[Federal Register Volume 59, Number 84 (Tuesday, May 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10584]


[[Page Unknown]]

[Federal Register: May 3, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-34-93]
RIN 1545-AR64

 

Definition of Sewage Facilities for Tax-exempt Bond Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations on the definition 
of sewage facilities. The proposed regulations reflect changes to the 
law made by the Tax Reform Act of 1986 and affect taxpayers who seek 
tax-exempt bond financing for sewage facilities. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented 
at the public hearing scheduled for 10 a.m. on July 26, 1994, must be 
received by July 5, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-34-93), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-34-93), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, 
Washington, DC.
    The public hearing will be held in the Commissioner's Conference 
Room, Internal Revenue Building, room 3313, 1111 Constitution Avenue 
NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joanne E. 
Johnson at (202) 622-3110; concerning submissions and the hearing, 
Carol Savage, (202) 622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 103(a) generally provides that the interest on obligations 
of a State or political subdivision thereof is excluded from gross 
income. Section 103(b)(1) provides, however, that section 103(a) does 
not apply to any private activity bond unless the bond is a qualified 
bond. Section 141(e) defines a qualified bond to include an exempt 
facility bond which, under section 142(a)(5), includes an issue at 
least 95 percent of the net proceeds of which are used to provide 
sewage facilities.
    Until the Tax Reform Act of 1986 (1986 Act), both sewage disposal 
facilities and water pollution control facilities constituted exempt 
facilities under former sections 103(b)(4)(E) and 103(b)(4)(F), 
respectively, the predecessors to existing section 142. Section 1.103-
8(f)(2)(i) defines sewage disposal facilities to mean any property used 
for the collection, storage, treatment, utilization, processing, or 
final disposal of sewage.
    The 1986 Act eliminated the exempt facility exemptions for air and 
water pollution control facilities, while retaining the exemption for 
sewage disposal facilities (renamed sewage facilities by the 1986 Act) 
under section 142(a)(5). Neither section 142 nor the regulations issued 
under section 103(b)(4) define sewage. As a result, it has become 
important to define the facilities eligible for private activity bond 
financing as sewage facilities under section 142(a)(5).

Explanation of Provisions

Definition of Sewage Facility

    The proposed regulations define a sewage facility for purposes of 
section 142(a)(5). A facility may satisfy the definition of a sewage 
facility regardless whether wastewater originates from a domestic, a 
commercial, or an industrial source. The proposed regulations, in 
effect, generally distinguish between sewage treatment facilities and 
water pollution control facilities. The proposed regulations define 
sewage facilities by reference to the operations historically performed 
at most publicly-owned treatment works (POTW). On the other hand, 
because toxic, priority, and nonconventional pollutants are more in the 
nature of water pollutants, the regulations consider treatment of these 
pollutants as ordinarily not performed in sewage facilities.
    The proposed regulations provide that sewage facilities include 
property used for the secondary treatment of wastewater but only to the 
extent the treatment is for wastewater having an average daily raw 
wasteload concentration of biochemical oxygen demand (BOD) that does 
not exceed 350 milligrams per liter as oxygen. Thus, to the extent the 
wastewater treated by the property has an average daily raw wasteload 
concentration of BOD exceeding 350 milligrams per liter as oxygen, then 
the property used for the secondary treatment of the excess is not a 
sewage facility. The limitation is intended to reasonably approximate 
the upper limit of the average daily raw wasteload concentration for 
most POTWs.
    The proposed regulations further provide that any property used for 
the preliminary and/or primary treatment of wastewater used in 
connection with secondary treatment qualifies as a sewage facility. 
Sewage facilities also include related property used for the 
collection, storage, use, processing, or final disposal of wastewater 
or sewage sludge and property functionally related and subordinate to a 
sewage facility.
    Generally, other treatment of wastewater is not sewage treatment. 
Thus, for example, sewage facilities, including functionally related 
and subordinate property, do not include property used for the 
pretreatment, advanced treatment, or tertiary treatment of wastewater, 
whether or not the treatment is necessary for preliminary, primary, or 
secondary treatment.
    For property that has both a sewage treatment function and another 
function, such as pretreatment or, in certain cases, secondary 
treatment of wastewater having an average daily raw wasteload 
concentration of BOD in excess of 350 milligrams per liter as oxygen, 
the proposed regulations provide an allocation rule to permit the 
portion of the property allocable to sewage treatment to be financed as 
part of an exempt facility issue.
    The IRS solicits comments on how best to address technological 
advances to wastewater treatment processes within the definition of 
sewage facilities.

