[Federal Register Volume 69, Number 90 (Monday, May 10, 2004)]
[Proposed Rules]
[Pages 25856-25861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10500]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-140492-02]
RIN 1545-BD04


Definition of Solid Waste Disposal 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 solid waste disposal facilities for purposes of the rules applicable 
to tax-exempt bonds issued by State and local governments. These 
regulations provide guidance to State and local governments that issue 
tax-exempt bonds to finance solid waste disposal facilities and to 
taxpayers that use those facilities. This document also contains a 
notice of public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by August 9, 
2004. Outlines of topics to be discussed at the public hearing 
scheduled for August 11,

[[Page 25857]]

2004, at 10 a.m., must be received by August 4, 2004.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-140492-02), room 5203, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-140492-02), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically to the IRS Internet site at http://www.irs.gov/regs, or 
via the Federal eRulemaking Portal at http://www.regulations.gov (IRS--
REG-140492-02). The public hearing will be held in the auditorium, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Michael P. 
Brewer, (202) 622-3980; concerning submissions and the hearing, Sonya 
Cruse, (202) 622-4693 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Generally, interest on a State or local bond is excluded from gross 
income under section 103 of the Internal Revenue Code (Code). However, 
section 103(b) provides that the exclusion does not apply to a private 
activity bond unless the bond is a qualified bond. Section 141(e) 
defines qualified bond to include an exempt facility bond that meets 
certain requirements. Section 142(a) lists the categories of exempt 
facility bonds, which include bonds for solid waste disposal facilities 
under section 142(a)(6).
    Section 1.103-8(f)(2)(ii)(a) of the Income Tax Regulations 
generally defines solid waste disposal facilities as any property or 
portion thereof used for the collection, storage, treatment, 
utilization, processing, or final disposal of solid waste. Section 
1.103-8(f)(2)(ii)(b) provides that the term solid waste has the same 
meaning as in former section 203(4) of the Solid Waste Disposal Act (42 
U.S.C. 3252(4)), as quoted in Sec.  1.103-8(f)(2)(ii)(b), except that 
material will not qualify as solid waste unless, on the date of issue 
of the obligations issued to provide the facility to dispose of the 
waste material, it is property that is useless, unused, unwanted, or 
discarded solid material that has no market or other value at the place 
where the property is located (the no-value test). Thus, under the 
existing regulations, when any person is willing to purchase the 
property, at any price, the material is not waste. However, if any 
person is willing to remove the property at his own expense but is not 
willing to purchase it at any price, the material is waste under the 
existing regulations.
    Former section 203(4) of the Solid Waste Disposal Act, as quoted in 
Sec.  1.103-8(f)(2)(ii)(b), provides that the term solid waste means,

garbage, refuse, and other discarded solid materials, including 
solid-waste materials resulting from industrial, commercial, and 
agricultural operations, and from community activities, but does not 
include solids or dissolved material in domestic sewage or other 
significant pollutants in water resources, such as silt, dissolved 
or suspended solids in industrial waste water effluents, dissolved 
materials in irrigation return flows or other common water 
pollutants.

