[Federal Register Volume 76, Number 161 (Friday, August 19, 2011)]
[Rules and Regulations]
[Pages 51879-51885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21154]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 17

[TD 9546]
RIN 1545-BD04


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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.

DATES: Effective Date: These regulations are effective August 19, 2011.
    Applicability Date: For dates of applicability, see Sec.  
1.142(a)(6)-1(i).

FOR FURTHER INFORMATION CONTACT: Timothy Jones, (202) 622-3980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document amends the Income Tax Regulations (26 CFR part 1) 
under section 142 of the Internal Revenue Code (Code) to provide final 
rules for determining whether a facility is a solid waste disposal 
facility under section 142(a)(6). This document also removes certain 
existing regulations on this subject. On September 16, 2009, the IRS 
published a Notice of Proposed Rulemaking (REG-140492-02) in the 
Federal Register (74 FR 47500) (the Proposed Regulations). The Proposed 
Regulations under proposed Sec.  1.142(a)(6)-1 would modify existing 
regulations under Sec.  1.103-8(f)(2) of the Income Tax Regulations and 
Sec.  17.1 of the temporary Income Tax Regulations (together, the 
Existing Regulations) on this subject. Public comments on the Proposed 
Regulations were received and a public hearing was held on January 5, 
2010.
    After consideration of the public comments, the IRS and the 
Treasury Department adopt the Proposed Regulations, with revisions, as 
final regulations by this Treasury decision (the Final Regulations). 
Significant aspects of the public comments and the revisions made in 
the Final Regulations are discussed in this preamble.

Explanation of Provisions

1. Introduction

    In general, interest on State or local bonds is excludable from 
gross income under section 103(a). Under section 103(b), however, 
interest on private activity bonds 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.
    In general, the Proposed Regulations addressed the requirements for 
solid waste disposal facilities under section 142(a)(6) for purposes of 
eligibility for tax-exempt private activity bond financing. The 
Proposed Regulations provided that a facility qualifies as a solid 
waste disposal facility if it processes solid waste in a qualified 
solid waste disposal process, performs preliminary functions, or is a 
functionally related or subordinate facility. The Proposed Regulations 
focused on eligible processes to dispose of solid waste, including a 
final disposal process, an energy conversion process, and a recycling 
process. The Proposed Regulations also provided a more developed 
definition of solid waste which focused on used materials and residual 
materials, with certain specific exclusions. The Proposed Regulations 
eliminated a ``no-value'' test from the solid waste definition under 
Sec.  1.103-8(f)(2)(ii)(b) of the Existing Regulations, which provides 
that material does not qualify as solid waste unless, on the issue date 
of the tax-exempt bonds used to provide the solid waste disposal 
facility, the property 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). The Proposed Regulations also 
proposed various allocation and accounting rules based on existing 
principles for mixed-input facilities and mixed-use facilities. 
Overall, the Proposed Regulations implement a policy in favor of 
recycling through the use of solid waste disposal facilities.
    Commentators generally supported the approach taken towards solid 
waste

[[Page 51880]]

disposal facilities under the Proposed Regulations. The Final 
Regulations retain the overall approach of the Proposed Regulations and 
make certain technical changes in response to public comments, as 
discussed further in this preamble.

2. Solid Waste Disposal Facility

    The Proposed Regulations defined the term solid waste disposal 
facility to mean a facility that processes solid waste in a qualified 
solid waste disposal process, performs a preliminary function, or is a 
functionally related and subordinate facility. The Final Regulations 
retain this definition of a solid waste disposal facility.