Proposed Effective Dates

    The regulations are proposed to apply to issues of bonds issued 60 
days after publication of the final regulations in the Federal 
Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for July 26, 1994, at 10 a.m., 
in the Commissioner's Conference Room, Internal Revenue Building, room 
3313, 1111 Constitution Avenue, NW., Washington, DC. Because of access 
restrictions, visitors will not be admitted beyond the Internal Revenue 
Building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and an outline of the topics to be discussed 
and the time to be devoted to each topic (signed original and eight (8) 
copies) by July 5, 1994.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Joanne E. Johnson, 
Office of Assistant Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


    Par. 2. Section 1.142(a)(5)-1 is added to read as follows:


Sec. 1.142(a)(5)-1  Exempt facility bonds: Sewage facilities.

    (a) In general. Under section 103(a), a private activity bond is a 
tax-exempt bond only if it is a qualified bond. Qualified bonds include 
exempt facility bonds, defined as any bond issued as part of an issue 
95 percent or more of the net proceeds of which are used to provide a 
facility specified in section 142. One type of facility specified in 
section 142(a) is a sewage facility. This section defines the term 
sewage facility for purposes of section 142(a).
    (b) Definitions--(1) Sewage facility defined. A sewage facility is 
property--
    (i) Used for the secondary treatment of wastewater but, for 
property treating wastewater reasonably expected to have an average 
daily raw wasteload concentration of biochemical oxygen demand (BOD) 
that exceeds 350 milligrams per liter as oxygen, only to the extent the 
treatment is for wastewater having an average daily raw wasteload 
concentration of BOD that does not exceed 350 milligrams per liter as 
oxygen (see paragraph (d) of this section regarding permissible 
allocations of costs);
    (ii) Used for the preliminary and/or primary treatment of 
wastewater but only to the extent used in connection with secondary 
treatment (without regard to the BOD limitation described in paragraph 
(b)(1)(i) of this section);
    (iii) Used for the collection, storage, use, processing, or final 
disposal of--
    (A) Wastewater, which property is necessary for such preliminary, 
primary, or secondary treatment; or
    (B) Sewage sludge removed during such preliminary, primary, or 
secondary treatment; and
    (iv) Functionally related and subordinate to property described in 
this paragraph (b)(1).
    (2) Other applicable definitions--(i) Advanced or tertiary 
treatment generally means the treatment of wastewater after secondary 
treatment. Advanced or tertiary treatment ranges from biological 
treatment extensions to physical-chemical separation techniques such as 
denitrification, ammonia stripping, carbon adsorption, and chemical 
precipitation.
    (ii) Nonconventional pollutants are any pollutants that are not 
listed in 40 CFR 401.15, 401.16, part 423, app. A.
    (iii) Preliminary treatment generally means treatment that removes 
large extraneous matter from incoming wastewater and renders the 
incoming wastewater more amenable to subsequent treatment and handling.
    (iv) Pretreatment means processes that equalize flow and loadings, 
or that precondition wastewater to neutralize or remove toxic, 
priority, nonconventional pollutants, and other wastes that could 
adversely affect sewers or inhibit preliminary, primary, or secondary 
treatment operations.
    (v) Primary treatment means treatment that removes material that 
floats or will settle, usually by screens or settling tanks.
    (vi) Priority pollutants are those pollutants listed in 40 CFR part 
423, app. A.
    (vii) Secondary treatment means the stage in sewage treatment in 
which a bacterial process (or an equivalent process) consumes the 
organic parts of wastes, usually by trickling filters or an activated 
sludge process.
    (viii) Sewage sludge means sludge as defined in 40 CFR 122.2.
    (ix) Toxic pollutants are those pollutants listed in 40 CFR 401.15.
    (c) Other property not included in the definition of a sewage 
facility. Property other than property described in paragraph (b)(1) of 
this section is not a sewage facility. Thus, for example, property is 
not a sewage facility, or functionally related and subordinate 
property, if the property is used for pretreatment, advanced treatment, 
or tertiary treatment of wastewater (whether or not this treatment is 
necessary to perform preliminary, primary, or secondary treatment), or 
the related collection, storage, use, processing, or final disposal of 
the wastewater. In addition, property used to treat, process, or use 
wastewater subsequent to the time the wastewater can be discharged into 
navigable waters is not a sewage facility.
    (d) Allocation of costs. In the case of property that has both a 
use described in paragraph (b)(1) of this section (a sewage treatment 
function) and a use other than sewage treatment, only the portion of 
the cost of the property allocable to the sewage treatment function is 
taken into account as an expenditure to provide sewage facilities. The 
portion of the cost of property allocable to the sewage treatment 
function is determined by allocating the cost of that property between 
the property's sewage treatment function and any other uses by any 
method which, based on all the facts and circumstances, reasonably 
reflects a separation of costs for each use of the property.
    (e) Effective date. This section applies to issues of bonds issued 
60 days after publication of the final regulations in the Federal 
Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-10584 Filed 5-2-94; 8:45 am]
BILLING CODE 4830-01-U