[Federal Register Volume 59, Number 246 (Friday, December 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31424]


[[Page Unknown]]

[Federal Register: December 23, 1994]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8576]
RIN 1545-AR64

 

Definition of Sewage Facilities for Tax-exempt Bond Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations on the definition of 
sewage facilities. These 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.

DATES: These regulations are effective on December 23, 1994.
    For dates of applicability of these regulations, see 
Sec. 1.142(a)(5)-1(e).

FOR FURTHER INFORMATION CONTACT: Joanne E. Johnson at (202) 622-3110 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends 26 CFR part 1 to provide rules under section 
142(a)(5) of the Internal Revenue Code of 1986 (Code) allowing tax-
exempt, private activity bond financing for sewage facilities.
    On May 3, 1994, the IRS published in the Federal Register a notice 
of proposed rulemaking (59 FR 22773 [PS-34-93]) defining sewage 
facilities under section 142(a)(5). A number of written comments were 
received concerning the proposed regulations, and a public hearing was 
held on July 26, 1994. After consideration of all the written and oral 
comments, the proposed regulations are adopted as revised by this 
Treasury decision.

Explanation of Provisions

In General

    The final regulations define a sewage facility for purposes of 
section 142(a)(5) of the Code. Many commentators, including the United 
States Environmental Protection Agency, recommended expanding the 
definition of a sewage facility to include property for advanced or 
tertiary treatment. Commentators suggested that additional treatment of 
these types is often necessary due to the condition of the receiving 
water, rather than the characteristics of the influent wastewater. In 
response to this comment, the final regulations provide that qualifying 
sewage facilities include certain property used for advanced or 
tertiary treatment.
    Several commentators suggested modifying or eliminating the 
biochemical oxygen demand (BOD) limit contained in the proposed 
regulations because they believe that property that performs a sewage 
treatment function should qualify regardless of the BOD level of the 
wastewater. Other commentators maintained that the BOD limit undermines 
current water conservation policy and may be subject to manipulation. 
Clarification was also requested regarding the particular point in the 
sewage treatment process that the BOD limit must be measured.
    The BOD limit has been retained in the final regulations because it 
reasonably approximates the upper limit of the average daily raw 
wasteload concentration for most publicly owned treatment works and 
generally distinguishes between water pollution control and sewage 
treatment. However, the BOD limit has been modified in response to the 
comments received. The BOD limit does not apply if the failure to 
satisfy the limit results from the implementation of federal, state, or 
local water conservation measures. The final regulations also clarify 
that determination of the BOD limit is measured at the time the 
influent enters the sewage facility. Finally, an anti-abuse rule has 
been added to prevent distortions of BOD levels designed to circumvent 
the BOD limit.
    While some commentators requested that tax-exempt, private activity 
bond financing be permitted for pretreatment property, the final 
regulations retain the rule contained in the proposed regulations that 
excluded pretreatment property from the definition of a sewage 
facility. The IRS and Treasury have concluded that pretreatment 
property is more in the nature of water pollution control property, 
which is ineligible for tax-exempt, private activity bond financing.
    In response to comments, the final regulations clarify that sewage 
disinfection property is functionally related and subordinate to 
property qualifying for tax-exempt, private activity bond financing as 
a sewage facility. Furthermore, some commentators advised that it was 
not clear under the proposed regulations whether septage treatment 
property qualified as a sewage facility. The final regulations clarify 
that, since sewage sludge, as defined under 40 CFR 122.2, includes 
septage, septage treatment property qualifies as a sewage facility. In 
addition, under the final regulations septage treatment property is not 
subject to the BOD limit.
    Finally, in light of potential future technological advances in 
wastewater treatment, the final regulations provide that the 
Commissioner may determine that facilities using technologically 
advanced or innovative processes qualify as sewage facilities if these 
facilities perform functions that are consistent with the definition of 
sewage facilities contained in the final regulations.

Effective Date

    The final regulations apply to issues of bonds issued after 
February 21, 1995. A transitional rule is provided for certain 
refundings.

Special Analyses

    It has been determined that this Treasury decision 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, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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. A qualified bond 
includes an exempt facility bond, 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) Except as provided in paragraphs (b)(2) and (d) of this 
section, used for the secondary treatment of wastewater; however, 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 (measured at the time 
the influent enters the facility) (the BOD limit), this paragraph 
(b)(1)(i) applies only to the extent the treatment is for wastewater 
having an average daily raw wasteload concentration of BOD that does 
not exceed the BOD limit;
    (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 limit described in paragraph 
(b)(1)(i) of this section);
    (iii) Used for the advanced or tertiary treatment of wastewater but 
only to the extent used in connection with and after secondary 
treatment;
    (iv) Used for the collection, storage, use, processing, or final 
disposal of--
    (A) Wastewater, which property is necessary for such preliminary, 
primary, secondary, advanced, or tertiary treatment; or
    (B) Sewage sludge removed during such preliminary, primary, 
secondary, advanced, or tertiary treatment (without regard to the BOD 
limit described in paragraph (b)(1)(i) of this section);
    (v) Used for the treatment, collection, storage, use, processing, 
or final disposal of septage (without regard to the BOD limit described 
in paragraph (b)(1)(i) of this section); and
    (vi) Functionally related and subordinate to property described in 
this paragraph (b)(1), such as sewage disinfection property.
    (2) Special rules and exceptions--(i) Exception to BOD limit. A 
facility treating wastewater with an average daily raw wasteload 
concentration of BOD exceeding the BOD limit will not fail to qualify 
as a sewage facility described in paragraph (b)(1) of this section to 
the extent that the failure to satisfy the BOD limit results from the 
implementation of a federal, state, or local water conservation program 
(for example, a program designed to promote water use efficiency that 
results in BOD concentrations beyond the BOD limit).
    (ii) Anti-abuse rule for BOD limit. A facility does not satisfy the 
BOD limit if there is any intentional manipulation of the BOD level to 
circumvent the BOD limit (for example, increasing the volume of water 
in the wastewater before the influent enters the facility with the 
intention of reducing the BOD level).
    (iii) Authority of Commissioner. In appropriate cases upon 
application to the Commissioner, the Commissioner may determine that 
facilities employing technologically advanced or innovative treatment 
processes qualify as sewage facilities if it is demonstrated that these 
facilities perform functions that are consistent with the definition of 
sewage facilities described in paragraph (b)(1) of this section.
    (3) Other applicable definitions--(i) Advanced or tertiary 
treatment 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, or appendix A to part 423.
    (iii) Preliminary treatment 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 a process that preconditions wastewater to 
neutralize or remove toxic, priority, or nonconventional pollutants 
that could adversely affect sewers or inhibit a preliminary, primary, 
secondary, advanced, or tertiary treatment operation.
    (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 appendix A 
to 40 CFR part 423.
    (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 is defined in 40 CFR 122.2 and includes 
septage.
    (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 of wastewater 
(whether or not this treatment is necessary to perform preliminary, 
primary, secondary, advanced, or tertiary 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, as defined in 33 U.S.C. 1362, 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--(1) In general. This section applies to issues 
of bonds issued after February 21, 1995.
    (2) Refundings. In the case of a refunding bond issued to refund a 
bond to which this section does not apply, the issuer need not apply 
this section to that refunding bond. This paragraph (e)(2) applies only 
if the weighted average maturity of the refunding bonds, as described 
in section 147(b), is not greater than the remaining weighted average 
maturity of the refunded bonds.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: December 2, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-31424 Filed 12-22-94; 8:45 am]
BILLING CODE 4830-01-U