Bond-financed property, management contract | KPMG | US
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Bond-financed property, management contract not resulting in private business use

Bond-financed property, management contract

The IRS has released an advance version of Rev. Proc. 2016-44 to set forth safe harbor conditions under which a management contract does not:


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  • Result in private business use of property financed with governmental tax-exempt bonds under section 141(b) or
  • Cause the modified private business use test for property financed with qualified 501(c)(3) bonds under section 145(a)(2)(B) to be met

Earlier revenue procedures, as amplified by Notice 2014-67, set forth conditions under which a management contract does not result in private business use under section 141 or cause the modified private business use test under section 145(a)(2)(B) to be met.

Rev. Proc. 2016-44 [PDF 27 KB] builds upon the amplifications in Notice 2014-67 by taking a more flexible and less formulaic approach toward variable compensation for longer-term management contracts of up to 30 years. The safe harbor under Rev. Proc. 2016-44 generally permits any type of fixed or variable compensation that is reasonable compensation for services rendered under the contract. Rev. Proc. 2016-44 also includes constraints on net profits arrangements and the relationship between the parties (as under the original safe harbors), but applies a more principles-based approach focusing on governmental control over projects, governmental bearing of risk of loss, economic lives of managed projects, and consistency of tax positions taken by the service provider.

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