[Federal Register Volume 74, Number 178 (Wednesday, September 16, 2009)]
[Proposed Rules]
[Pages 47500-47507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22258]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 17

[REG-140492-02]
RIN 1545-BDO4


Definition of Solid Waste Disposal Facilities for Tax-Exempt Bond 
Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking; Notice of proposed 
rulemaking; Notice of public hearing on proposed rulemaking.

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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 
proposed 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 
withdraws the notice of proposed rulemaking that was published in the 
Federal Register on May 10, 2004, proposes to remove certain existing 
regulations that provide rules for determining whether a facility is a 
solid waste disposal facility, and contains a notice of public hearing 
on these proposed regulations.

DATES: Written or electronic comments must be received by December 15, 
2009. Outlines of topics to be discussed at the public hearing 
scheduled for January 5, 2010 must be received by December 17, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-140492-02), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered to: 
CC:PA:LPD:PR 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, or sent 
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-140492-02). The public hearing will be 
held in room 2615 at the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Aviva Roth at (202) 622-3980; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Background

    This document proposes to amend the Income Tax Regulations (26 CFR 
part 1) under section 142 of the Internal Revenue Code (Code) to 
provide rules for determining whether a facility is a solid waste 
disposal facility under section 142(a)(6). This document also proposes 
to remove certain existing regulations that provide rules for 
determining whether a facility is a solid waste disposal facility and 
contains a notice of public hearing on these proposed regulations. On 
May 10, 2004, the IRS published a notice of proposed rulemaking (REG-
140492-02) in the Federal Register (69 FR 25856) regarding when a 
facility qualifies as a solid waste disposal facility under section 142 
(2004 Proposed Regulations). The 2004 Proposed Regulations proposed a 
new Sec.  1.142(a)(6)-1 of the Income Tax Regulations and would have 
removed existing Sec.  1.103-8(f)(2) and Sec.  17.1 of the temporary 
Income Tax Regulations on this subject (together, the Existing 
Regulations). Comments on the 2004 Proposed Regulations were received 
and a hearing was held on August 11, 2004. After consideration of the 
public comments, the IRS and the Treasury Department propose extensive 
changes to the 2004 Proposed Regulations. In order to allow the public 
an opportunity to comment with respect to these extensive changes, we 
are issuing these proposed regulations and holding a public hearing on 
these proposed regulations.

Explanation of Provisions

1. Introduction and Existing Regulations

    In general, interest on State or local bonds is excludable from 
gross income

[[Page 47501]]

under section 103(a). Under section 103(b), however, interest on 
private activity bond is excludable from gross income under section 103 
only if the bond meets the requirements for a qualified bond under 
section 141(e) and other applicable requirements under section 103. 
Section 141(e) defines a qualified bond to include an exempt facility 
bond that meets certain requirements. Section 142(a) defines an exempt 
facility bond to mean any bond that is issued as part of an issue 95 
percent or more of the net proceeds of which are to be used to provide 
an exempt facility specified in section 142(a). Section 142(a)(6) 
includes a solid waste disposal facility as one specified type of 
qualified exempt facility.
    Section 1.103-8(f)(2)(ii)(a) of the Existing Regulations generally 
defines solid waste disposal facilities to mean 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) of the Existing Regulations 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 (No-
Value Test). Thus, under the Existing Regulations, if any person is 
willing to purchase property at any price, the property fails to 
constitute waste. By contrast, under Sec.  1.103-8(f)(ii)(B) of the 
Existing Regulations, if any person is willing to remove the property 
at his own expense but is unwilling to purchase it at any price, the 
material is waste.
    Former section 203(4) of the Solid Waste Disposal Act, as quoted in 
Sec.  1.103-8(f)(2)(ii)(b) of the Existing Regulations, provides that 
the term solid waste means:

[g]arbage, 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) of the Existing Regulations provides 
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 Existing Regulations generally provides 
that, for mixed-use facilities that serve a solid waste disposal 
function and other functions, only the portion of the cost of the 
property allocable to the function of solid waste disposal qualifies as 
an eligible cost of a solid waste disposal facility. Section 17.1(a) of 
the Existing Regulations further provides that 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) of the Existing 
Regulations 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) of the Existing Regulations 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 that reasonably reflects a separation of costs for each function 
of the property, based on the facts and circumstances.