    Section 1.103-8(f)(2)(ii)(c) states that a facility that disposes 
of solid waste by reconstituting, converting, or otherwise recycling it 
into material that is not waste also qualifies as a solid waste 
disposal facility if solid waste constitutes at least 65 percent, by 
weight or volume, of the total materials introduced into the recycling 
process. Such a recycling facility does not fail to qualify as a solid 
waste disposal facility under the existing regulations solely because 
it operates at a profit.
    Section 17.1(a) of the temporary Income Tax Regulations generally 
provides that, in the case of property that has both a solid waste 
disposal function and a function other than the disposal of solid 
waste, only the portion of the cost of the property allocable to the 
function of solid waste disposal is taken into account as an 
expenditure to provide solid waste disposal facilities. However, under 
Sec.  17.1(a), a facility that otherwise qualifies as a solid waste 
disposal facility will not be treated as having a function other than 
solid waste disposal merely because material or heat that has utility 
or value is recovered or results from the disposal process. Section 
17.1(a) provides that, when materials or heat are recovered, the waste 
disposal function includes the processing of those materials or heat 
that occurs in order to put them into the form in which the materials 
or heat are in fact sold or used, but does not include further 
processing that converts the materials or heat into other products.
    Section 17.1(b) provides that the portion of the cost of property 
allocable to solid waste disposal is determined by allocating the cost 
of the property between the property's solid waste disposal function 
and any other functions by any method which, with reference to all the 
facts and circumstances with respect to the property, reasonably 
reflects a separation of costs for each function of the property.
    In Notice 2002-51 (2002-2 C.B. 131) the IRS and Treasury Department 
requested public comments on the application of section 142(a)(6) to 
recycling facilities. Notice 2002-51 also invited comments on any other 
issues concerning the application of that Code provision.
    In response to the Notice, commentators suggested that the rules 
governing exempt facility bonds for solid waste disposal facilities 
should be consistent with national policies to encourage, facilitate, 
and increase recycling. For example, commentators stated that the rules 
should not deny tax-exempt financing to recycling while providing such 
financing to landfills and municipal waste incinerators.
    Commentators suggested revisions to the no-value test used for 
determining whether material is solid waste. For example, commentators 
suggested that material that has a market or other value at the place 
it is located only by reason of its value for recycling should not be 
considered to have a market or other value. Commentators also suggested 
that material acquired by a recycler should qualify as solid waste if 
the amounts paid to the packer, collector or similar party are not in 
excess of the cost of transporting and handling the material. Some 
commentators suggested that the determination of whether material is 
waste should be made at the point of generation prior to the time costs 
are incurred to divert the material from the waste stream.
    Commentators also suggested that the determination of when the 
waste recycling process stops should not depend on whether the activity 
is being carried out by a single party or multiple parties, or whether 
there has been a change of ownership of the material.
    The IRS and Treasury Department have considered these comments, and 
the proposed regulations contained in this document (the proposed 
regulations) implement a number of these recommendations.

Explanation of Provisions

I. Solid Waste

    The proposed regulations contain proposed amendments to 26 CFR part 
1 regarding exempt facility bonds for solid waste disposal facilities. 
In light of the changes that have occurred in the waste recycling 
industry since the existing regulations were issued in 1972, the 
proposed regulations eliminate the no-

[[Page 25858]]

value test for determining whether material is solid waste. The 
proposed regulations retain the definition of solid waste under former 
section 203(4) of the Solid Waste Disposal Act, quoted above, and 
provide guidance for determining whether material constitutes 
``garbage, refuse and other discarded solid materials'' under that 
definition.
    Thus, the proposed regulations provide that the term solid waste 
means garbage, refuse, and other discarded solid materials, including 
solid-waste materials resulting from industrial, commercial, and 
agricultural operations, and from community activities, but does not 
include solids or dissolved material in domestic sewage or other 
significant pollutants in water resources, such as silt, dissolved or 
suspended solids in industrial waste water effluents, dissolved 
materials in irrigation return flows or other common water pollutants.
    For these purposes, the proposed regulations provide that garbage, 
refuse and other discarded solid materials means material that is solid 
and that is introduced into a final disposal process, conversion 
process, recovery process, or transformation process (as those terms 
are defined in the proposed regulations and described in part II below) 
unless the material falls within one of several categories of excluded 
items.
    The first category of material that does not constitute solid waste 
is material that is introduced into a conversion process if the 
material is either: (1) A fossil fuel; or (2) any material that is 
grown, harvested, produced, mined, or otherwise created for the 
principal purpose of converting the material to heat, hot water, steam, 
or another useful form of energy. For this purpose, material is not 
treated as grown, harvested, produced, mined, or otherwise created for 
the principal purpose of converting the material to heat, hot water, 
steam, or another useful form of energy just because an operation is 
performed on the material to make the material more conducive to being 
converted to heat, hot water, or steam. For example, if material that 
is not otherwise grown, harvested, produced, mined, or created for the 
principal purpose of converting the material to a useful form of energy 
is formed into pellets to make the material more conducive to being 
incinerated to produce steam, the creation of pellets does not cause 
the material to be produced or created for the principal purpose of 
converting the material to steam.
    The second category of material that does not constitute solid 
waste is any precious metal that is introduced into a recovery process.
    The regulations are reserved with respect to any additional 
category of excluded material that may be specified with respect to a 
transformation process.
    Under the proposed regulations, hazardous material is not solid 
waste if the material is disposed of at a facility that is subject to 
final permit requirements under subtitle C of title II of the Solid 
Waste Disposal Act (as in effect on October 22, 1986, the date of the 
enactment of the Tax Reform Act of 1986). Thus, under the proposed 
regulations, a hazardous waste disposal facility described in section 
142(h)(1) would not qualify as a solid waste disposal facility.
    Finally, the proposed regulations provide that radioactive material 
is not solid waste.

