STATE BONDS FOR HAZARDOUS WASTE CLEANUP MAY BE TAX-EXEMPT DESPITE PRIVATE REIMBURSEMENT.

Notice 89-9

SEC. 1. SCOPE

This notice describes forthcoming regulations concerning the application of the private security or payment test of section 141(b)(2) of the Internal Revenue Code and the private loan financing test of section 141(c) to state and local bonds issued to finance the costs of hazardous waste clean-up activities conducted by state or local governments when some of the clean-up activities occur on privately owned land and reimbursement may be sought from private parties.

SEC. 2. BACKGROUND

01 Section 6179 of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 102 Stat. 3342, provides that the Secretary of the Treasury or his delegate shall issue guidance concerning the application of the private security or payment test under section 141(b)(2) of the Code to tax-exempt bond financing by state and local governments of hazardous waste clean-up activities conducted by such governments where some of the activities occur on privately owned land.

02 The specific concern raised by the state or local bonds issued to finance hazardous waste clean-up activities ("hazardous waste remediation bonds") on privately owned land is whether the bonds meet the private security or payment test of section 141(b)(2) of the Code if reimbursement of the costs of the remediation is sought from private parties. Conference Report to Accompany H.R. 4333, 2 H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. II-204 (1988). The private parties from whom state or local governments may seek or require reimbursements for costs of the remediation may include the owner of the land or persons who are or were responsible for disposing of the hazardous waste. In addition, fees paid by private persons who are engaged in generating or handling hazardous waste, or in refining, producing, or transporting petroleum, may be used, directly or indirectly, to pay for costs of the remediation.

03 Under section 103 of the Code, interest on a state or local bond generally is not tax-exempt if the bond is a private activity bond.

04 Section 141(a) of the Code defines the term "private activity bond" as any bond issued as part of an issue which meets either the private business tests of section 141(b) or the private loan financing test of section 141(c). An issue meets the private business tests of section 141(b) only if the issue meets both the private business use test of section 141(b)(1) and the private security or payment test of section 141(b)(2).

05 An issue meets the private business use test of section 141(b)(1) of the Code if more than 10 percent of the proceeds of such issue is to be used (directly or indirectly) in a trade or business carried on by any person other than a governmental unit.

06 An issue meets the private security test of section 141(b)(2)(A) of the Code if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly secured by any interest in property used or to be used for a private business use (or by any interest in payments in respect of such property).

07 An issue meets the private payment test of section 141(b)(2)(B) of the Code if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly to be derived from payments (whether or not to the issuer) in respect of property (or borrowed money) used or to be used for a private business use.

08 The legislative history of section 141(b)(2) of the Code indicates that payments in respect of property (or borrowed money) financed with the proceeds of an issue need not be pledged as security for, or directly used to pay, debt service on the issue in order to be taken into account under section 141(b)(2). See 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-688 (1986), 1986-3 C.B. (Vol. 4) 688. Thus, for purposes of section 141(b)(2)(B), the payment of the principal of, or the interest on, the proceeds of an issue generally is considered (under an underlying arrangement) to be derived from such payments.

09 An issue meets the private loan financing test of section 141(c) of the Code if the amount of the proceeds of the issue which is to be used (directly or indirectly) to make or finance loans (with the exception of certain loans described in the following sentence) to persons other than governmental units exceeds the lesser of five percent of such proceeds or $5,000,000. A loan is described in this sentence if the loan enables the borrower to finance any governmental tax or assessment of general application for a specific essential governmental function or is a nonpurpose investment (within the meaning of section 148(f)(6)(A)).

SEC. 3. GUIDANCE

01 Under regulations to be promulgated under section 141 of the Code regarding the application of the private security test of section 141(b)(2)(A) of the Code and the private payment test of section 141(b)(2)(B) to hazardous waste remediation bonds:

(1) Payments from private business persons who are not (other than coincidentally) either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site which payments secure the payment of principal of, or interest on, the bonds (directly or indirectly), under the terms of the bond issue are not taken into account for purposes of the private security test if such payments are made pursuant to either (a) a generally applicable state or local taxing statute or (b) a state or local statute that regulates or restrains activities on an industry- wide basis of persons who are engaged in generating or handling hazardous waste, or in refining, producing or transporting petroleum, provided that such payments do not represent, in substance, payment for the use of bond proceeds. For purposes of the preceding sentence, a state or local statute that imposes payments that have substantially the same character as those described in Chapter 38 of the Code are treated as generally applicable taxes.

(2) Payments from private business persons who are either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site which payments do not secure the payment of principal of, or interest on, the bonds (directly or indirectly), under the terms of the bond issue are not taken into account in determining whether the private payment test is met if at the time the bonds are issued the payments from the private business persons are not material to the security for the bonds. For purposes of the preceding sentence, there is an irrebuttable presumption that payments are not material to the security for the bonds if (a) the payments from the private business persons are not required for the payment of debt service on the bonds, (b) the amount and timing of the payments are not structured or designed to reflect the payment of debt service on the bonds, (c) the receipt or the amount of the payments is uncertain, and (d)(i) if no judgment has been entered against a private business person by the time the bonds are issued, the payments from such person, when and if received, are used either to redeem bonds of the issuer in an equivalent principal amount or to pay for costs of any hazardous waste remediation project, or (ii) if a judgment (but not a final judgment) has been entered against a private business person by the time the bonds are issued, there are, as of the date of issue of the bonds, costs of hazardous waste remediation other than those financed with bond proceeds which may be financed with the payments and such payments, when and if received, are used either to redeem bonds of the issuer in an equivalent principal amount or to pay for costs of any hazardous waste remediation project.

02 Under regulations to be promulgated under section 141 of the Code regarding the application of the private loan financing test of section 141(c) to hazardous waste remediation bonds, payments from private persons who are either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site which payments do not secure the payment of principal of, or interest on, the bonds (directly or indirectly), under the terms of the bond issue will not cause an issue to meet the private loan financing test of section 141(c) of the Code, where the conditions set forth in section 3.01(2) are satisfied.

RELIANCE

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Mr. George Delduke of the Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this notice, please contact Mr. Delduke at (202) 566-3347 or Mr. David Selig at (202) 566-4545 (not toll-free calls).