2. The 2004 Proposed Regulations

    In light of the changes that have occurred in the waste recycling 
industry since the Existing Regulations were issued in the 1970s, the 
IRS and the Treasury Department issued Notice 2002-51 (2002-2 CB 131), 
which invited comments on issues concerning the application of section 
142 to solid waste disposal facilities, including recycling facilities. 
After consideration of the public comments on the Notice, the IRS and 
the Treasury Department issued the 2004 Proposed Regulations. See Sec.  
601.601(d)(2)(ii)(b).
    The 2004 Proposed Regulations proposed to eliminate the No-Value 
Test for determining whether material is solid waste. Instead, the 2004 
Proposed Regulations, retaining the definition of solid waste under 
former section 203(4) of the Solid Waste Disposal Act, provided that 
``garbage, refuse and other discarded solid materials'' meant material 
that is solid and that is introduced into a final disposal process, 
conversion process, recovery process, or transformation process (as 
those terms were defined in the 2004 Proposed Regulations) unless such 
material fell within one of several categories of specifically excluded 
items. Included within the categories of specifically excluded items 
under the 2004 Proposed Regulations were: (1) Fossil fuels or other 
materials created for the principal purpose of converting the materials 
to heat, hot water, steam, or other useful energy, introduced into a 
conversion process; (2) precious metals introduced into a recovery 
process; (3) hazardous materials 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 enactment of the Tax Reform 
Act of 1986); and (4) radioactive materials.
    The 2004 Proposed Regulations provided 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, (2) used to perform a 
preliminary function, 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.
    The 2004 Proposed Regulations further defined a 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. A final disposal process was defined as 
the placement of material in a landfill or the incineration of material 
without any useful energy being captured. A conversion process was 
defined as a process in which material is incinerated and heat, hot 
water, or steam is created and captured as useful energy beginning with 
the incineration of material and ending at the point at which the 
latest of heat, hot water, or steam is created. A recovery process was 
defined 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

[[Page 47502]]

processed to fabricate the end product. With respect to such definition 
of recovery process, the 2004 Proposed Regulations further provided 
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. According to the 2004 Proposed Regulations, refurbishing, 
repair, or similar activities are not recovery processes. The IRS and 
Treasury Department reserved on the definition of transformation 
process.
    The 2004 Proposed Regulations provided that 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 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.
    The 2004 Proposed Regulations further provided that 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 2004 Proposed Regulations also contained 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.

3. Comments on the 2004 Proposed Regulations

    In response to the 2004 Proposed Regulation, comments were received 
with respect to the definition of solid waste. Some commentators 
criticized the elimination of the No-Value Test from the definition of 
solid waste in the 2004 Proposed Regulations, while other commentators 
agreed with the deletion of the No-Value Test. Commentators suggested 
various changes to the proposed definition of solid waste. Other 
commentators suggested clarification that community waste qualifies as 
solid waste.
    Comments also were received with respect to categories of items 
specifically excluded from the definition of solid waste under the 2004 
Proposed Regulations. Some commentators suggested that the exclusion 
from solid waste for fossil fuels that are introduced into an energy 
conversion process is too broad because it excludes fossil fuels that 
are low-grade, such as waste coal that is not grown, harvested, 
produced, mined, or otherwise created for the principal purpose of 
converting material to useful energy. Other commentators suggested that 
solid waste introduced into an energy conversion process should include 
certain byproducts of typical agricultural operations that are not 
engaged in with the principal purpose of growing, harvesting, 
producing, or otherwise creating products to convert such products into 
useful energy. Commentators further suggested clarification of the 
exclusion from the definition of solid waste for precious metals 
introduced to a recycling process. Still other commentators further 
suggested the inclusion of hazardous waste and radioactive waste as 
solid waste.
    Comments were received with respect to the various solid waste 
disposal processes. With respect to the final disposal process, some 
commentators suggested the inclusion of indefinite confinement of 
material within a final disposal process. With respect to the energy 
conversion process, commentators suggested including methods of 
creating energy besides combustion within an energy conversion process 
and expanding the scope of an eligible energy conversion process to 
include certain related processes. Another comment suggested 
disregarding small amounts of otherwise-ineligible fossil fuels and 
chemical and other additives.
    Comments also were received with respect to mixed-input facilities 
that receive both solid waste material and other types of input. 
Commentators suggested an expansion of the scope of permitted mixed-
input facilities to include an allowable amount of 35 percent or less 
of material that is not solid waste to be introduced to an energy 
conversion process or a recycling process without disqualifying those 
processes. Commentators also suggested measuring the allowable amount 
of non-solid waste input into a mixed-input facility based on the 
average percentage of inputs that are not solid waste over the life of 
the issue.
    The IRS and Treasury Department have considered these comments, and 
the proposed regulations contained in this document implement a number 
of these recommendations.

