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is an output contract. See sec. 1.141-3(b)(5), Income Tax Regs.
However, respondent determined that Company’s contract with
petitioner is not an output contract, and the pipeline is not an
output facility. Indeed, respondent argues on brief that “The
Contract with the Company is not an arrangement for the purchase
of output, but rather was entered for the purpose of disposing
[of] the Wastewater.” Given respondent’s position and his
agreement that the pipeline is a sewage facility, we cannot agree
that Company’s rights are comparable to an output contract or any
of the arrangements listed in the regulations. We cannot agree
that Company has any special legal entitlements with respect to
the financed pipeline. Company simply receives the waste product
that petitioner disposes of through that facility.
Respondent also argues for the first time on brief that the
private business use test is met because the facts and
circumstances establish that Company receives a special economic
benefit with respect to the financed pipeline. In most cases,
the private business use test is met only if a nongovernmental
person has special legal entitlements to use the financed
property under an arrangement with the issuer. Sec. 1.141-
3(b)(1), Income Tax Regs. However, section 1.141-3(b)(7)(ii),
Income Tax Regs., provides a special rule for facilities that are
not used by the general public:
(ii) Special rule for facilities not used by the
general public. In the case of financed property that
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