[Federal Register Volume 59, Number 246 (Friday, December 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31424]
[[Page Unknown]]
[Federal Register: December 23, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8576]
RIN 1545-AR64
Definition of Sewage Facilities for Tax-exempt Bond Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final Regulations.
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SUMMARY: This document contains final regulations on the definition of
sewage facilities. These regulations reflect changes to the law made by
the Tax Reform Act of 1986 and affect taxpayers who seek tax-exempt
bond financing for sewage facilities.
DATES: These regulations are effective on December 23, 1994.
For dates of applicability of these regulations, see
Sec. 1.142(a)(5)-1(e).
FOR FURTHER INFORMATION CONTACT: Joanne E. Johnson at (202) 622-3110
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part 1 to provide rules under section
142(a)(5) of the Internal Revenue Code of 1986 (Code) allowing tax-
exempt, private activity bond financing for sewage facilities.
On May 3, 1994, the IRS published in the Federal Register a notice
of proposed rulemaking (59 FR 22773 [PS-34-93]) defining sewage
facilities under section 142(a)(5). A number of written comments were
received concerning the proposed regulations, and a public hearing was
held on July 26, 1994. After consideration of all the written and oral
comments, the proposed regulations are adopted as revised by this
Treasury decision.
Explanation of Provisions
In General
The final regulations define a sewage facility for purposes of
section 142(a)(5) of the Code. Many commentators, including the United
States Environmental Protection Agency, recommended expanding the
definition of a sewage facility to include property for advanced or
tertiary treatment. Commentators suggested that additional treatment of
these types is often necessary due to the condition of the receiving
water, rather than the characteristics of the influent wastewater. In
response to this comment, the final regulations provide that qualifying
sewage facilities include certain property used for advanced or
tertiary treatment.
Several commentators suggested modifying or eliminating the
biochemical oxygen demand (BOD) limit contained in the proposed
regulations because they believe that property that performs a sewage
treatment function should qualify regardless of the BOD level of the
wastewater. Other commentators maintained that the BOD limit undermines
current water conservation policy and may be subject to manipulation.
Clarification was also requested regarding the particular point in the
sewage treatment process that the BOD limit must be measured.
The BOD limit has been retained in the final regulations because it
reasonably approximates the upper limit of the average daily raw
wasteload concentration for most publicly owned treatment works and
generally distinguishes between water pollution control and sewage
treatment. However, the BOD limit has been modified in response to the
comments received. The BOD limit does not apply if the failure to
satisfy the limit results from the implementation of federal, state, or
local water conservation measures. The final regulations also clarify
that determination of the BOD limit is measured at the time the
influent enters the sewage facility. Finally, an anti-abuse rule has
been added to prevent distortions of BOD levels designed to circumvent
the BOD limit.
While some commentators requested that tax-exempt, private activity
bond financing be permitted for pretreatment property, the final
regulations retain the rule contained in the proposed regulations that
excluded pretreatment property from the definition of a sewage
facility. The IRS and Treasury have concluded that pretreatment
property is more in the nature of water pollution control property,
which is ineligible for tax-exempt, private activity bond financing.
In response to comments, the final regulations clarify that sewage
disinfection property is functionally related and subordinate to
property qualifying for tax-exempt, private activity bond financing as
a sewage facility. Furthermore, some commentators advised that it was
not clear under the proposed regulations whether septage treatment
property qualified as a sewage facility. The final regulations clarify
that, since sewage sludge, as defined under 40 CFR 122.2, includes
septage, septage treatment property qualifies as a sewage facility. In
addition, under the final regulations septage treatment property is not
subject to the BOD limit.
Finally, in light of potential future technological advances in
wastewater treatment, the final regulations provide that the
Commissioner may determine that facilities using technologically
advanced or innovative processes qualify as sewage facilities if these
facilities perform functions that are consistent with the definition of
sewage facilities contained in the final regulations.
Effective Date
The final regulations apply to issues of bonds issued after
February 21, 1995. A transitional rule is provided for certain
refundings.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Joanne E. Johnson,
Office of Assistant Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.142(a)(5)-1 is added to read as follows:
Sec. 1.142(a)(5)-1 Exempt facility bonds: Sewage facilities.
(a) In general. Under section 103(a), a private activity bond is a
tax-exempt bond only if it is a qualified bond. A qualified bond
includes an exempt facility bond, defined as any bond issued as part of
an issue 95 percent or more of the net proceeds of which are used to
provide a facility specified in section 142. One type of facility
specified in section 142(a) is a sewage facility. This section defines
the term sewage facility for purposes of section 142(a).