4. Regulations Proposed in This Document

A. Solid Waste Disposal Facility
    The proposed regulations define a solid waste disposal facility as 
any facility to the extent that it (1) processes solid waste in a 
qualified solid waste disposal process, (2) performs a preliminary 
function, or (3) is functionally related and subordinate (within the 
meaning of Sec.  1.103-8(a)(3)) to a facility which either processes 
solid waste in a qualified solid waste disposal process or performs a 
preliminary function.
B. Definition of Solid Waste
    The proposed regulations eliminate the No-Value Test, as did the 
2004 Regulations. The IRS and the Treasury Department have determined 
that whether material has value, or value apart from recycling as one 
commentator suggested, is unadministrable. However, in response to the 
comments received with respect to the 2004 Proposed Regulations, the 
IRS and the Treasury Department have determined that a definition of 
solid waste is needed that takes into account

[[Page 47503]]

the material itself and not only the process by which such material is 
to be disposed or recycled. Accordingly, the proposed regulations 
define solid waste as garbage, refuse, and other solid material, 
derived from any agricultural, commercial, consumer, or industrial 
operation or activity that is either used material or residual material 
and that is reasonably expected by the person who purchases or 
otherwise acquires such material to be introduced within a reasonable 
time after such purchase or acquisition in a qualified solid waste 
disposal process. While the type of disposal or recycling process does 
not affect the treatment of material as solid waste, the person 
acquiring such material must intend to place such materials into a 
qualified solid waste disposal process within a reasonable time after 
acquisition. Material that the acquiring party intends to store or 
resell to the general public is not solid waste under the proposed 
regulations.
    Used material is defined in the proposed regulations as any 
material that has been used previously as an agricultural, commercial, 
consumer, or industrial product or as a component of any such product. 
It is the intention of the IRS and Treasury Department that this 
definition be interpreted broadly to encompass popularly understood 
uses of materials but that such definition should not apply to smaller 
products purchased by manufacturers and incorporated by such 
manufacturer into a larger product.
    Residual material is defined in the proposed regulations as any 
residual byproduct or excess unused raw material that remains from the 
production of any agricultural, commercial, consumer, or industrial 
product, provided that material qualifies as residual material only to 
the extent that it constitutes less than five percent of the total 
material introduced into the production process and it has a fair 
market value that is reasonably expected to be lower than that of any 
product made in that production process. This definition is intended to 
encompass a wide range of products from waste coal to byproducts of 
typical agricultural operations, and is intended to further encourage 
innovation in the full use of all resources.
C. Specific Exclusions From the Definition of Solid Waste
    The proposed regulations exclude from the definition of solid waste 
the following items: (1) Virgin material; (2) solids within liquids and 
liquid waste; (3) precious metals; (4) hazardous material; and (5) 
radioactive material. The definition of virgin material in the proposed 
regulations encompasses all raw materials except to the extent such 
material becomes remainder material. The proposed regulations further 
clarify that a material does not cease to be virgin material until it 
has been processed to a point where no further processing is expected.
    The proposed regulations specifically exclude certain commonly-
recognized precious metals from the definition of solid waste because 
recovery of these metals generally would take place with or without a 
recycling industry.
    With respect to hazardous and radioactive waste, the statute and 
legislative history suggest that Congress intended to exclude hazardous 
waste and radioactive waste from solid waste. The statute treats 
qualified hazardous waste facilities separately as eligible exempt 
facilities under section 142(a)(10) in addition to solid waste disposal 
facilities under section 142(a)(6). In addition, the legislative 
history provides, in relevant part, that ``the conferees wish to 
clarify that solid waste does not include most hazardous waste 
(including radioactive waste).'' H. Rep. No. 99-841, 99th Cong. 2d. 
Sess (September 18, 1986), 1986-3 C.B. Vol. 4, at II-704. Accordingly, 
such items are specifically excluded from the definition of solid 
waste.
D. Qualified Solid Waste Disposal Process
    The proposed regulations provide for three eligible types of solid 
waste disposal processes, including a final disposal process, an energy 
conversion process, and a recycling process. In order to provide 
flexibility for future innovation, absent an express restriction in the 
proposed regulations, a solid waste disposal function may employ any 
