Bond Lawyers, Recyclers, Paper Groups Suggest IRS Steps On Recycling

Recyclers, paper industry groups and municipal bond lawyers said they had made suggestions to the Internal Revenue Service they hope will resolve controversy over tax-exempt financing of recycling facilities.

"We're hoping they do something as soon as possible," said Dave Koenig, director of tax policy at the American Forest and Paper Association. "This problem has been going on for a few years now."

In a letter written to the IRS, the AFPA suggested that the IRS adhere to the following principles:

·        The Administration and Congress through both actions and words have intended that tax-exempt bond financing be available for recycling facilities, so as to encourage recycling as a preferred method of dealing with solid waste.  Interpretation of the solid waste rules/regulations should be consistent with that intent.

·        Taxpayers should be allowed to elect to apply any guidance put forth by the IRS retroactively.  This will hold taxpayers harmless as a result of ambiguities in the current regulations that made this regulatory project necessary. 

·        Determining whether material is waste should be made at the location of the generator of the waste.

·        Determining when the waste recycling process stops should not be made based on whether the activity is being carried out by a single party or multiple parties, or whether there has been a change of ownership of the material.

 Dozens of audits the IRS has launched in the sector have raised hackles among environmental groups, state and local governments and paper companies, who decry the threat to low-cost financing for environmentally friendly recycling projects.

One of the first cases where the IRS and the recycling comunity clashed was with the case of the Liberty Paper mill in Becker, Minn. The issue arose five years ago.

The legal community, in the form of the National Association of Bond Lawyers, also takes issue with the audits, saying they exploit ambiguities in the tax code itself and that contradictions should be resolved before audits are launched.

According to an article by Reuters, tax-free bonds that don't pass muster under an audit could be deemed taxable, though typically issuers reach a settlement with the IRS to prevent any change in the bonds' tax status.

Along with the AFPA and the Bond group, other parties in support of the recyclers include  the Californians Against Waste, Empire State Development, Municipal Waste Management Association, National Recycling Coalition, Natural Resources Defense Council, Paper Recycling Coalition, and the Solid Waste Association of North America

The groups said their suggestions were a response to a request from the IRS earlier this summer for comments and suggestions as to how the alleged inconsistencies could be resolved in new regulations it plans to work out next year.

Mark Scott, head of the IRS's tax-exempt debt division, estimated agents currently were working on about 20 cases in the sector, down from a peak of as many as 40 or more.

"Until new guidance comes out I don't see that impacting the course of our audit work in this area," he said.

One of the key issues at stake is the value of the solid waste -- such as old cardboard and newspaper -- that the facilities recycle.

If the IRS judges the material to have value, for instance because a recycling company is willing to buy it to create products that can be sold, then it could revoke the tax-exempt status of the bonds issued to finance the recycling facilities.

NABL and the "Tax Exempt Bonds Recycling Coalition" both urged the IRS to treat solid waste as by definition having no value if it was used by a recycling facility, even if the recycler had to pay for it, just to keep operating, because supplies were scarce. (click here to read letter)

"The way in which these rules were being interpreted actually made a number of deals just grind to a halt and go away at fairly significant expense," said Charles Henck, a partner at Ballard Spahr Andrews & Ingersoll.

Henck, who chairs NABL's task force on solid waste financing, said billions of dollars of outstanding debt was at stake in the controversy, although not all of it was necessarily under audit.

"The net result is that the material in question is still going into a landfill rather than into a recycling facility," Henck added.

Another issue is tax-exempt financing for facilities that don't meet the tax code's definition of a recycling facility -- one where at least 65 percent of input is solid waste.

Henck said a reasonable interpretation would allow tax-exempt financing for a part of the facility in proportion to how much of its input was solid waste.