II. Solid Waste Disposal Facility

A. In General

    The proposed regulations provide that a facility is a solid waste 
disposal facility to the extent that the facility is: (1) Used to 
perform a solid waste disposal function (as defined in the proposed 
regulations and discussed in part II, B below); (2) used to perform a 
preliminary function (as defined in the proposed regulations and 
discussed in part II, C below); or (3) functionally related and 
subordinate (within the meaning of Sec.  1.103-8(a)(3)) to a facility 
that is used to perform a solid waste disposal function or a 
preliminary function.

B. Solid Waste Disposal Function

    The proposed regulations define solid waste disposal function as 
the processing of solid waste in (1) a final disposal process, (2) a 
conversion process, (3) a recovery process, or (4) a transformation 
process.
1. Final Disposal Process
    Under the proposed regulations, a final disposal process is (1) the 
placement of material in a landfill or (2) the incineration of material 
without any useful energy being captured. Comments are requested on 
whether other types of processes should be included in the definition 
of final disposal process.
2. Conversion Process
    The proposed regulations define conversion process as a process in 
which material is incinerated and heat, hot water, or steam is created 
and captured as useful energy. For this purpose, the conversion process 
begins with the incineration of material and ends at the point at which 
the latest of heat, hot water, or steam is created. Thus, the 
conversion process ends before any transfer or distribution of heat, 
hot water or steam. Comments are requested on the definition of 
conversion process in the proposed regulations, including whether the 
definition should include processes in which useful energy in a form 
other than heat, hot water, or steam is created.
3. Recovery Process
    The proposed regulations define recovery process as a process that 
starts with the melting or re-pulping of material to return the 
material to a form in which the material previously existed for use in 
the fabrication of an end product and ends immediately before the 
material is processed in the same or substantially the same way that 
virgin material is processed to fabricate the end product.
    The proposed regulations further provide that, if an end product is 
fabricated entirely from non-virgin material, the recovery process ends 
immediately before the non-virgin material is processed in the same or 
substantially the same way that virgin material is processed in a 
comparable fabrication process that uses only virgin material or a 
combination of virgin and non-virgin material.
    The proposed regulations also specify that refurbishing, repair, or 
similar activities are not recovery processes.
    Comments are requested on the definition of recovery process in the 
proposed regulations, including whether the definition should include 
processes, other than melting or re-pulping, that return material to a 
form in which the material previously existed.
4. Transformation Process
    The IRS and Treasury Department recognize that certain processes in 
which material is transformed for use in the creation of a useful 
product (transformation processes) should be treated as solid waste 
disposal functions. A transformation process could include, for 
example, shredding used tires for use as roadbed material. However, 
defining a transformation process requires clear criteria that 
distinguish a transformation process from a manufacturing or production 
process that uses material other than solid waste. The proposed 
regulations reserve on the definition of transformation process so that 
the public may comment on how the definition should be crafted to meet 
this objective within the context of the proposed regulations. Comments 
are requested in particular on whether the

[[Page 25859]]

definition of a transformation process should be limited to the 
processing of particular types of materials to produce certain 
categories of products, and, if so, what types of materials and which 
categories of products should be included.

