WASHINGTON -- An Internal Revenue Service ruling that clarifies which of a chemical company's waste disposal facilities can be financed with tax-exempt private-activity bonds is both helpful and harmful to issuers, several bond lawyers said this week.

The private-letter ruling, which the IRS published last week, helps issuers because it concludes that semisolid wastes, such as sludge and dewatered wastes, qualify as solid wastes so the facilities used to dispose of them can be financed with tax-exempt bonds, the lawyers said.

But it is negative, they said, because it concludes that facilities used to dewater the liquid wastes do not qualify for tax-exempt financing. However, the lawyers were divided as to whether the IRS was saying most dewatering facilities will not qualify for tax-exempt financing.

The IRS typically cautions that private-letter rulings are only mean to apply to the parties that request them and should not be read as setting a precedent.

The lawyers all said, however, that this ruling would be relied upon because it sheds light on solid waste issues where there has been uncertainty at a time when private air and water pollution control facilities can no longer be financed with tax-exempt private-activity bonds.

"This is an evolving area," said John P. MacMaster, a lawyer with the firm of Winthrop, Stimson, Putnam & Roberts in New York. "Now that air and water pollution control facilities cannot be financed with tax-exempt private-activity bonds, there's more pressure on solid waste," he said.

Congress in 1986 eliminated the use of tax-exempt private-activity bonds for private air and water pollution control facilities but preserved their use for private solid waste facilities. Under current tax laws, a private solid waste facility can be financed with tax-exempt private-activity bonds as long as 95% of the proceeds are used for the facility.

But a key question lawyers and their clients have to wrestle with is what wastes are solid. The IRS has come under increasing pressure to consider some liquid and gaseous wastes as solid wastes, as Congress has done in amendments to one of the key laws affecting solid wastes, the Solid Waste Disposal Act of 1965. The agency has refused to go that far, but showed a little flexibility in the recent letter ruling, the lawyers said.

"We've never really had very good definition of solid wastes. And what this ruling does is say what is solid," said Thomas W. Taylor, a lawyer with the firm of Ropes & Gray in Boston.

The letter ruling, which did not identify the participants, was sought by a chemical and pharmaceutical company that built waste disposal facilities for its polyester manufacturing plant. These include sludge disposal, dewatering, incineration, and emission control facilities.

The company was seeking a ruling allowing it to use tax-exempt bonds to finance the dewatering, incineration, and emission control facilities. The plant wastes to be put through these facilities included a filtrate purge sludge, a waste-water stream which was to be dewatered and miscellaneous liquid wastes.

The sludge, normally a solid material, had to be transformed into a molten state to be put into the incinerator. The IRS ruled that the sludge was a solid waste and, in a helpful clarification for issuers, said the determination of whether waste is solid should be made when it is at ambient temperature and pressure.

The IRS ruled that the wastewater stream, which was 99.2% liquid when first put into the dewatering facility treatment facility, was not a solid or semisolid. But it said the dewatered waste, which was to be burned in the incinerator, was a semisolid that would be considered a solid waste.

The lawyers, however, were frustrated by the fact that the IRS refused to give the percentages of water and solid waste in the dewatered waste -- details that would have further clarified what it considered to be semisolid waste.

"One of the questions we have when dealing with an industrial sludge is when it is solid and when it is liquid but they didn't give the percentages to give us any real guidance on that," Mr. Taylor said.

The IRS said in the ruling that the miscellaneous wastes, which the company admitted were in liquid form, were not solid wastes.

The ruling concluded that the dewatering facility would not be considered a solid waste facility and could therefore not be tax-exempt financed. Some lawyers said they were disappointed at this conclusion as IRS rules stipulate that solid waste facilities would include facilities that are "functionally related and subordinate."

"I don't think they had to come out that way," Mr. Taylor said. "In most cases, this is going to mean that less of a [disposal] facility that has to be built will be financed with tax-exempt bonds," he said.

But Charles Henck, a lawyer with Ballard, Spahr, Andrews & Ingersoll, said he was not surprised at the IRS's conclusion. "I don't think this ruling stands for the proposition that a dewatering facility automatically does not qualify" for tax-exempt financing. It would depend on the waste stream put through the facility, he said. And in this case, the waste stream was mostly water.

The ruling said the incinerator would qualify as a solid waste facility to the extent that it burned solid waste and that the emission control facility would be "functionally related and subordinate" to the incinerator.

The IRS concluded in the ruling that the company could use tax-exempt financing for these two facilities to the extent that they were used for the disposal of the wastes considered to be solid.

The IRS said bond proceeds should be allocated to the financing of these facilities based on the average weights of the semisolid and solid wastes that were put through them as a percentage of the average weights of all the wastes put through them.

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