September 1, 2016
The Internal Revenue Service has relaxed the existing formulaic safe harbor requirements for contracts for services performed in tax-exempt bond-financed facilities. Management contracts and other use agreements may give rise to 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.
Revenue Procedure 2016-44 (the “Revenue Procedure”), released on August 22, 2016, eliminates the various detailed safe harbors involving length of term, termination rights, and limits on non-fixed compensation set forth in Revenue Procedure 97-13, as amplified by Notice 2014-67. In their place, the new safe harbor provided in the Revenue Procedure applies a series of principle-based tests rather than a series of mechanical tests.
The effective date of the Revenue Procedure is August 22, 2016, but issuers and borrowers may choose to apply it to contracts entered into before August 22, 2016. Issuers and borrowers may also apply Revenue Procedure 97-13, as amplified by Notice 2014-67, to a contract entered into before August 18, 2017, provided it is not materially modified or extended on or after August 18, 2017 (other than pursuant to certain legally enforceable renewal options).
The Revenue Procedure offers issuers and borrowers new flexibility in structuring service contracts involving bond-financed facilities. The safe harbor provided by the Revenue Procedure is available for management contracts that meet the following requirements:
Due to the lack of technical specifics in the Revenue Procedure, issuers and borrowers must carefully navigate these principle-based concepts to ensure that service contracts do not result in private business use.
To view the Revenue Procedure, CLICK HERE.
For more information on how the Revenue Procedure could impact your organization or for other questions on post-issuance tax compliance, please contact us.
Alan Bond
[email protected]
212.506.5275