3. Definition of Solid Waste

    The Proposed Regulations defined the term solid waste to mean 
garbage, refuse, and other solid material derived from any 
agricultural, commercial, consumer, or industrial operation or 
activity, based largely on an existing definition under the Existing 
Regulations. The Proposed Regulations refined the existing definition 
to require that solid waste be either used material or residual 
material. The Proposed Regulations also eliminated the No-Value Test. 
Additionally, the Proposed Regulations required that the person who 
acquires the material must reasonably expect to introduce it into a 
qualified solid waste disposal process within a reasonable period of 
time after acquisition.
    The Proposed Regulations defined used material to mean any material 
that has been used previously as an agricultural, commercial, consumer, 
or industrial product or as a component of any such product. The 
Proposed Regulations defined residual material to mean any residual 
byproduct or excess unused raw material that remains from the 
production of any agricultural, commercial, consumer, or industrial 
product, provided that material qualified as residual material only to 
the extent that it constituted less than five percent (5%) of the total 
material introduced into the production process and it had a fair 
market value that is reasonably expected to be lower than that of any 
product made in that production process.
    The Final Regulations generally retain the core definition of solid 
waste from the Proposed Regulations but modify that definition in 
certain technical respects. The Final Regulations clarify that material 
is ``solid'' only if it is solid at ambient temperature and pressure. 
The Final Regulations also clarify that solid waste can result from 
governmental operations or activities. The Final Regulations expand the 
definition of solid waste to include animal waste.
    With respect to the definition of residual material, commentators 
generally supported the analytic standard under the Proposed 
Regulations but recommended removing the five percent (5%) size 
limitation on residual material. Commentators recommended removing this 
size limit because it unduly restricts the scope of residual material 
in many circumstances and it arbitrarily treats various industries and 
activities differently because residual amounts vary widely by industry 
and activity. The Final Regulations adopt this comment to eliminate the 
five percent (5%) size limitation on residual material and otherwise 
generally retain the analytic standard for residual material. The Final 
Regulations also expand the definition of residual material to include 
material derived from providing a service in which no product is 
produced.
    Further, for purposes of determining residual material when 
multiple production processes are operated on the same site, 
commentators recommended a separate evaluation of each process. Based 
on reasons associated with scope and administrability, the IRS and the 
Treasury Department intended to cover only residual material that 
remains at the end of integrated processes that are functionally 
interconnected or interdependent, based on all the facts and 
circumstances. Accordingly, the Final Regulations do not adopt this 
comment. Instead, the Final Regulations adopt an integrated process 
standard to limit residual material.

4. Specific Exclusions From the Definition of Solid Waste

    In general, the Proposed Regulations excluded 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 Final Regulations retain 
these exclusions with certain technical modifications.
    The exclusion for virgin material aimed to distinguish solid waste 
disposal from manufacturing. The exclusion for certain precious metals 
aimed to recognize that recovery of these metals generally would take 
place without regard to a recycling industry. With respect to the 
exclusions for hazardous and radioactive waste, the statute and 
legislative history indicate that Congress intended to exclude 
hazardous waste and radioactive waste from solid waste. The statute 
treats qualified hazardous waste facilities as eligible exempt 
facilities under section 142(a)(10) separate and apart from 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, at II-704 (1986), 
1986-3 (Vol. 4) CB 704.
    Some commentators expressed concern that the introduction of virgin 
material or precious metals into a final disposal process, such as a 
landfill (as contrasted with a recycling process), could disqualify a 
facility from treatment as a qualified solid waste disposal facility. 
The Final Regulations address this comment favorably and modify the 
definition of solid waste to allow the introduction of virgin materials 
and precious metals into a final disposal process. The Final 
Regulations also add a provision that allows the IRS to identify other 
excluded precious metals in future public administrative guidance.
    Commentators also recommended treating hazardous waste and 
radioactive waste as solid waste. The Final Regulations generally do 
not adopt this comment. The IRS and the Treasury Department believe 
that Congress generally intended to exclude these materials from the 
definition of solid waste. Recognizing that only certain hazardous 
waste and radioactive waste are required to be disposed of at regulated 
facilities, however, the Final Regulations limit the exclusions for 
these two types of waste to the extent that they are required to be 
disposed of or contained at a regulated hazardous waste or radioactive 
waste disposal facility.

5. Qualified Solid Waste Disposal Process

    The Proposed Regulations provided for three eligible types of solid 
waste disposal processes: A final disposal process, an energy 
conversion process, and a recycling process. To provide flexibility for 
future innovation, the Proposed Regulations provided that, absent an 
express restriction in the proposed regulations, a solid waste disposal 
function may employ any biological, engineering, industrial, or 
technological method.
    The Final Regulations generally retain the eligible types of solid 
waste disposal processes from the Proposed Regulations, with technical 
clarifications. The Final Regulations clarify that a final disposal 
process includes the spreading of solid waste in an environmentally 
compliant and safe

[[Page 51881]]

manner. The Final Regulations also clarify that an energy conversion 
process ends at the point at which useful energy is first created or 
incorporated into the form of synthesis gas, heat, hot water, or other 
useful energy.