biological, engineering, industrial, or technological method.
    Under the proposed regulations, a final disposal process includes 
the placement of solid waste in a landfill, the incineration of solid 
waste without capturing any useful energy, and the containment of solid 
waste with the reasonable expectation that the containment will 
continue indefinitely and that the solid waste has no current or future 
beneficial use.
    To accommodate existing and new technologies, the description of an 
energy conversion process in the proposed regulations includes thermal, 
chemical, and other processes used to create and capture useful energy. 
The proposed regulations also permit 35 percent or less of the material 
introduced to an energy conversion process to be material other than 
solid waste to accommodate disposal processes that require the 
introduction of materials other than solid waste. In general, under the 
proposed regulations, an energy conversion process begins at the point 
of the first application of a process to create and capture useful 
energy and ends at the point at which the useful energy is first 
created or captured in the form of a first useful product (for example, 
the conversion of solid waste into useful steam energy). The proposed 
regulations generally do not include related processes in an energy 
conversion process because these processes are appropriately included 
in preliminary facilities and functionally related and subordinate 
functions.
    In response to public comment and in further consideration of 
policy in support of recycling, the proposed regulations combine the 
concepts of recovery process and transformation process introduced in 
the 2004 Proposed Regulations into an eligible recycling process, which 
means a process for disposing of solid waste that reconstitutes, 
transforms, or otherwise processes the solid waste into a useful 
product. The recycling process begins at the point of the first 
application of a process to reconstitute or transform the solid waste 
into a useful product, such as decontamination, melting, re-pulping, 
shredding, or other processing of the solid waste to accomplish this 
purpose. The recycling process ends at the point of completion of 
production of the first useful product from the solid waste.
E. First Useful Product Principle
    The proposed regulations provide guidance on the standard for 
determining the first useful product for purposes of the end point of 
an eligible energy conversion process and recycling process. For this 
purpose, the proposed regulations provide that the term useful product 
means a product that is useful for consumption in individual, 
commercial, industrial, or agricultural use and that could be sold for 
such use, whether or not actually sold. For this purpose, a useful 
product includes both a product useful to an individual or commercial 
consumer as an ultimate end-use product and a product useful to an 
industrial user as a material or input for processing in some stage of 
a manufacturing or production process to produce a different end-use 
product. Further, for this purpose, in the case of a continuous or 
integrated production process, the determination of when a useful 
product may result from such an integrated process may take into 
account operational constraints that affect the point in production 
when a useful product reasonably can be

[[Page 47504]]

extracted or isolated and sold independently.
F. Mixed-Input Facilities
    The proposed regulations expand the scope of permitted mixed-input 
facilities to include an allowable amount of 35 percent or less of 
material that is not solid waste to be introduced each year into an 
energy conversion process or a recycling process without disqualifying 
those processes.

Proposed Effective Dates

    In general, the proposed regulations will apply to bonds to which 
section 142 applies that are 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. Issuers may apply this section to 
bonds sold before the date that is 60 days after publication of final 
regulations in the Federal Register.

Special Analysis

    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, the notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their 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 January 5, 2010 beginning 
at 10 a.m. in room 2615 of the 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 immediate entrance area 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 electronic or 
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 December 17, 2009. 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 authors of these proposed regulations are Aviva M. 
Roth and Timothy L. Jones, Office of the Associate Chief Counsel 
(Financial Institutions and Products), Internal Revenue Service. 
However, personnel from other offices of the Treasury Department and 
the IRS participated in their development.

Withdrawal of Previous Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking (REG-140492-02) that was published in the Federal 
Register on May 10, 2004 (69 FR 25856), is withdrawn as of September 
16, 2009.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 17

    Income taxes, Reporting and recordkeeping requirements.

