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Clarifying safe harbor, management contracts not resulting in private business use

Clarifying safe harbor, management contracts

The IRS today released an advance version of Rev. Proc. 2017-13 that clarifies the safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds or cause the modified private business use test for property financed with qualified 501(c)(3) bonds to be met.

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Rev. Proc. 2017-13 [PDF 47 KB] modifies, amplifies, and supersedes Rev. Proc. 2016-44 to address certain types of compensation, the timing of payment of compensation, the treatment of land, and methods of approval of rates. 

Summary

Issued in 2016, Rev. Proc. 2016-44 [PDF 35 KB] provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds or cause the modified private business use test for property financed with qualified 501(c)(3) bonds to be met. 

Today’s revenue procedure clarifies the safe harbor conditions. 

  • Safe harbor provision in Rev. Proc. 2016-44: The management contract must neither provide to the service provider a share of net profits nor impose on the service provider the burden of bearing any share of net losses from the operation of the managed property. 
  • Clarification in Rev. Proc. 2017-13: To provide continuity with the previous safe harbors, Rev. Proc. 2017-13 clarifies that certain types of compensation—including capitation fees, periodic fixed fees, and per-unit fees—do not provide a share of net profits.

 

  • Safe harbor provision in Rev. Proc. 2016-44: The timing of payment of compensation cannot be contingent upon net profits or net losses from the operation of the managed property. 
  • Clarification in Rev. Proc. 2017-13: Today’s revenue procedure clarifies that compensation subject to an annual payment requirement and reasonable consequences for late payment (such as interest charges or late payment fees) will not be treated as contingent upon net profits or net losses if the contract includes a requirement that the qualified user will pay the deferred compensation within five years of the original due date of the payment. 

 

  • Safe harbor provision in Rev. Proc. 2016-44: The term of the contract, including all renewal options, must be no greater than the lesser of 30 years or 80% of the weighted average reasonably expected economic life of the managed property. Although land generally is not taken into account if 25% or more of the net proceeds of any issue is to be used to finance the acquisition of land, such land is be taken into account and treated as having an economic life of 30 years. 
  • Clarification in Rev. Proc. 2017-13: Today’s revenue procedure clarifies that land will be treated as having an economic life of 30 years if 25% or more of the net proceeds of the issue that finances the managed property is to be used to finance the costs of such land. 

 

  • Safe harbor provision in Rev. Proc. 2016-44: The qualified user must exercise a significant degree of control over the use of the managed property, and this standard may be satisfied if the contract requires the qualified user to approve, among other things, the rates charged for use of the managed property. 
  • Clarification in Rev. Proc. 2017-13: Today’s revenue procedure clarifies that a qualified user may satisfy the approval of rates requirement by approving a reasonable general description of the method used to set the rates, or by requiring that the service provider charge rates that are reasonable and customary as specifically determined by, or negotiated with, an independent third party.

 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Greg Goller | +1 703 286 8391 | greggoller@kpmg.com

Alexandra Mitchell | +1 202 533 6078 | aomitchell@kpmg.com

Randall Thomas | +1 202 533 3786 | randallthomas@kpmg.com

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