(b) Definitions--(1) Sewage facility defined. A sewage facility is
property--
(i) Except as provided in paragraphs (b)(2) and (d) of this
section, used for the secondary treatment of wastewater; however, for
property treating wastewater reasonably expected to have an average
daily raw wasteload concentration of biochemical oxygen demand (BOD)
that exceeds 350 milligrams per liter as oxygen (measured at the time
the influent enters the facility) (the BOD limit), this paragraph
(b)(1)(i) applies only to the extent the treatment is for wastewater
having an average daily raw wasteload concentration of BOD that does
not exceed the BOD limit;
(ii) Used for the preliminary and/or primary treatment of
wastewater but only to the extent used in connection with secondary
treatment (without regard to the BOD limit described in paragraph
(b)(1)(i) of this section);
(iii) Used for the advanced or tertiary treatment of wastewater but
only to the extent used in connection with and after secondary
treatment;
(iv) Used for the collection, storage, use, processing, or final
disposal of--
(A) Wastewater, which property is necessary for such preliminary,
primary, secondary, advanced, or tertiary treatment; or
(B) Sewage sludge removed during such preliminary, primary,
secondary, advanced, or tertiary treatment (without regard to the BOD
limit described in paragraph (b)(1)(i) of this section);
(v) Used for the treatment, collection, storage, use, processing,
or final disposal of septage (without regard to the BOD limit described
in paragraph (b)(1)(i) of this section); and
(vi) Functionally related and subordinate to property described in
this paragraph (b)(1), such as sewage disinfection property.
(2) Special rules and exceptions--(i) Exception to BOD limit. A
facility treating wastewater with an average daily raw wasteload
concentration of BOD exceeding the BOD limit will not fail to qualify
as a sewage facility described in paragraph (b)(1) of this section to
the extent that the failure to satisfy the BOD limit results from the
implementation of a federal, state, or local water conservation program
(for example, a program designed to promote water use efficiency that
results in BOD concentrations beyond the BOD limit).
(ii) Anti-abuse rule for BOD limit. A facility does not satisfy the
BOD limit if there is any intentional manipulation of the BOD level to
circumvent the BOD limit (for example, increasing the volume of water
in the wastewater before the influent enters the facility with the
intention of reducing the BOD level).
(iii) Authority of Commissioner. In appropriate cases upon
application to the Commissioner, the Commissioner may determine that
facilities employing technologically advanced or innovative treatment
processes qualify as sewage facilities if it is demonstrated that these
facilities perform functions that are consistent with the definition of
sewage facilities described in paragraph (b)(1) of this section.
(3) Other applicable definitions--(i) Advanced or tertiary
treatment means the treatment of wastewater after secondary treatment.
Advanced or tertiary treatment ranges from biological treatment
extensions to physical-chemical separation techniques such as
denitrification, ammonia stripping, carbon adsorption, and chemical
precipitation.
(ii) Nonconventional pollutants are any pollutants that are not
listed in 40 CFR 401.15, 401.16, or appendix A to part 423.
(iii) Preliminary treatment means treatment that removes large
extraneous matter from incoming wastewater and renders the incoming
wastewater more amenable to subsequent treatment and handling.
(iv) Pretreatment means a process that preconditions wastewater to
neutralize or remove toxic, priority, or nonconventional pollutants
that could adversely affect sewers or inhibit a preliminary, primary,
secondary, advanced, or tertiary treatment operation.
(v) Primary treatment means treatment that removes material that
floats or will settle, usually by screens or settling tanks.
(vi) Priority pollutants are those pollutants listed in appendix A
to 40 CFR part 423.
(vii) Secondary treatment means the stage in sewage treatment in
which a bacterial process (or an equivalent process) consumes the
organic parts of wastes, usually by trickling filters or an activated
sludge process.
(viii) Sewage sludge is defined in 40 CFR 122.2 and includes
septage.
(ix) Toxic pollutants are those pollutants listed in 40 CFR 401.15.
(c) Other property not included in the definition of a sewage
facility. Property other than property described in paragraph (b)(1) of
this section is not a sewage facility. Thus, for example, property is
not a sewage facility, or functionally related and subordinate
property, if the property is used for pretreatment of wastewater
(whether or not this treatment is necessary to perform preliminary,
primary, secondary, advanced, or tertiary treatment), or the related
collection, storage, use, processing, or final disposal of the
wastewater. In addition, property used to treat, process, or use
wastewater subsequent to the time the wastewater can be discharged into
navigable waters, as defined in 33 U.S.C. 1362, is not a sewage
facility.
(d) Allocation of costs. In the case of property that has both a
use described in paragraph (b)(1) of this section (a sewage treatment
function) and a use other than sewage treatment, only the portion of
the cost of the property allocable to the sewage treatment function is
taken into account as an expenditure to provide sewage facilities. The
portion of the cost of property allocable to the sewage treatment
function is determined by allocating the cost of that property between
the property's sewage treatment function and any other uses by any
method which, based on all the facts and circumstances, reasonably
reflects a separation of costs for each use of the property.
(e) Effective date--(1) In general. This section applies to issues
of bonds issued after February 21, 1995.
(2) Refundings. In the case of a refunding bond issued to refund a
bond to which this section does not apply, the issuer need not apply
this section to that refunding bond. This paragraph (e)(2) applies only
if the weighted average maturity of the refunding bonds, as described
in section 147(b), is not greater than the remaining weighted average
maturity of the refunded bonds.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 2, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-31424 Filed 12-22-94; 8:45 am]
BILLING CODE 4830-01-U
