employ any biological, engineering, industrial, or technological method, as long as it is not expressly prohibited in the regulations.

A final disposal process includes placing solid waste in a landfill, incinerating it without capturing useful energy, or containing it indefinitely with the expectation the waste has no current or future use, the Treasury said.

An energy conversion process includes thermal, chemical, and other processes that create and capture useful energy. A conversion process can still qualify as a solid waste disposal process if 35% or less of a non-solid waste material is introduced in that process.

In response to public comments and further consideration, the Treasury decided to combine the recovery process and transformation process it first suggested in 2004 into a single recycling process. It defines this as a process for disposing of solid waste in a way that reconstitutes, transforms, or otherwise processes the solid waste into a useful product. It includes processes like decontamination, melting, re-pulping and shredding.

The recycling process will have ended when the first useful product is completed. A useful product is a product that is useful for consumption in individual, commercial, industrial, or agricultural use and could be sold for that purpose, regardless of whether or not it actually is sold.

Aviva Roth and Timothy Jones, both of IRS’ associate chief counsel’s office for the financial institutions and products division, were the principal authors of the document.

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