Tax Alert: IRS NOTICE 2014-67

October 30, 2014

On Friday, October 24th, the Internal Revenue Service released Notice 2014-67 (the “Notice”), providing interim guidance for determining whether a State or local government entity or a Section 501(c)(3) organization that benefits from tax-exempt bond financing will be considered to have private business use of its bond financed facilities as a result of its participation in the Shared Savings Program through an “accountable care organization” (ACO).  In addition, the Notice amplifies Revenue Procedure 97-13 regarding certain management contracts that do not result in private business use.

Governmental issuers and 501(c)(3) organizations typically will be participating in the Shared Savings Programs through ACOs with nongovernmental persons and this participation may take a variety of forms.  The Notice details certain conditions that if all are met will not result in private business use of the tax-exempt bond financed facility relating to the participation of a qualified user in the Shared Savings Program through an ACO.

Management contracts, along with research and other use agreements, are indicators of both actual and beneficial use of tax-exempt bond financed facilities and may potentially generate private business use, which in the aggregate cannot exceed 10% per bond issue for governmental bonds and 5% per bond issue for qualified 501(c)(3) bonds.

Management contracts may give rise to private business use depending on the structure of such contracts relating to the contract’s term and compensation.  Rev. Proc 97-13, issued 17 years ago, provides for 5 permissible arrangements or safe harbors under which management contracts do not result in private business use.  The Notice provides an additional safe harbor for certain 5-year contracts in which all of the compensation for services is based on a stated amount, periodic fixed fee, a capitation fee, a per-unit fee, or a combination of those.  The Notice also provides guidance on contracts that include productivity rewards.  The Notice reconfirms that these types of contracts may not provide for compensation based on a share of net profits.

The Treasury Department and the IRS are soliciting comments on the guidance contained in the Notice.  Comments should be submitted in writing and must be received on or before January 22, 2014.

For the complete IRS Notice 2014-67 please click here.

For more information on how the Notice could affect your organization or for other questions on post-issuance tax compliance, please contact us.

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