6. First Useful Product Principle

    The Proposed Regulations provided guidance on the standard for 
determining the first useful product for purposes of establishing the 
end point of a solid waste disposal process. The first useful product 
principle has particular application to recycling. Under the Proposed 
Regulations, a useful product generally included a product useful for 
consumption, either as an ultimate end-use product or as an input to 
some stage of a manufacturing or production process, and that could be 
sold for such use (taking into account operational constraints on such 
sales for certain integrated processes), whether or not actually sold.
    The Final Regulations generally retain the first useful product 
standard from the Proposed Regulations. Some commentators recommended 
that determinations under the first useful product rule take into 
account geographic location and transportation costs in certain 
situations. The Final Regulations adopt this comment.

7. Mixed-Input Facilities

    The Proposed Regulations provided a mixed-input accounting rule, 
which treated a facility as a qualified solid waste disposal facility 
if at least 65 percent of all of the material introduced into such 
facility in each year consisted of solid waste. This proposed rule 
recognizes that recycling processes may require supplemental inputs 
besides solid waste to operate viably. This proposed rule is similar to 
an existing rule under Sec.  1.103-8(f)(2)(ii)(c) of the Existing 
Regulations. This proposed rule requires annual testing for compliance 
with the requisite 65 percent solid waste threshold. Several 
commentators recommended reformulating this 65 percent test to require 
compliance based on an aggregate testing period measured over the life 
of the tax-exempt bonds instead of an annual testing period. These 
commentators expressed concerns about compliance with an annual test 
during start-up periods and aberrational years for various reasons.
    The Final Regulations retain the annual 65 percent test for mixed-
input facilities with modifications. In response to the public 
comments, the Final Regulations provide a special rule that allows a 
three-year curative period to address the impact of extraordinary 
events outside the control of the operator of the solid waste disposal 
facility (such as natural disasters, strikes, major utility 
disruptions, or governmental interventions). In addition, the Final 
Regulations provide that the annual testing does not begin until the 
facility is placed in service within the meaning of the special placed-
in-service definition in Sec.  1.150-2(c), which focuses on the point 
at which a facility is operational at substantially its design level.

8. Certain Other Changes

    Several commentators recommended removal of the proposed concept of 
facilities that perform a preliminary function for a qualified solid 
waste disposal process and removal of the threshold limit on 
preliminary functions that requires more than 50 percent of the 
materials that result from preliminary functions to constitute solid 
waste. The Final Regulations retain the concept of a preliminary 
function, but remove the 50 percent threshold limit on preliminary 
functions. The Final Regulations also provide for application of a 
mixed-use accounting rule to facilities that perform preliminary 
functions.
    One commentator expressed concern that Example 2 in the Proposed 
Regulations was confusing, and the Final Regulations remove that 
example with no substantive inference intended by that removal. The 
Final Regulations also expand and clarify certain other examples.
    Commentators recommended various transition rules for applicability 
of the Final Regulations to refunding bonds issued prior to the date of 
publication of the final regulations. The Final Regulations provide a 
transition rule for current refunding bonds the weighted average 
maturity of which is no longer than the remaining weighted average 
maturity of the refunded bonds.

Effective/Applicability Dates

    The Final Regulations apply to bonds to which section 142 applies 
that are sold on or after October 18, 2011. Issuers may apply the Final 
Regulations to outstanding bonds sold before October 18, 2011. The 
Final Regulations need not be applied to bonds that are issued in a 
current refunding to refund bonds to which the Final Regulations do not 
apply if the weighted average maturity of the refunding bonds is no 
longer than the remaining weighted average maturity of the refunded 
bonds.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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 are 
interpretative and 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 proposed 
regulations preceding these final regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these final regulations is Timothy L. 
Jones, Office of Associate Chief Counsel (Financial Institutions and 
Products). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 17

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 1 
and 17 are amended as follows:

PART 1--INCOME TAXES

0
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]

0
Par. 2. Section 1.103-8 is amended by removing paragraph (f)(2)(ii) and 
redesignating paragraph (f)(2)(iii) as (f)(2)(ii).

