rr-98-47.pdf

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September 14, 1998
ADVANCE COPY OF INTERNAL REVENUE BULLETIN ITEM
Attached is an advance copy of Revenue Ruling 98-47,
describing exempt facility bonds.
It will appear in Internal revenue Bulletin 1998-39, dated
September 28, 1998.
You may release this rev. rul. immediately.
Communications Division

Part I
Section 142.--Exempt Facility Bond
26 CFR 1.103-8: Interest on bonds to finance certain exempt
facilities.
(Also §§ 145 and 103)
Rev. Rul. 98-47
ISSUE
Are the buildings described below residential rental
property for purposes of § 142(d) and § 145(d) of the Internal
Revenue Code?
FACTS
Complex M provides housing units on a non-transient basis
for individuals who are of retirement age or older. All of the
units in Complex M are available to members of the general
public. Complex M is comprised of Building X, Building Y, and
Building Z, each of which is composed of similarly constructed
housing units that have separate and complete facilities for
living, sleeping, eating, cooking, bathing, and sanitation. The
cooking and eating area contains a small refrigerator, a sink, a
pull-down table, and a two-burner stove with an oven. Each unit
is designed so that the stove can be replaced with a full-sized

microwave oven if the physical or mental frailties of the
resident make it imprudent to provide a functioning cooking
stove.
Each resident enters into a lease arrangement with Complex
M. The amount of the monthly payment under the lease varies
according to the level of care provided in the building in which
the resident resides, with Building Z commanding the largest
payment and Building X the smallest payment. The monthly payment
is made in exchange for use of an individual unit, basic services
and, with respect to Buildings Y and Z, other services. Under a
lifetime lease payment option, residents of Complex M may pay a
fixed monthly amount for the time they reside in Complex M. The
lifetime lease option guarantees a resident the right to move to
a unit in Buildings Y or Z if the resident requires additional
care.
The basic services available to the residents in all three
buildings include: laundry; housekeeping; regular daily meals in
the common dining areas; 24 hour monitored emergency call service
using call buttons and two-way communication devices located in
each room of a unit; planned social activities; and scheduled
transportation to various sites in the vicinity including
commercial areas, shopping centers, hospitals, and doctor’s
offices.
Building X, Building Y, and Building Z each contains a
separate common dining area. The dining area in each building
will be used exclusively by residents of Complex M and visitors
of those residents. The size of the dining area in any building

does not exceed that necessary to serve the residents of the
building and their guests. The dining area serves the special
needs of the residents and provides the staff of Complex M an
opportunity to monitor the overall well-being, nutrition, and
health of the residents.
Only the basic services are made available to residents of
Building X. No other services are included in the monthly
payment. Continual or frequent nursing, medical, or psychiatric
services are not made available in Building X.
The basic services and the Building Y support services are
made available to residents of Building Y. The Building Y
support services are as follows: assistance by medication
management technicians in medication management and intake;
maintenance of detailed medication records; consultation with a
nurse as needed about health concerns and medication plans;
assistance by non-medically certified aides each day during
waking hours in activities of daily living that include getting
in and out of bed and chairs, walking, using the toilet,
dressing, eating, and bathing; and routine checks by staff
members of Building Y to insure the residents’ general well-
being. Some residents of Building Y have incapacitating
infirmities that require continual assistance, but do not require
continual or frequent nursing, medical, or psychiatric services.
Continual or frequent nursing, medical, or psychiatric services
are not made available in Building Y.
The basic services and the Building Y support services are
made available to residents of Building Z. In addition, Building

Z is staffed in the following manner: registered nurses are on
duty for 12 hours each day; licensed practical nurses are on duty
for 24 hours each day; and licensed nurses’ aides are available
24 hours each day. The nurses and nurses’ aides are available to
provide nursing care for residents’ medical or psychiatric needs.
Thus, continual or frequent nursing, medical, or psychiatric
services are made available in Building Z.
Residents in Building X are required to move into Buildings
Y or Z or another facility outside of Complex M if, because of
physical or mental disability, they require additional care
beyond that offered by Building X. Residents in Buildings X and
Y are required to move into Building Z or another facility
outside of Complex M if they require continual or frequent
nursing, medical, or psychiatric services.
LAW AND ANALYSIS
Under the general rule of § 103(a), gross income does not
include interest on any state or local bond. Section 103(b)(1),
however, provides that the exclusion does not apply to any
private activity bond unless it is one of the qualified bonds
under § 141(e). Among these qualified bonds are exempt facility
bonds and qualified § 501(c)(3) bonds.
Section 142(a) describes an exempt facility bond as any bond
issued as part of an issue of bonds if 95 percent or more of the
net proceeds of the issue are to be used to provide listed types
of projects or facilities. Within the list, in § 142(a)(7), are
qualified residential rental projects.
Section 142(d) defines a qualified residential rental