Proposed 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 * * *


Sec.  1.103-8  [Amended]

    Par. 2. Section 1.103-8 is amended by removing paragraph (f)(2)(ii) 
and redesignating paragraph (f)(2)(iii) as (f)(2)(ii).
    Par. 3. 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. This section defines the term solid waste disposal 
facility for purposes of section 142(a)(6).
    (b) Solid waste disposal facility. The term solid waste disposal 
facility means a facility to the extent that the facility--
    (1) Processes solid waste (as defined in paragraph (c) of this 
section) in a qualified solid waste disposal process (as defined in 
paragraph (d) of this section);
    (2) Performs a preliminary function (as defined in paragraph (f) of 
this section); or
    (3) Is functionally related and subordinate (within the meaning of 
Sec.  1.103-8(a)(3)) to a facility described in paragraph (1) or (2) of 
this section.
    (c) Solid waste--(1) In general. Except to the extent excluded 
under paragraph (c)(2) of this section, for purposes of section 
142(a)(6), the term solid waste means garbage, refuse, and other solid 
material derived from any agricultural, commercial, consumer, or 
industrial operation or activity if the material meets the requirements 
of both paragraph (c)(1)(i) and paragraph (c)(1)(ii) of this section.
    (i) Used material or residual material. Material meets the 
requirements of this paragraph (c)(1) if it is either used material (as 
defined in paragraph (c)(1)(i)(A)) or residual material (as defined in 
paragraph(c)(1)(i)(B)).
    (A) Used material. The term used material means any material that 
has been used previously as an agricultural, commercial, consumer or 
industrial product or as a component of any such product.
    (B) Residual material. The term residual material means any 
residual byproduct or excess unused raw material that remains from the 
production of any agricultural, commercial, consumer, or industrial 
product, provided that material qualifies as residual material only to 
the extent that it constitutes less than five percent of the total 
material introduced into the production process and it has a fair 
market value that is reasonably expected to be lower than that of any 
product made in that production process.
    (ii) Reasonably expected introduction into a qualified solid waste 
disposal process. Material meets the requirements of this paragraph 
(c)(1)(ii) if it is reasonably expected by the person who purchases or 
otherwise acquires it to be introduced within a

[[Page 47505]]

