WASHINGTON -- The National Association of Bond Lawyers is urging the Treasury and the Internal Revenue Service to write rules that broadly define the term "sewage facilities" so that tax-exempt bonds can be used for privately owned as well as publicly owned wastewater treatment systems.

"We believe that examination of the law, regulations and supporting materials can only lead to the conclusion that sewage disposal facilities include facilities that dispose of industrial sewage, storm drainage sewage and domestic sewage," the association said in a position paper that was sent to the Treasury and the IRS last month.

The Treasury should broadly define "sewage facilities," but could set limits on "sewage" to include only those wastes that traditionally have been discharged into municipal wastewater treatment systems and that have the basic characteristics commonly associated with sewage, the lawyers said.

New private-activity bond rules are needed, the lawyers said, to clear up the confusion over the definition of sewage that resulted from 1986 tax law changes and IRS reversals of two letter rulings that had allowed such facilities to be bond-financed.

In the Tax Reform Act of 1986, Congress eliminated tax-exempt private- activity bond financing for water pollution control facilities but retained it for sewage facilities, leaving issuers and bond counsel to try to distinguish between them.

Then in 1990, the IRS revoked separate letter rulings that had allowed a food-processing plant in Ohio and some electroplating companies in California to use tax-exempt financing for the acquisition and development of facilities that would pretreat waste before it was discharged into public sewer systems.

In the rulings, which were issued in 1988 and 1989, the IRS concluded that the pretreatment facilities qualified for tax-exempt financing because they were an integral part of public sewer systems to the extent that they helped local governments meet tougher environmental standards.

But the agency revoked the rulings without explaining its reasons for doing so or providing further guidance. Bond lawyers have since been reluctant to give opinions that bonds for most privately owned sewage facilities would be tax-exempt, several bond lawyers said.

Clearing up the confusion has become a priority for the National Association of Bond Lawyers because an increasing number of privately owned facilities are required to pretreat their wastes to meet environmental requirements, the lawyers said.

"It's becoming a bigger and bigger issue for companies as they are trying to comply with the clean water act," said Robert W. Buck, a lawyer with Palmer & Dodge in Boston who helped write the position paper.

The current Treasury rules do not adequately define sewage, the lawyers said in the paper, because the rules say only that "the term sewage disposal facilities' means any property used for the collection, storage, treatment, utilization, processing, or final disposal of sewage."

Congress intended that industrial facilities be treated as sewage facilities, they said, because it allowed tax-exempt private-activity bonds to be used to finance them. "In general, municipally owned sewer systems can be financed with governmental bonds," the lawyers said.

Even though the Treasury rules do not define sewage, the lawyers said, the rules state that sewage disposal facilities "will be treated in all events as serving a general public use although they may be part of a nonpublic facility such as a manufacturing facility."

Buck pointed out that the use of tax-exempt bonds for sewage facilities is now, and would continue to be, restricted because private-activity bonds can be issued only under state volume limits.

"If you've got the volume cap and the state views this as an important objective, then the state should be allowed to use private-activity bonds for this purpose," Buck said.

"The legislative history and long-standing IRS rules suggest that private industrial users should be allowed to tax-exempt finance sewage facilities. The only thing that's thrown a monkey wrench into this whole issue is the IRS' revocation of those two private-letter rulings," he said.

The lawyers group said that allowing tax-exempt financing of industrial wastewater treatment facilities would promote federal environmental policies that encourage producers of industrial waste to pretreat or completely treat their waste before discharging it into a waterway or a municipal system.

The EPA, they said, broadly defines wastewater treatment facilities to include those used in the "storage, treatment recycling, and reclamation or municipal sewage or industrial wastes of a liquid nature."

The dictionary also contains a broad definition of sewage, the lawyers group said. Webster's New Collegiate Dictionary, for example, defines sewage as "refuse liquids or waste matter carried off by sewers," they said.

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