0
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--

[[Page 51882]]

    (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 (b)(1) or 
(b)(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, 
governmental, 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. For purposes of this section, material is solid if it 
is solid at ambient temperature and pressure.
    (i) Used material or residual material. Material meets the 
requirements of this paragraph (c)(1)(i) if it is either used material 
(as defined in paragraph (c)(1)(i)(A)) of this section or residual 
material (as defined in paragraph (c)(1)(i)(B) of this section).
    (A) Used material. The term used material means any material that 
is a product of any agricultural, commercial, consumer, governmental, 
or industrial operation or activity, or a component of any such product 
or activity, and that has been used previously. Used material also 
includes animal waste produced by animals from a biological process.
    (B) Residual material. The term residual material means material 
that meets the requirements of this paragraph (c)(1)(i)(B). The 
material must be a residual byproduct or excess raw material that 
results from or remains after the completion of any agricultural, 
commercial, consumer, governmental, or industrial production process or 
activity or from the provision of any service. In the case of multiple 
processes constituting an integrated manufacturing or industrial 
process, the material must result from or remain after the completion 
of such integrated process. As of the issue date of the bonds used to 
finance the solid waste disposal facility, the material must be 
reasonably expected to have a fair market value that is lower than the 
value of all of the products made in that production process or lower 
than the value of the service that produces such residual material.
    (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 generates, 
purchases, or otherwise acquires it to be introduced within a 
reasonable time after such generation, 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. Except to the extent that virgin material 
constitutes an input to a final disposal process or residual material, 
solid waste excludes any virgin material. The term virgin material 
means material that has not been processed into an agricultural, 
commercial, consumer, governmental, 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. Except to the extent that a precious metal 
constitutes an input to a final disposal process and/or an 
unrecoverable trace of the particular precious metal, solid waste 
excludes gold, silver, ruthenium, rhodium, palladium, osmium, iridium, 
platinum, gallium, rhenium, and any other precious metal material as 
may be identified by the Internal Revenue Service in future public 
administrative guidance.
    (iv) Hazardous material. Solid waste excludes any hazardous 
material that must be 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 for the definition of qualified hazardous 
waste facilities.
    (v) Radioactive material. Solid waste excludes any radioactive 
material subject to regulation under the Nuclear Regulatory Act (10 CFR 
1.1 et. seq), as in effect on the issue date of the bonds.
    (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 
the placement of solid waste in a landfill (including, for this 
purpose, the spreading of solid waste over land in an environmentally 
compliant and safe manner with no intent to remove such solid waste), 
the incineration of solid waste without capturing any useful energy, or 
the containment of solid waste with a reasonable expectation as of the 
date of issue of the bonds 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, 
captured, or incorporated into the form of synthesis gas, heat, hot 
water, or other useful energy and before any transfer or distribution 
of such synthesis gas, heat, hot water or other useful energy, 
regardless of whether such synthesis gas, heat, hot water, or other 
useful energy constitutes a first useful product within the meaning of 
paragraph (e) of this section.
    (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

[[Page 51883]]