reasonable time after such purchase or acquisition into a qualified 
solid waste disposal process described in paragraph (d) of this 
section.
    (2) Exclusions from solid waste. The following materials do not 
constitute solid waste:
    (i) Virgin material. Solid waste excludes any virgin material 
except to the extent that it is a residual material. The term virgin 
material means material that has not been processed into an 
agricultural, commercial, consumer, or industrial product or a 
component of any such product. Further, for this purpose, material 
continues to be virgin material after it has been grown, harvested, 
mined, or otherwise extracted from its naturally occurring location and 
cleaned, divided into component elements, modified, or enhanced as long 
as further processing is required before it becomes an agricultural, 
commercial, consumer, or industrial product or a component of any such 
product.
    (ii) Solids within liquids and liquid waste. Solid waste excludes 
any solid or dissolved material in domestic sewage or other significant 
pollutant 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, and liquid or 
gaseous waste.
    (iii) Precious metals. Solid waste excludes gold, silver, 
ruthenium, rhodium, palladium, osmium, iridium, platinum, gallium, and 
rhenium.
    (iv) Hazardous material. Solid waste excludes any hazardous 
material that 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 the date of the enactment of the Tax 
Reform Act of 1986 (which is October 22, 1986). See section 142(h)(1) 
of the Internal Revenue Code.
    (v) Radioactive material. Solid waste excludes any radioactive 
material.
    (d) Qualified solid waste disposal process. The term qualified 
solid waste disposal process means the processing of solid waste in a 
final disposal process (as defined in paragraph (d)(1) of this 
section), an energy conversion process (as defined in paragraph (d)(2) 
of this section), or a recycling process (as defined in paragraph 
(d)(3) of this section). Absent an express restriction to the contrary 
in this section, a qualified solid waste disposal process may employ 
any biological, engineering, industrial, or technological method.
    (1) Final disposal process. The term final disposal process means 
either the placement of solid waste in a landfill, the incineration of 
solid waste without capturing any useful energy, or the containment of 
solid waste with a reasonable expectation that the containment will 
continue indefinitely and that the solid waste has no current or future 
beneficial use.
    (2) Energy conversion process. The term energy conversion process 
means a thermal, chemical, or other process that is applied to solid 
waste to create and capture synthesis gas, heat, hot water, steam, or 
other useful energy. The energy conversion process begins at the point 
of the first application of such process. The energy conversion process 
ends at the point at which the useful energy is first created or 
captured in the form of a first useful product (as defined in paragraph 
(e) of this section), provided that, in all events, the energy 
conversion process ends before any transfer or distribution of 
synthesis gas, heat, hot water, steam, or other useful energy.
    (3) Recycling process--(i) In general. The term recycling process 
means reconstituting, transforming, or otherwise processing solid waste 
into a useful product. The recycling process begins at the point of the 
first application of a process to reconstitute or transform the solid 
waste into a useful product, such as decontamination, melting, re-
pulping, shredding, or other processing of the solid waste to 
accomplish this purpose. The recycling process ends at the point of 
completion of production of the first useful product from the solid 
waste.
    (ii) Refurbishment, repair, or similar activities. The term 
recycling process does not include refurbishment, repair, or similar 
activities. The term refurbishment means the breakdown and reassembly 
of a product if such activity is done on a product by product basis and 
if the finished product contains more than 30 percent of its original 
materials or components.
    (e) First useful product. The term first useful product means the 
first product produced from solid waste that is useful for consumption 
in agricultural, consumer, commercial, or industrial operation or 
activity and that could be sold for such use, whether or not actually 
sold. A useful product includes both a product useful to an individual 
consumer as an ultimate end-use consumer product and a product useful 
to an industrial user as a material or input for processing in some 
stage of a manufacturing or production process to produce a different 
end-use consumer product. In the case of a continuous or integrated 
production process, the determination of when a useful product may 
result from such an integrated process may take into account 
operational constraints that affect the point in production when a 
useful product reasonably can be extracted or isolated and sold 
independently.
    (f) Preliminary function. A preliminary function is a function to 
collect, separate, sort, store, treat, process, disassemble, or handle 
solid waste that is preliminary to and directly related to a qualified 
solid waste disposal process. A function qualifies as a preliminary 
function only if more than 50 percent of the total materials that 
result from the function is solid waste in each year that the issue is 
outstanding.
    (g) Mixed-use facilities--(1) In general. Except as otherwise 
provided in paragraph (g)(2) of this section, if a facility is used for 
both a qualified solid waste disposal function (including a qualified 
solid waste disposal process or a preliminary function) and a 
nonqualified function, then the costs of the facility allocable to the 
qualified solid waste disposal function are determined using any 
reasonable method, based on all the facts and circumstances. See Sec.  
1.103-8(a)(1) for allocation rules on amounts properly allocable to an 
exempt facility.
    (2) Mixed inputs--(i) In general. Except as provided in paragraph 
(g)(2)(ii) of this section, for each qualified solid waste disposal 
process, the percentage of the costs of the property used for such 
process that are allocable to a qualified solid waste disposal process 
equals the average annual percentage of solid waste processed in that 
process while the issue is outstanding. The average percentage of solid 
waste processed in such process for any year is the average 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 65 percent 
of the materials processed are solid waste. For each qualified solid 
waste disposal process, if the annual percentage of solid waste used in 
that process for each year that the issue is outstanding equals at 
least 65 percent of the materials used in that process, then all of the 
costs of the property used for such process are treated as allocable to 
a qualified solid waste disposal process. The percentage of solid waste 
used in such process for any year is the percentage, by weight or 
volume, of the total materials used in that process that constitute 
solid waste for that year.
    (h) Examples. The following examples illustrate the application of 
this section:

    Example 1. Nonqualified unused material--cloth. Company A takes 
wool and

[[Page 47506]]

