Definition of Sewage Facilities for Tax-exempt Bond Purposes

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-34-93]

RIN 1545-AR64

Definition of Sewage Facilities for Tax-exempt Bond Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations on the definition

of sewage facilities. The proposed regulations reflect changes to the

law made by the Tax Reform Act of 1986 and affect taxpayers who seek

tax-exempt bond financing for sewage facilities. This document also

provides notice of a public hearing on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented

at the public hearing scheduled for 10 a.m. on July 26, 1994, must be

received by July 5, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-34-93), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-34-93),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC.

The public hearing will be held in the Commissioner's Conference

Room, Internal Revenue Building, room 3313, 1111 Constitution Avenue

NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joanne E.

Johnson at (202) 622-3110; concerning submissions and the hearing,

Carol Savage, (202) 622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 103(a) generally provides that the interest on obligations

of a State or political subdivision thereof is excluded from gross

income. Section 103(b)(1) provides, however, that section 103(a) does

not apply to any private activity bond unless the bond is a qualified

bond. Section 141(e) defines a qualified bond to include an exempt

facility bond which, under section 142(a)(5), includes an issue at

least 95 percent of the net proceeds of which are used to provide

sewage facilities.

Until the Tax Reform Act of 1986 (1986 Act), both sewage disposal

facilities and water pollution control facilities constituted exempt

facilities under former sections 103(b)(4)(E) and 103(b)(4)(F),

respectively, the predecessors to existing section 142. Section 1.103-

8(f)(2)(i) defines sewage disposal facilities to mean any property used

for the collection, storage, treatment, utilization, processing, or

final disposal of sewage.

The 1986 Act eliminated the exempt facility exemptions for air and

water pollution control facilities, while retaining the exemption for

sewage disposal facilities (renamed sewage facilities by the 1986 Act)

under section 142(a)(5). Neither section 142 nor the regulations issued

under section 103(b)(4) define sewage. As a result, it has become

important to define the facilities eligible for private activity bond

financing as sewage facilities under section 142(a)(5).

Explanation of Provisions

Definition of Sewage Facility

The proposed regulations define a sewage facility for purposes of

section 142(a)(5). A facility may satisfy the definition of a sewage

facility regardless whether wastewater originates from a domestic, a

commercial, or an industrial source. The proposed regulations, in

effect, generally distinguish between sewage treatment facilities and

water pollution control facilities. The proposed regulations define

sewage facilities by reference to the operations historically performed

at most publicly-owned treatment works (POTW). On the other hand,

because toxic, priority, and nonconventional pollutants are more in the

nature of water pollutants, the regulations consider treatment of these

pollutants as ordinarily not performed in sewage facilities.

The proposed regulations provide that sewage facilities include

property used for the secondary treatment of wastewater but only to the

extent the treatment is for wastewater having an average daily raw

wasteload concentration of biochemical oxygen demand (BOD) that does

not exceed 350 milligrams per liter as oxygen. Thus, to the extent the

wastewater treated by the property has an average daily raw wasteload

concentration of BOD exceeding 350 milligrams per liter as oxygen, then

the property used for the secondary treatment of the excess is not a

sewage facility. The limitation is intended to reasonably approximate

the upper limit of the average daily raw wasteload concentration for

most POTWs.

The proposed regulations further provide that any property used for

the preliminary and/or primary treatment of wastewater used in

connection with secondary treatment qualifies as a sewage facility.

Sewage facilities also include related property used for the

collection, storage, use, processing, or final disposal of wastewater

or sewage sludge and property functionally related and subordinate to a

sewage facility.

Generally, other treatment of wastewater is not sewage treatment.

Thus, for example, sewage facilities, including functionally related

and subordinate property, do not include property used for the

pretreatment, advanced treatment, or tertiary treatment of wastewater,

whether or not the treatment is necessary for preliminary, primary, or

secondary treatment.

For property that has both a sewage treatment function and another

function, such as pretreatment or, in certain cases, secondary

treatment of wastewater having an average daily raw wasteload

concentration of BOD in excess of 350 milligrams per liter as oxygen,

the proposed regulations provide an allocation rule to permit the

portion of the property allocable to sewage treatment to be financed as

part of an exempt facility issue.

The IRS solicits comments on how best to address technological

advances to wastewater treatment processes within the definition of

sewage facilities.