C. Preliminary Function

    A facility is a solid waste disposal facility under the proposed 
regulations to the extent that the facility is used to perform a 
preliminary function. For this purpose, a preliminary function is the 
collection, separation, sorting, storage, treatment, processing, 
disassembly, or handling of solid material that is preliminary and 
directly related to a solid waste disposal function. However, no 
portion of a collection, separation, sorting, storage, treatment, 
processing, disassembly, or handling activity is a preliminary function 
unless, for each year while the issue is outstanding, more than 50 
percent, by weight or volume, of the total materials that result from 
the entire activity (both the part that is preliminary and directly 
related to a solid waste disposal function and the part that is not 
preliminary and directly related to a solid waste disposal function) is 
solid waste. For example, if a facility sorts material and some of the 
sorted material is processed in a solid waste disposal function and 
some of the sorted material is processed in another manner, a portion 
of the sorting facility is a solid waste disposal facility if, for each 
year while the issue is outstanding, more than 50 percent, by weight or 
volume, of all the sorted material is solid waste.

D. Mixed-Function Facilities

    The proposed regulations provide that, in general, if a facility is 
used to perform both (1) a solid waste disposal function or a 
preliminary function, and (2) another function, then the costs of the 
facility allocable to the solid waste disposal function or the 
preliminary function are determined using any reasonable method, based 
on all the facts and circumstances. This rule applies, for example, if 
a facility is used (1) to process solid waste in a recovery process and 
(2) to perform another function that is neither a solid waste disposal 
function (because it does not process solid waste in a final disposal 
process, conversion process, recovery process, or transformation 
process) nor a preliminary function (because it is not preliminary and 
directly related to a solid waste disposal function).
    The proposed regulations also contain a special rule to determine 
the portion of the costs of property that are allocable to a solid 
waste disposal function if the property is used to perform a final 
disposal process, conversion process, recovery process, or 
transformation process and the inputs to the process consist of solid 
waste and material that is not solid waste. Under this special rule, 
the portion of the costs of property used to perform such a process 
that are allocable to a solid waste disposal function equals the lowest 
percentage of solid waste processed in the process in any year while 
the issue is outstanding. The percentage of solid waste processed in 
such a process for any year is the percentage, by weight or volume, of 
the total materials processed in the process that constitute solid 
waste for that year. If, however, for each year while the issue is 
outstanding, solid waste constitutes at least 80 percent, by weight or 
volume, of the total materials processed in the process, all of the 
costs of the property used to perform the process are allocable to a 
solid waste disposal function.

Proposed Effective Date

    The proposed regulations will apply to bonds that are: (1) Sold on 
or after the date that is 60 days after the date of publication of 
final regulations under section 142(a)(6) in the Federal Register; and 
(2) subject to section 142. However, the proposed regulations provide 
that an issuer is not required to apply the regulations to bonds 
described in the preceding sentence that are issued to refund a bond to 
which the regulations do not apply if the weighted average maturity of 
the refunding bonds is not longer than the weighted average maturity of 
the refunded bonds. Section 1.103-8(f)(2) of the Income Tax Regulations 
and Sec.  17.1 of the temporary Income Tax Regulations will not apply 
to bonds that are subject to the final regulations under section 
142(a)(6).

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the 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 (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for August 11, 2004, at 10 a.m. 
in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the lobby 
more than 30 minutes before the hearing starts. For information about 
having your name placed on the building access list to attend the 
hearing, see the FOR FURTHER INFORMATION CONTACT section of this 
preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments by August 9, 2004 and submit an outline of the topics to be 
discussed and the amount of time to be devoted to each topic by August 
4, 2004.
    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.
    Comments are requested on all aspects of the proposed regulations, 
including those aspects for which specific requests for comments are 
set forth above.

Drafting Information

    The principal authors of these regulations are Michael P. Brewer, 
Timothy L. Jones and Rebecca L. Harrigal, Office of Chief Counsel, IRS 
(TE/GE). 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:

[[Page 25860]]

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)(6)-1 is added to read as follows:


Sec.  1.142(a)(6)-1  Exempt facility bonds: solid waste disposal 
facilities.