weaves it into cloth and then sells the cloth to a manufacturer to 
manufacture clothing. The cloth is material that has not been used 
previously as an agricultural, commercial, consumer, or industrial 
product or as a component of any such product. Accordingly, the 
cloth is not solid waste.
    Example 2. Residual material from refining of crude oil. Company 
B takes crude oil and refines it into various products, including 
finished motor gasoline, distillate fuel oil, and jet fuel. The 
balance of the crude oil remaining after this production process is 
in the form of a nonhazardous material which subsequently is used to 
make asphalt. This nonhazardous material constitutes less than 5 
percent of the total crude oil that was introduced into the 
production process and it has a fair market value that is reasonably 
expected to be lower than that of any product produced in that oil 
refining process. The portion of the crude oil that remains after 
the refining process as the nonhazardous material is residual 
material within the meaning of paragraph (c)(1)(i)(B) of this 
section that qualifies as solid waste. The portion of the facility 
directly related to the production of asphalt from such residual 
material may be treated as a qualified solid waste disposal facility 
up to the point of the production of a first useful product (here 
asphalt) within the meaning of paragraph (e) of this section from 
the residual material.
    Example 3. Residual material--waste coal. Company C mines coal. 
Less than 5 percent of ore mined is low quality byproduct of coal 
mining known as waste coal, which cannot be converted to energy 
under a normal energy-production process because the BTU content is 
too low. Waste coal has a lower fair market value than any product 
produced in the coal mining operation. Waste coal is solid waste 
because it is residual material within the meaning of paragraph 
(c)(1)(i)(B) of this section and Company C reasonably expects to 
introduce the waste coal into a solid waste disposal process. A 
facility that converts this waste coal into energy may be treated as 
a solid waste disposal facility.
    Example 4. Virgin material--logs. Company D cuts down trees and 
sells the lumber to another company, which further processes the 
lumber into paper. In order to facilitate shipping, Company D cuts 
the trees into uniform logs. The trees are not solid waste because 
they are virgin materials within the meaning of paragraph (c)(2)(i) 
of this section. The division of such trees into uniform logs does 
not change the status of the trees as virgin material.
    Example 5. Qualified solid waste disposal process--landfill. 
Company E plans to construct a landfill. The landfill will not be 
subject to the final permit requirements under subtitle C of title 
II of the Solid Waste Disposal Act (as in effect on the date of 
enactment of the Tax Reform Act of 1986). Company E expects that the 
landfill will be filled entirely with material that will qualify as 
solid waste within the meaning of paragraph (c) of this section. 
Company E does not expect that a significant portion of the material 
placed in the landfill will be virgin materials or precious metals. 
Placing solid waste into a landfill is a qualified solid waste 
disposal process. The landfill is a qualified solid waste disposal 
facility.
    Example 6. Qualified solid waste disposal process--recycling 
tires. Company F owns a facility that converts old, previously used 
tires into roadbed material. The used tires are used material within 
the meaning of paragraph (c)(1)(i)(A) of this section that qualifies 
as solid waste. Between the introduction of the old tires into the 
roadbed manufacturing process and the completion of the roadbed 
material, the facility does not create any interim useful products. 
The process for the manufacturing of the roadbed material from the 
old tires is a qualified solid waste disposal process as a recycling 
process and the facility that converts the tires into roadbed 
material is a qualified solid waste disposal facility. This 
conclusion would be the same if the recycling process took place at 
more than one plant.
    Example 7. Nonqualified refurbishment. Company G purchases used 
cars and restores them. This restoration process includes 
disassembly, cleaning, and repairing of the cars. Parts that cannot 
be repaired are replaced. The restored cars contain at least 30 
percent of the original pieces. While the cars are solid waste, the 
refurbishing process is not a qualified solid waste disposal 
process. Accordingly, Company G's facility is not a qualified solid 
waste disposal facility.
    Example 8. Qualified solid waste disposal facility--first useful 
product rule--paper recycling. Company H employs an integrated 
process to re-pulp discarded magazines, clean the pulp, and produce 
retail paper towel products. Operational constraints on Company H's 
process do not allow for reasonable extraction, isolation, and sale 
of the cleaned paper pulp independently without degradation of the 
pulp. Company H further processes the paper pulp into large 
industrial-sized rolls of paper which are about 12 feet in diameter. 
At this point in the process, Company H could either sell such 
industrial-sized rolls of paper to another company for further 
processing to produce retail paper products or it could produce 
those retail products itself. In general, paper pulp is a useful 
product that is bought and sold on the market as a material for 
input into manufacturing or production processes. The discarded 
magazines are solid waste because they are used material within the 
meaning of paragraph (c)(1)(i)(A) of this section. Company H's 
facility is engaged in a recycling process within the meaning of 
paragraph (d)(3) of this section to the extent that it repulps and 
cleans the discarded magazines generally and further to the extent 
that it produces industrial-sized rolls of paper under the 
particular circumstances here. Specifically, taking into account the 
operational constraints on Company H's facility that limit its 
ability reasonably to extract, isolate, and sell the paper pulp 
independently, the first useful products within the meaning of 
paragraph (e) of this section from Company H's recycling process are 
the industrial-sized rolls of paper. The portion of Company H's 
facility that produces industrial-sized rolls of paper is a 
qualified solid waste disposal facility, and the portion of Company 
H's facility that further processes the industrial-sized rolls of 
paper into retail paper towels is not a qualified solid waste 
facility. Further, if the operational characteristics of Company H's 
facility allowed for reasonable extraction, isolation, and sale of 
the paper pulp independently, the first useful product would be the 
paper pulp and the portion of Company H's facility that cleans and 
re-pulps the magazines before processing in the paper machine to 
produce industrial-sized rolls of paper would be a qualified solid 
waste disposal facility.
    Example 9. First useful product rule--energy conversion process. 
Company I receives solid waste from a municipal garbage collector. 
Company I burns that solid waste in an incinerator to remove exhaust 
gas and to produce heat. Company I further processes the heat in a 
heat exchanger to produce steam. Company I further processes the 
steam to generate electricity. The first useful product in this 
process is the useful energy in the form of steam. The facilities 
used to burn the solid waste and then capture the steam as useful 
energy are qualified solid waste disposal facilities because they 
process solid waste in an energy conversion process. The generating 
facilities used for further processing of the steam to create 
electricity do not engage in the energy conversion process and are 
not qualified solid waste disposal facilities.
    Example 10. Preliminary function. Company J 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 represents less than 5 percent 
of the logs processed into paper and has a lower fair market value 
than any product produced from the paper mill. The stripped bark 
falls onto a conveyor belt that transports the bark to a storage bin 
that is used to store the bark briefly until Company J 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 
stripped bark is solid waste because it is residual material within 
the meaning of paragraph (c)(1)(i)(B) of this section and because 
Company J expects to introduce the bark into a conversion process 
within a reasonable period of time. The creation of steam from the 
stripped bark is an energy conversion process that starts with the 
incineration of the stripped bark. The energy conversion process is 
a qualified solid waste disposal process. 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 bark 
removal process is not a preliminary function because it is not 
directly related to the energy conversion process and it does not 
become so related merely because it results in material that is 
solid waste.
    Example 11. Mixed-input facility. Company K owns an incinerator 
financed by an issue and uses the incinerator exclusively to burn 
coal and solid material to create steam that is used to generate 
electricity.

