Santa Rosa, California has a sewage and water reclamation system serving 250,000 people in Sonoma County. It wanted to issue tax-exempt bonds to finance a $140 million pipeline to supply wastewater to a geothermal power company for its use in activating geysers to produce steam for generating electricity. Santa Rosa has a contract with the geothermal power company obligating Santa Rosa to deliver 11 million gallons of wastewater a day. The geothermal company will not have to pay anything for the water it receives.

Santa Rosa also plans to sign separate agreements with farmers along the pipeline route to supply them with wastewater for irrigating their fields. It plans to have the farmers pay for the water, but with total fees capped at 5% of the debt service on the bonds. The remaining 95% of the debt service will be paid out of rates charged the 250,000 Sonoma County residents for sewage services.

Tax-exempt bonds are supposed to be used only for schools, roads, hospitals and other public facilities — with a few exceptions. The IRS argued that there will be too much private use of the facilities being financed with the bonds in this case.

Santa Rosa asked the US Tax Court for a “declaratory judgment” that the bonds it plans to issue will be tax-exempt. The court agreed. It said the pipeline will be used by the public to dispose of wastewater, not to provide a service to the farmers or the geothermal power company, and — as such, it will be put entirely to public use. The case is Santa Rosa v. Commissioner.