    (a) In general. Section 103(a) provides that, generally, interest 
on a state or local bond is not included in gross income. However, this 
exclusion does not apply to any private activity bond that is not a 
qualified bond. Section 141(e) defines qualified bond to include an 
exempt facility bond that meets certain requirements. Section 142(a) 
defines exempt facility bond as any bond issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to provide 
a facility specified in section 142(a). One type of facility specified 
in section 142(a) is a solid waste disposal facility. This section 
defines the term solid waste disposal facility for purposes of section 
142(a).
    (b) Solid waste disposal facility--(1) In general. The term solid 
waste disposal facility means a facility to the extent that the 
facility is--
    (i) Used to perform a solid waste disposal function (within the 
meaning of paragraph (b)(2) of this section);
    (ii) Used to perform a preliminary function (within the meaning of 
paragraph (b)(3) of this section); or
    (iii) Functionally related and subordinate (within the meaning of 
Sec.  1.103-8(a)(3)) to a facility that is used to perform a solid 
waste disposal function or a preliminary function.
    (2) Solid waste disposal function. A solid waste disposal function 
is the processing of solid waste (as defined in paragraph (c) of this 
section) in--
    (i) A final disposal process (as defined in paragraph (d) of this 
section);
    (ii) A conversion process (as defined in paragraph (e) of this 
section);
    (iii) A recovery process (as defined in paragraph (f) of this 
section); or
    (iv) A transformation process (as defined in paragraph (g) of this 
section).
    (3) Preliminary function. A preliminary function is the collection, 
separation, sorting, storage, treatment, processing, disassembly, or 
handling of solid material that is preliminary and directly related to 
a solid waste disposal function. However, no portion of a collection, 
separation, sorting, storage, treatment, processing, disassembly, or 
handling activity is a preliminary function unless, for each year while 
the issue is outstanding, more than 50 percent, by weight or volume, of 
the total materials that result from the entire activity is solid 
waste.
    (4) Mixed-function facilities. Paragraph (h) of this section 
provides rules for determining the portion of a facility that is a 
solid waste disposal facility for a facility that is used to perform--
    (i) A solid waste disposal function or a preliminary function; and
    (ii) Another function.
    (c) Solid Waste--(1) In general. For purposes of this section, the 
term solid waste means garbage, refuse, and other discarded solid 
materials (as defined in paragraph (c)(2) of this section), including 
solid'waste materials resulting from industrial, commercial, and 
agricultural operations, and from community activities, but does not 
include solids or dissolved material in domestic sewage or other 
significant pollutants in water resources, such as silt, dissolved or 
suspended solids in industrial waste water effluents, dissolved 
materials in irrigation return flows or other common water pollutants. 
Liquid or gaseous waste is not solid waste.
    (2) Garbage, refuse and other discarded solid materials--(i) In 
general. For purposes of paragraph (c)(1) of this section, garbage, 
refuse and other discarded solid materials means material that is solid 
and that is introduced into a final disposal process, conversion 
process, recovery process, or transformation process unless the 
material is described in paragraph (c)(2)(ii), (iii), (iv), (v) or (vi) 
of this section.
    (ii) Certain material introduced into a conversion process. 
Material is described in this paragraph (c)(2)(ii) if the material is 
introduced into a conversion process and the material is--
    (A) A fossil fuel; or
    (B) Any material that is grown, harvested, produced, mined, or 
otherwise created for the principal purpose of converting the material 
to heat, hot water, steam, or another useful form of energy. For 
example, organic material that is closed-loop biomass under section 
45(c) is described in this paragraph (c)(2)(ii) if the material is 
introduced into a conversion process. Material is not treated as 
described in this paragraph (c)(2)(ii) just because an operation is 
performed on the material to make the material more conducive to being 
converted to heat, hot water, or steam. For example, if material that 
is not otherwise grown, harvested, produced, mined, or created for the 
principal purpose of converting the material to a useful form of energy 
is formed into pellets to make the material more conducive to being 
incinerated to produce steam, the creation of pellets does not cause 
the material to be produced or created for the principal purpose of 
converting the material to steam.
    (iii) Certain material introduced into a recovery process. Material 
is described in this paragraph (c)(2)(iii) if the material is 
introduced into a recovery process, and the material is a precious 
metal.
    (iv) Certain material introduced into a transformation process. 
[Reserved].
    (v) Certain hazardous material. Material is described in this 
paragraph (c)(2)(v) if the material is hazardous material and it is 
disposed of at a facility that is subject to final permit requirements 
under subtitle C of title II of the Solid Waste Disposal Act (as in 
effect on October 22, 1986, the date of the enactment of the Tax Reform 
Act of 1986). See section 142(h)(1).
    (vi) Radioactive material. Material is described in this paragraph 
(c)(2)(vi) if the material is radioactive.
    (d) Final disposal process. The term final disposal process means--
    (1) The placement of material in a landfill; or
    (2) The incineration of material without any useful energy being 
captured.
    (e) Conversion process. The term conversion process means a process 
in which material is incinerated and heat, hot water, or steam is 
created and captured as useful energy. The conversion process begins 
with the incineration of material and ends at the point at which the 
latest of heat, hot water, or steam is created. Thus, the conversion 
process ends before any transfer or distribution of heat, hot water or 
steam.
    (f) Recovery process--(1) In general. The term recovery process 
means a process that starts with the melting or re-pulping of material 
to return the material to a form in which the material previously 
existed for use in the fabrication of an end product and ends 
immediately before the material is processed in the same or 
substantially the same way that virgin material is processed to 
fabricate the end product. For example, melting non-virgin metal to 
fabricate a metal product is not a recovery process if virgin metal is 
melted in the same or substantially the same process to fabricate the 
product.
    (2) End products fabricated entirely from non-virgin material. If 
an end product is fabricated entirely from non-virgin material, the 
recovery process ends immediately before the non-virgin material is 
processed in the same or substantially the same way that virgin