Proposed Effective Dates

The regulations are proposed to apply to issues of bonds issued 60

days after publication of the final regulations in the Federal

Register.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for July 26, 1994, at 10 a.m.,

in the Commissioner's Conference Room, Internal Revenue Building, room

3313, 1111 Constitution Avenue, NW., Washington, DC. Because of access

restrictions, visitors will not be admitted beyond the Internal Revenue

Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and an outline of the topics to be discussed

and the time to be devoted to each topic (signed original and eight (8)

copies) by July 5, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Joanne E. Johnson,

Office of Assistant Chief Counsel (Passthroughs and Special

Industries). However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

part as follows:

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

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

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

(a) In general. Under section 103(a), a private activity bond is a

tax-exempt bond only if it is a qualified bond. Qualified bonds include

exempt facility bonds, defined as any bond issued as part of an issue

95 percent or more of the net proceeds of which are used to provide a

facility specified in section 142. One type of facility specified in

section 142(a) is a sewage facility. This section defines the term

sewage facility for purposes of section 142(a).

(b) Definitions--(1) Sewage facility defined. A sewage facility is

property--

(i) Used for the secondary treatment of wastewater but, for

property treating wastewater reasonably expected to have an average

daily raw wasteload concentration of biochemical oxygen demand (BOD)

that exceeds 350 milligrams per liter as oxygen, only to the extent the

treatment is for wastewater having an average daily raw wasteload

concentration of BOD that does not exceed 350 milligrams per liter as

oxygen (see paragraph (d) of this section regarding permissible

allocations of costs);

(ii) Used for the preliminary and/or primary treatment of

wastewater but only to the extent used in connection with secondary

treatment (without regard to the BOD limitation described in paragraph

(b)(1)(i) of this section);

(iii) Used for the collection, storage, use, processing, or final

disposal of--

(A) Wastewater, which property is necessary for such preliminary,

primary, or secondary treatment; or

(B) Sewage sludge removed during such preliminary, primary, or

secondary treatment; and

(iv) Functionally related and subordinate to property described in

this paragraph (b)(1).

(2) Other applicable definitions--(i) Advanced or tertiary

treatment generally means the treatment of wastewater after secondary

treatment. Advanced or tertiary treatment ranges from biological

treatment extensions to physical-chemical separation techniques such as

denitrification, ammonia stripping, carbon adsorption, and chemical

precipitation.

(ii) Nonconventional pollutants are any pollutants that are not

listed in 40 CFR 401.15, 401.16, part 423, app. A.

(iii) Preliminary treatment generally means treatment that removes

large extraneous matter from incoming wastewater and renders the

incoming wastewater more amenable to subsequent treatment and handling.

(iv) Pretreatment means processes that equalize flow and loadings,

or that precondition wastewater to neutralize or remove toxic,

priority, nonconventional pollutants, and other wastes that could

adversely affect sewers or inhibit preliminary, primary, or secondary

treatment operations.

(v) Primary treatment means treatment that removes material that

floats or will settle, usually by screens or settling tanks.

(vi) Priority pollutants are those pollutants listed in 40 CFR part

423, app. A.

(vii) Secondary treatment means the stage in sewage treatment in

which a bacterial process (or an equivalent process) consumes the

organic parts of wastes, usually by trickling filters or an activated

sludge process.

(viii) Sewage sludge means sludge as defined in 40 CFR 122.2.

(ix) Toxic pollutants are those pollutants listed in 40 CFR 401.15.

(c) Other property not included in the definition of a sewage

facility. Property other than property described in paragraph (b)(1) of

this section is not a sewage facility. Thus, for example, property is

not a sewage facility, or functionally related and subordinate

property, if the property is used for pretreatment, advanced treatment,

or tertiary treatment of wastewater (whether or not this treatment is

necessary to perform preliminary, primary, or secondary treatment), or

the related collection, storage, use, processing, or final disposal of

the wastewater. In addition, property used to treat, process, or use

wastewater subsequent to the time the wastewater can be discharged into

navigable waters is not a sewage facility.

(d) Allocation of costs. In the case of property that has both a

use described in paragraph (b)(1) of this section (a sewage treatment

function) and a use other than sewage treatment, only the portion of

the cost of the property allocable to the sewage treatment function is

taken into account as an expenditure to provide sewage facilities. The

portion of the cost of property allocable to the sewage treatment

function is determined by allocating the cost of that property between

the property's sewage treatment function and any other uses by any

method which, based on all the facts and circumstances, reasonably

reflects a separation of costs for each use of the property.

(e) Effective date. This section applies to issues of bonds issued

60 days after publication of the final regulations in the Federal

Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-10584 Filed 5-2-94; 8:45 am]

BILLING CODE 4830-01-U