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 the processing of solid waste in a solid 
waste disposal process that is useful for consumption in agricultural, 
consumer, commercial, governmental, 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. The determination of whether a useful product has 
been produced 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. For this purpose, the 
costs of extracting, isolating, storing, and transporting the product 
to a market may only be taken into account as operational constraints 
if the product is not to be used as part of an integrated manufacturing 
or industrial process in the same location as that in which the product 
is produced.
    (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.
    (g) Mixed-use facilities--(1) In general. 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 (a mixed-use facility), 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. Facilities qualify as 
functionally related and subordinate to a qualified solid waste 
disposal function only to the extent that they are functionally related 
and subordinate to the portion of the mixed-use facility that is used 
for one or more qualified solid waste disposal functions (including a 
qualified solid waste disposal process or a preliminary function).
    (2) Mixed inputs--(i) In general. Except as otherwise provided in 
paragraph (g)(2)(ii) of this section, for each facility (or a portion 
of a mixed-use facility) performing a qualified solid waste disposal 
process or a preliminary function, the percentage of the costs of the 
property used for such process that are allocable to a qualified solid 
waste disposal process or a preliminary function cannot exceed the 
average annual percentage of solid waste processed in that qualified 
solid waste disposal process or that preliminary function while the 
issue is outstanding. The annual percentage of solid waste processed in 
that qualified solid waste disposal process or preliminary function for 
any year is the percentage, by weight or volume, of the total materials 
processed in that qualified solid waste disposal process or preliminary 
function 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--(A) In general. Except as 
otherwise provided in paragraph (g)(2)(ii)(B) of this section, for each 
facility (or a portion of a mixed-use facility) performing a qualified 
solid waste disposal process or preliminary function, if the annual 
percentage of solid waste processed in that qualified solid waste 
disposal process or preliminary function for each year that the issue 
is outstanding (beginning with the date such facility is placed in 
service within the meaning of Sec.  1.150-2(c)) equals at least 65 
percent of the materials processed in that qualified solid waste 
disposal process or preliminary function, then all of the costs of the 
property used for such process are treated as allocable to a qualified 
solid waste disposal process. The annual percentage of solid waste 
processed in such qualified solid waste disposal process or preliminary 
function for any year is the percentage, by weight or volume, of the 
total materials processed in that qualified solid waste disposal 
process or preliminary function that constitute solid waste for that 
year.
    (B) Special rule for extraordinary events. In the case of an 
extraordinary event that is beyond the control of the operator of a 
solid waste disposal facility (such as a natural disaster, strike, 
major utility disruption, or governmental intervention) and that causes 
a solid waste disposal facility to be unable to meet the 65 percent 
test under paragraph (g)(2)(ii)(A) of this section for a particular 
year, the percentage of solid waste processed for that year equals--
    (1) The sum of the amount of solid waste processed in the solid 
waste disposal facility for the year affected by the extraordinary 
event and the amount of solid waste processed in the solid waste 
disposal facility during the following two years in excess of the 
amount required to meet the general 65 percent threshold for the 
facility during each of such two years; divided by
    (2) The total materials processed in the solid waste disposal 
facility during the year affected by the extraordinary event. If the 
resulting measure of solid waste processed for the year affected by the 
extraordinary event equals at least 65 percent, then the facility is 
treated as meeting the requirements of the 65 percent test under 
paragraph (g)(2)(ii)(A) of this section for such year.
    (iii) Facilities functionally related and subordinate to mixed-
input facilities. Except to the extent that facilities are functionally 
related and subordinate to a mixed-input facility that meets the 65 
percent test under paragraph (g)(2)(ii) of this section, facilities 
qualify as functionally related and subordinate to a mixed-input 
facility only to the extent that they are functionally related and 
subordinate to the qualified portion of the mixed-input facility that 
is used for one or more qualified solid waste disposal functions 
(including a qualified solid waste disposal process or a preliminary 
function).
    (h) Examples. The following examples illustrate the application of 
this section:

    Example 1. Nonqualified Unused Material--Cloth. Company A takes 
wool and 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 a product of or otherwise used in an 
agricultural, commercial, consumer, governmental, or industrial 
operation or activity, or as a component of any such product or 
activity. Accordingly, the cloth is not solid waste.
    Example 2. Residual Material--Waste Coal. Company B mines coal. 
Some of the ore mined is a low quality byproduct of coal mining 
commonly 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 the lowest fair market value of any product 
produced in Company B's coal mining process. Waste coal is solid 
waste because it is residual material within the meaning of 
paragraph (c)(1)(i)(B) of this section and Company B reasonably 
expects to introduce the waste coal into a solid waste disposal 
process.
    Example 3. Virgin Material--Logs. Company C cuts down trees and 
sells the logs to another company, which further processes the logs 
into lumber. In order to facilitate shipping, Company C cuts the 
trees into uniform logs. The trees are not solid waste because they 
are virgin material within the meaning of paragraph (c)(2)(i) of 
this section