[[Page 25861]]

material is processed in a comparable fabrication process that uses 
only virgin material or a combination of virgin and non-virgin 
material. For example, if new paper is fabricated entirely from re-
pulped, non-virgin material, the recovery process ends immediately 
before the non-virgin material is processed in the same or 
substantially the same manner that virgin material is processed in the 
fabrication of paper made only with virgin material, or with a mixture 
of virgin and non-virgin material.
    (3) Refurbishing, repair, or similar activities. Refurbishing, 
repair, or similar activities are not recovery processes.
    (g) Transformation process. [Reserved].
    (h) Mixed-function facilities--(1) In general. Except to the extent 
provided in paragraph (h)(2) of this section, if a facility is used to 
perform both a solid waste disposal function or a preliminary function 
and another function, then the costs of the facility allocable to the 
solid waste disposal function or the preliminary function are 
determined using any reasonable method, based on all the facts and 
circumstances. See Sec.  1.103-8(a)(1) for rules relating to which 
amounts are used to provide an exempt facility.
    (2) Mixed inputs--(i) In general. Except as provided in paragraph 
(h)(2)(ii) of this section, for each final disposal process, conversion 
process, recovery process, or transformation process, the percentage of 
costs of the property used to perform such process that are allocable 
to a solid waste disposal function equals the lowest percentage of 
solid waste processed in that process in any year while the issue is 
outstanding. The percentage of solid waste processed in such process 
for any year is the percentage, by weight or volume, of the total 
materials processed in that process that constitute solid waste for 
that year.
    (ii) Special rule for mixed-input processes if at least 80 percent 
of the materials processed are solid waste. For each final disposal 
process, conversion process, recovery process, or transformation 
process, all of the costs of the property used to perform such process 
are allocable to a solid waste disposal function if, for each year 
while the issue is outstanding, solid waste constitutes at least 80 
percent, by weight or volume, of the total materials processed in the 
process.
    (i) Examples. The following examples illustrate the application of 
this section:

    Example 1. Final disposal process. Garbage trucks collect solid 
material at curbside from businesses and residences and dump the 
material in a landfill owned by Company A. The landfill is not 
subject to final permit requirements under subtitle C of title II of 
the Solid Waste Disposal Act (as in effect on the date of the 
enactment of the Tax Reform Act of 1986). The placement of material 
in the landfill is a final disposal process. The solid material 
placed in the landfill is solid waste under paragraph (c) of this 
section. Therefore, the landfill is a solid waste disposal facility.
    Example 2. Recovery process. Company B re-pulps magazines and 
cleans the pulp. After cleaning, B mixes the pulp with virgin 
material and uses the mixed material to produce rolls of paper 
towels. Before the mixing, the re-pulped material is not processed 
in the same or substantially the same way that virgin material is 
processed to produce the paper towels. The process starting with the 
re-pulping of the magazines and ending immediately before the re-
pulped material is mixed with the virgin material is a recovery 
process. The magazines introduced into the recovery process are 
solid waste. Therefore, the property that re-pulps the magazines and 
the property that cleans the re-pulped material are used to perform 
a solid waste disposal function.
    Example 3. Preliminary function. Company C owns a paper mill. At 
the mill, logs from nearby timber operations are processed through a 
machine that removes bark. The stripped logs are used to manufacture 
paper. The stripped bark falls onto a conveyor belt that transports 
the bark to a storage bin used to briefly store the bark until C 
feeds the bark into a boiler. The conveyor belt and storage bin are 
used only for these purposes. The boiler is used only to create 
steam by burning the bark, and the steam is used to generate 
electricity. The creation of steam from the stripped bark is a 
conversion process that starts with the incineration of the stripped 
bark. The conversion process is a solid waste disposal function. The 
conveyor belt performs a collection activity that is preliminary and 
that is directly related to the solid waste disposal function. The 
storage bin performs a storage function that is preliminary and that 
is directly related to the solid waste disposal function. Thus, the 
conveyor belt and storage bin are solid waste disposal facilities. 
The removal of the bark does not have a sufficient nexus to the 
conversion process to be directly related to the conversion process; 
the process of removing the bark does not become directly related to 
the conversion process merely because it results in material that 
will be waste used in the conversion process.
    Example 4. Mixed-input facility. Company D owns an incinerator 
financed by an issue and uses the incinerator exclusively to burn 
coal (a fossil fuel) and other solid material to create steam that 
is used to generate electricity. Each year while the issue is 
outstanding, 30 percent by volume and 40 percent by weight of the 
solid material that D processes in the conversion process is a 
fossil fuel. The remainder of the solid material processed is 
neither a fossil fuel nor material that was grown, harvested, 
produced, mined, or otherwise created for the principal purpose of 
converting the material to heat, hot water, steam, or another useful 
form of energy. Seventy percent of the costs of the property used to 
perform the conversion process are allocable to a solid waste 
disposal function.
    Example 5. Mixed-function facility. Company E owns and operates 
a facility financed by an issue and uses the facility exclusively to 
sort damaged bottles from bottles that may be re-filled. The damaged 
bottles are directly introduced into a process that melts them for 
use in the fabrication of an end product. The melting process is a 
recovery process. Each year while the issue is outstanding, more 
than 50 percent, by weight or volume, of all of the bottles that 
pass out of the sorting process are damaged bottles that are 
processed in a recovery process. The sorting facility performs a 
preliminary function, but it also performs another function. The 
costs of the sorting facility allocable to the preliminary function 
are determined using any reasonable method, based on all the facts 
and circumstances.

    (j) Effective date--(1) In general. Except as provided in paragraph 
(j)(2) of this section, this section applies to bonds that are--
    (i) Sold on or after the date that is 60 days after the date of 
publication of final regulations in the Federal Register; and
    (ii) Subject to section 142.
    (2) Certain refunding bonds. An issuer is not required to apply 
this section to bonds described in paragraph (j)(1) of this section 
that are issued to refund a bond to which this section does not apply 
if the weighted average maturity of the refunding bonds is not longer 
than the weighted average maturity of the refunded bonds.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-10500 Filed 5-5-04; 2:45 pm]
BILLING CODE 4930-01-P