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determined to be a “use” of the pipeline: (1) The use is
incidental to petitioner’s governmental use and is not a special
legal entitlement or special economic benefit, see sec. 1.141-
3(b)(7)(i) and (ii), Income Tax Regs., that results in private
business use; or (2) Company’s arrangement should be analyzed
under the output facility regulations as an output contract.
With respect to the application of the output facility
regulations, petitioner argues that the financed pipeline is an
output facility. Petitioner contends that the pipeline is a
water facility since it distributes wastewater to Company and the
irrigators. Accordingly, petitioner argues that Company’s
arrangement with petitioner should be analyzed under the output
facility regulations. Petitioner contends that the arrangement
with Company will not have the effect of transferring the
substantial burdens of paying debt service on the proposed bonds
since Company pays nothing for the wastewater.
Respondent determined that the bond-financed pipeline is “an
integral part of the City’s sewage system” and is not a water
facility and that the term “output facility” does not include
“facilities for the disposal of treated wastewater.” He agrees
with petitioner’s primary contention (in the context of the
private business use test) that the pipeline carries out the
sewage function of petitioner’s sewage system, it provides for
the final disposal of wastewater, it was not built to provide
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