CCH Tax Day Report
The IRS has issued guidance that provides updated safe harbor conditions under which a management contract will not result in either the private business use of property financed by governmental tax-exempt bonds or cause the modified private business use test for property financed by qualified Code Sec. 501(c)(3) bonds to be met. This new safe harbor takes a more flexible and less formulaic approach toward variable compensation for longer-term management contracts. The guidance, however, includes constraints on net profit arrangements and the relationship between parties. The safe harbor does take 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.
If a management contract satisfies all the conditions or is an eligible expense reimbursement arrangement, the contract does not result in private business use under Code Secs. 141(b) or 145(a)(2)(B). The conditions are:
1. The payments to the service provider must be reasonable for the services rendered and there can be no net profits arrangements nor the imposition upon the service provide to bear any portion of net losses;
2. The contract terms, including all renewal options, cannot exceed the lesser of 30 years or 80 percent of the reasonably expected economic life;
3. The qualified user must exercise a significant degree of control over the use of the managed property;
4. The qualified user must bear the risk of loss upon damage or destruction of the managed property;
5. The service provider must agree that it is not entitled to and will not take any tax position that is inconsistent with being a service provider; and
6. The service provider must not have any role or relationship with the qualified user that substantially limits the qualified user’s ability to exercise its rights under the contract, based on all facts and circumstances.
This revenue procedure modifies and supersedes Rev. Procs. 97-13, 1997-1 CB 632, and 2001-39, 2001-2 CB 38, and section 3.02 of Notice 2014-67, I.R.B. 2014-46, 822. All other sections of Notice 2014-67 remain in effect.
Rev. Proc. 2016-44, 2016FED ¶46,394
Code Sec. 141
CCH Reference – 2016FED ¶7707.60
Code Sec. 145
CCH Reference – 2016FED ¶7830.70
Tax Research Consultant
CCH Reference – TRC SALES: 51,102.10