project as a project for residential rental property that houses
occupants who meet one of the alternative income tests at all
times throughout a qualified project period. In the Tax Reform
Act of 1986, 1986-3 (Vol. 1) C.B. 519-575 (the A1986 Act@),
Congress reorganized § 103 and § 103A of the Internal Revenue
Code of 1954 (the A1954 Code@) regarding tax-exempt bonds into
§ 103 and §§ 141 through 150 of the Internal Revenue Code of
1986. Congress intended that to the extent not amended by the
1986 Act, all principles of pre-1986 Act law would continue to
apply to the reorganized provisions. 2 H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess. II-686 (1986), 1986-3 (Vol. 4) C.B. 686.
(Conference Report). Because no Income Tax Regulations have been
promulgated under § 142(d), the regulations promulgated pursuant
to § 103(b)(4) of the 1954 Code continue to apply to residential
rental property except as otherwise modified by the 1986 Act and
subsequent law.
Section 145(a) describes a qualified § 501(c)(3) bond as any
bond issued as part of an issue of bonds if all of the property
to be provided by the net proceeds of the issue is to be owned by
a § 501(c)(3) organization or a governmental unit and 95 percent
or more of the net proceeds of the issue are used in a manner
related to the exempt purpose of the § 501(c)(3) organization.
Under § 145(d)(1), however, a bond generally is not a qualified
§ 501(c)(3) bond if net proceeds of the issue are used directly
or indirectly to provide residential rental property for family
units. Section 145(d)(2) provides certain exceptions to
§ 145(d)(1). The legislative history of § 145(d) indicates that

the phrase residential rental property for family units in
§ 145(d) has the same meaning as residential rental property
under § 1.103-8(b) of the Income Tax Regulations.
Under § 1.103-8(b)(4), a residential rental project is
residential rental property that meets certain requirements
including occupancy requirements by low-income tenants during the
period when the units must be continually rented or available for
rental. Residential rental property is a building or structure,
together with any functionally related and subordinate
facilities, containing one or more similarly constructed units
that are available to members of the general public and used on
other than a transient basis. The regulations also provide that
hotels, motels, dormitories, fraternity and sorority houses,
rooming houses, hospitals, nursing homes, sanitariums, rest
homes, and trailer parks and courts for use on a transient basis
are not residential rental projects.
Section 1.103-8(b)(8) defines a "unit" as any accommodation
containing separate and complete facilities for living, sleeping,
eating, cooking, and sanitation. The regulations note that an
example of a unit would be a separate and distinct apartment
containing a living area, a sleeping area, bathing and sanitation
facilities, and cooking facilities equipped with a cooking range,
refrigerator, and sink.
Additional insight into the meaning of residential rental
property can be found under § 42, which provides the low-income
housing credit. 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess.
II-89 (1986), 1983-3 (Vol. 4) C.B. 89, states that the phrase

"residential rental property" generally has the same meaning
under both § 42 and § 142(d).
Section 1.42-11(c) provides a distinction between
residential rental properties and health care facilities by
focusing on whether frequent nursing, medical, or psychiatric
services are provided to residents. Under that section, if
continual or frequent nursing, medical, or psychiatric services
are provided to residents, it is presumed that the building is
ineligible for the credit as is the case with a hospital or
nursing home. The distinction drawn in the regulations under
§ 42 regarding the nature of the facility based on the frequency
of nursing, medical, or psychiatric services available in the
facility is also the appropriate standard for determining whether
facilities are residential rental property for purposes of
§ 142(d) and § 145(d).
For purposes of § 142(d) and § 145(d), if a facility makes
available continual or frequent nursing, medical, or psychiatric
services, the facility will not be residential rental property
under § 142(d) or § 145(d). In the case of a mixed use facility,
the allocable portion of the facility in which continual or
frequent nursing, medical, or psychiatric services are made
available will not be residential rental property under § 142(d)
or § 145(d).
As set forth in the facts above, Building X, Building Y, and
Building Z each contains complete living units within the meaning
of § 1.103-8(b)(8), all of the living units within the respective
buildings are available to the general public, and all of the

living units are used on a non-transient basis. Since Complex M
also provides significant non-housing services to residents of
the three buildings (including continual or frequent nursing,
medical, or psychiatric services to the residents of Building Z),
the analysis must consider the nature and extent of the non-
housing services. In the case of Complex M, the analysis must
examine whether the buildings of Complex M are hospitals, nursing
homes, sanitariums, or rest homes rather than residential rental
property. For purposes of § 142(d) and § 145(d), labels are not
determinative. The focus of these sections, their legislative
histories, and the applicable regulations thereunder, is whether
the facilities are, in substance, residences or health care
facilities. Therefore, the nature and degree of the services
provided by the facility controls.
Significant non-housing services are made available to
residents of Building X and Building Y, including meals and
various support services. The services available to residents of
Building X and Building Y do not include continual or frequent
nursing, medical, or psychiatric services although, under the
lifetime lease option, certain residents are assured that they
will receive continual or frequent nursing, medical, or
psychiatric services in Building Z if required. Thus, under the
principles set forth above, Buildings X and Y would be
residential rental property.
Continual or frequent nursing, medical, or psychiatric
services are made available to residents of Building Z in
addition to the same non-housing services that are made available

to residents of Building X and Building Y. Thus, under the
principles set forth above, Building Z would not be a residential
rental property.
HOLDING
Building X and Building Y are residential rental property
for purposes of § 142(d) and § 145(d). Because continual or
frequent nursing, medical, or psychiatric services are made
available in Building Z, Building Z is not residential rental
property for purposes of § 142(d) and § 145(d).
Neither Building X nor Building Y would fail to be
residential rental property under § 142(d) or § 145(d) merely
because it was called a hospital, a sanitarium, a rest home, or a
nursing home. Similarly, Building Z would not be residential
rental property under § 142(d) or § 145(d) merely because it was
called an assisted living facility or an elderly care facility.
DRAFTING INFORMATION
The principal authors of this revenue ruling are Harold N.
Diamond and Timothy L. Jones of the Office of Associate Chief
Counsel (Domestic) and Edwin G. Oswald of the Department of the
Treasury. For further information regarding this revenue ruling
contact Harold N. Diamond at 202-622-3980 (not a toll-free call).