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Firm Suggests Changes to Proposed Regs Defining Solid Waste Disposal Facilities

DEC. 15, 2009

Firm Suggests Changes to Proposed Regs Defining Solid Waste Disposal Facilities

DATED DEC. 15, 2009
DOCUMENT ATTRIBUTES
  • Authors
    Silverman, Mark J.
    Lerner, Matthew D.
  • Institutional Authors
    Steptoe & Johnson LLP
  • Cross-Reference
    For REG-140492-02, see Doc 2009-20505 or 2009 TNT

    177-12 2009 TNT 177-12: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-27748
  • Tax Analysts Electronic Citation
    2009 TNT 241-14

 

December 15, 2009

 

 

Internal Revenue Service

 

CC:PA:LPD:PR (REG--140492-02) Room 5203

 

Courier's Desk

 

1111 Constitution Avenue, NW

 

Washington, DC 20224

 

 

To Whom It May Concern:

We are writing to provide comments on the proposed regulations defining a "solid waste disposal facility" under section 142(a)(6) of the Internal Revenue Code. On September 15, 2009, the Internal Revenue Service ("IRS" or the "Service") issued revised proposed regulations defining "solid waste disposal facility" and "solid waste" for purposes of the tax-exempt bond rules (the "Proposed Regulations"). We commend the Treasury Department and the IRS for their efforts in promulgating these Proposed Regulations, which eliminate many of the problems that characterize the current regulations.

In particular, the Proposed Regulations do not include a "no value" limitation on what qualifies as "solid waste." The "no value" test in the current regulations is inconsistent with both Congressional intent and the definition of "solid waste" in other areas of the law, and has proved to be unadministrable in the context of modern recycling programs. In addition, the provision of the Proposed Regulations that allows taxpayers to elect to apply the new standards retroactively is an important clarification that will help to resolve existing controversies and confusion caused by the current rules. It will also eliminate the risk of treating similarly situated taxpayers differently.

There is, however, at least one aspect of the Proposed Regulations that we believe should be revised due to its lack of clarity and its potential for unintended consequences. The Proposed Regulations require "solid waste" to be either "used material" or "residual material." As a general matter, this definition makes sense. However, the definition of "residual material" in Prop. Treas. § 1.142(a)(6)-1(c)(1)(i)(B) contains an arbitrary and unworkable "five percent" test:

 

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.

 

The standard "only to the extent that it constitutes less than five percent of the total material introduced into the production process" is flawed for three different but inter-related reasons. First, a quantitative standard arbitrarily excludes materials that would otherwise clearly have qualified as "solid waste." Second, the five percent level is unreasonably low, and results in the exclusion of materials that we believe the Proposed Regulations intended to qualify as residual material. Third, even if a five percent, or some higher and more reasonable quantitative test is appropriate, the Proposed Regulations lack any guidance on how to measure either "five percent" or the "total material introduced into the production process."

First, a quantitative standard excludes materials that are clearly intended to qualify as residual waste. The goal of the statute and these regulations is to encourage the productive use of material that would otherwise have to be discarded, landfilled, or incinerated. Congress clearly prefers that such waste be employed in other production processes. Indeed, in those situations where the residual material constitutes a significant portion of the original production input, the need for efficient recycling/reuse is more pronounced, not less. Hence, the regulations should encourage recycling and reuse of all residual waste regardless of its relationship as a percentage of the whole. The construction of a facility to use, rather than dispose of, such material is plainly within the purpose of the statutory provision, yet, under the Proposed Regulations as currently drafted, a facility built for that purpose may not qualify for favorable tax treatment. If material is an otherwise unwanted by-product, it should qualify as residual material without regard to such arbitrary factors as its weight or volume relative to the valuable material from the same source.

Second, the five percent level specified in the Proposed Regulations is too low and would exclude materials that the Proposed Regulations clearly intend to include within the scope of "solid waste." For instance, Example 10 in the Proposed Regulations describes a paper mill that strips bark from trees used to make paper and burns that bark in a boiler to generate steam, which in turn generates electricity. Bark is a perfect example of a residual material. It must be stripped from trees to generate wood suitable for processing into pulp that can then be used to make paper. If the bark were not burned in the boiler, it would be discarded as waste.

Example 10 in the Proposed Regulations recognizes this and uses the bark boiler process as an example of the intended reach of the Proposed Regulations. However, Example 10 states, "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." While the Proposed Regulations do not specify how the five percent is measured, there are virtually no logs used to make paper that would meet the five percent test, either by weight or volume. Under either standard, bark generally constitutes in excess of five percent of a log. Accordingly, Example 10 describes facts that almost never exist, demonstrating why the five percent standard is illogical and unworkable. The relative percentage of bark on a log does not change the fact that the bark must be removed and discarded in order to make paper. That alone should be sufficient to qualify the bark as "residual material" and therefore "solid waste." Third, even if five percent were an appropriate limitation, the Proposed Regulations do not specify how to measure five percent of the total material introduced into the production process. Does five percent refer to some physical characteristic such as weight or volume? Or does it refer to value? What is included in "total material introduced into the production process?" Example 10 implies that the percentage of bark should be determined with reference to the logs from which it came. However, the paper production process also requires the use of water and chemicals, as well as energy generated from other sources. Do these other manufacturing inputs figure in the calculation, and, if so, how? Or is the five percent measured only with reference to the specific material from which the residual material is separated and removed? If all inputs into the production process can be used in calculating five percent, how does a taxpayer compare the amount of bark to the amount of chemicals and water? How would the proposed definition be applied if a single item (wood from a log) is used in multiple production processes?

Moreover, even if the above questions were answered, it is not clear how companies would gather and record the information necessary to satisfy a quantitative standard. What measurements would be required? Would a paper company be required to weigh or measure each tree, and the corresponding bark stripped off of that tree, to prove that the bark qualifies as residual material? If it is not necessary to weigh or measure each tree, how often must measurements be taken? Would estimates or industry standards for specific materials be sufficient? All of these questions indicate that a quantitative measurement standard is nearly impossible to administer and will likely introduce the uncertainty and confusion the Proposed Regulations were intended to avoid.

We understand the preference for a quantitative bright line rule where feasible. However, such a rule is not feasible or necessary in this instance for the reasons described above. The remainder of the definition of "residual material" in the Proposed Regulations, without the five percent limitation, is sufficient to ensure that only genuine "waste" qualifies as residual material. For instance, requiring that residual material be reasonably expected to have a value less than any product made in the production process is sufficient to ensure that valuable materials are not being harvested and treated as waste.

If, however, the IRS prefers a bright line, quantitative rule, the questions raised above must be addressed to make the Proposed Regulations administrable. In addition, the standard must be increased to include materials that are clearly residual waste. For example, based on some industry statistics, the bark stripped from trees typically comprises approximately 10-12 percent of a tree by weight. Accordingly, any quantitative standard must be increased above that amount so that bark qualifies as residual waste, as plainly contemplated by Example 10 in the Proposed Regulations.

We would be happy to discuss these comments further.

Sincerely,

 

 

Mark J. Silverman

 

Steptoe & Johnson LLP

 

Washington, DC

 

 

Matthew D. Lerner

 

Steptoe & Johnson LLP

 

Washington, DC
DOCUMENT ATTRIBUTES
  • Authors
    Silverman, Mark J.
    Lerner, Matthew D.
  • Institutional Authors
    Steptoe & Johnson LLP
  • Cross-Reference
    For REG-140492-02, see Doc 2009-20505 or 2009 TNT

    177-12 2009 TNT 177-12: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-27748
  • Tax Analysts Electronic Citation
    2009 TNT 241-14
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