[[Page 51884]]

that are not being introduced into a final disposal process within 
the meaning of paragraph (d)(1) of this section. The division of 
such trees into uniform logs does not change the status of the trees 
as virgin material.
    Example 4. Qualified Solid Waste Disposal Process--Landfill. 
Company D 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). As of the issue date, 
Company D 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. Placing solid waste into a landfill 
is a qualified solid waste disposal process. The landfill is a 
qualified solid waste disposal facility.
    Example 5. Qualified Solid Waste Disposal Process--Recycling 
Tires. Company E owns a facility that converts 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 6. Qualified Solid Waste Disposal Process--Energy 
Conversion Process. Company F receives solid waste from a municipal 
garbage collector. Company F burns that solid waste in an 
incinerator to remove exhaust gas and to produce heat. Company F 
further processes the heat in a heat exchanger to produce steam. 
Company F further processes the steam to generate electricity. The 
energy conversion process ends with the production of steam. The 
facilities used to burn the solid waste and to 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 to process the steam further to generate 
electricity are not engaged in the energy conversion process and are 
not qualified solid waste disposal facilities.
    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 parts. While the cars are used material, 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. (i) 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 approximately 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 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 processes the 
discarded magazines and 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.
    (ii) The facts are the same as in paragraph (i) of this Example 
8, except that Company H is able reasonably to extract the cleaned 
paper pulp from the process without degradation of the pulp and to 
sell the cleaned paper pulp at its dock for a price that exceeds its 
costs of extracting the pulp from the process. Therefore, the paper 
pulp is the first useful product within the meaning of paragraph (e) 
of this section. As a result, the portion of Company H's facility 
that processes the discarded magazines is a qualified solid waste 
disposal facility, and the portion of Company H's facility that 
produces industrial-sized rolls of paper is not a qualified solid 
waste disposal facility. If, however, the only reasonable way 
Company H could sell the pulp was to transport the pulp to a distant 
market, then the costs of storing and transporting the pulp to the 
market may be taken into account in determining whether the pulp is 
the first useful product.
    Example 9. Preliminary Function--Energy Conversion Process. (i) 
Company I 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 has 
the lowest fair market value of 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 I 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 Company I expects to introduce the bark into an 
energy 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.
    (ii) The facts are the same as in paragraph (a) of this Example 
9, except that the stripped bark represents only 55 percent by 
weight and volume of the materials that are transported by the 
conveyor belt. The remaining 45 percent of the materials transported 
by the conveyor belt are not solid waste and these other materials 
are sorted from the conveyor belt by a sorting machine immediately 
before the stripped bark arrives at the storage bin. Fifty-five 
percent of the costs of the conveyor belt and the sorting machine 
are allocable to solid waste disposal functions.
    Example 10. Preliminary Function--Final Disposal Process. 
Company J owns a waste transfer station and uses it to collect, 
sort, and process solid waste. Company J uses its trucks to haul the 
solid waste to the nearest landfill. At least 65 percent by weight 
and volume of the material brought to the transfer station is solid 
waste. The waste transfer station and the trucks perform functions 
that are preliminary and directly related to the solid waste 
disposal function of the landfill. Thus, the waste transfer station 
and the trucks qualify as solid waste disposal facilities.
    Example 11. Mixed-Input Facility. Company K owns an incinerator 
financed by an issue and uses the incinerator exclusively to burn 
coal and other solid material to create steam. 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.

    (i) Effective/Applicability Dates--(1) In general. Except as 
otherwise provided in this paragraph (i), this

[[Page 51885]]

section applies to bonds to which section 142 applies that are sold on 
or after October 18, 2011.
    (2) Elective retroactive application. Issuers may apply this 
section, in whole, but not in part, to outstanding bonds to which 
section 142 applies and which were sold before October 18, 2011.
    (3) Certain refunding bonds. An issuer need not apply this section 
to bonds that are issued in a current refunding to refund bonds to 
which this section does not apply if the weighted average maturity of 
the refunding bonds is no longer than the remaining weighted average 
maturity of the refunded bonds.

PART 17--[REMOVED]

0
Par. 4. Part 17 is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved by: August 9, 2011.
Emily S. McMahon,
(Acting) Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-21154 Filed 8-18-11; 8:45 am]
BILLING CODE 4830-01-P