[[Page 47507]]

Each year while the issue is outstanding, 40 percent by volume and 
45 percent by weight of the solid material that Company K processes 
in the conversion process is coal. The remainder of the solid 
material is either used material or residual material within the 
meaning of paragraph (c)(1)(i) of this section. Sixty percent of the 
costs of the property used to perform the energy conversion process 
are allocable to a solid waste disposal function.
    Example 12. Mixed-function facility. Company L owns and operates 
a facility financed by an issue and uses the facility exclusively to 
sort damaged bottles from undamaged bottles that may be re-used. The 
damaged bottles are directly introduced into a process that melts 
them for use in the fabrication of an end product. The damaged 
bottles are solid waste within the meaning of paragraph (b)(1) of 
this section, and the melting process is a qualified solid waste 
disposal process as a recycling process within the meaning of 
paragraph (c)(3) of this section. Refilling the bottles is not a 
qualified solid waste disposal 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 recycling 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.

    (i) Effective Dates--(1) In general. This section applies to bonds 
to which section 142 applies that are sold on or after the date that is 
60 days after publication of final regulations in the Federal Register.
    (2) Elective retroactive application. Issuers may apply this 
section to bonds sold before the date that is 60 days after publication 
of final regulations in the Federal Register.

PART 17--TEMPORARY INCOME TAX REGULATIONS UNDER 26 U.S.C. 103C

    Par. 4. The authority citation for part 17 continues to read in 
part as follows:

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


Sec.  17.1  [Removed]

    Par. 5. Section 17.1 is removed.

Linda M. Kroening,
(Acting) Deputy Commissioner for Services And Enforcement.
[FR Doc. E9-22258 Filed 9-15-09; 8:45 am]
BILLING CODE 4830-01-P