rp-17-13.pdf

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26 CFR 601.601: Rules and regulations.
(Also: §§ 141, 145, 1.141-3, 1.145-2)

Rev. Proc. 2017-13

SECTION 1. PURPOSE

This revenue procedure provides safe harbor conditions under which a management
contract does not result in private business use of property financed with governmental
tax-exempt bonds under § 141(b) of the Internal Revenue Code or cause the modified
private business use test for property financed with qualified 501(c)(3) bonds under
§ 145(a)(2)(B) to be met. This revenue procedure modifies, amplifies, and supersedes
Rev. Proc. 2016-44, 2016-36 IRB 316, to address certain types of compensation, the
timing of payment of compensation, the treatment of land, and methods of approval of
rates. Sections 2.11 through 2.14 of this revenue procedure generally describe the
modifications and amplifications made to Rev. Proc. 2016-44 by this revenue
procedure.
SECTION 2. BACKGROUND

.01 Section 103(a) provides that, except as provided in § 103(b), gross income does
not include interest on any State or local bond. Section 103(b)(1) provides that § 103(a)
shall not apply to any private activity bond that is not a qualified bond (within the
meaning of § 141). Section 141(a) provides that the term “private activity bond” means
any bond issued as part of an issue (1) that meets the private business use test and
private security or payment test, or (2) that meets the private loan financing test.

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.02 Section 141(b)(1) provides generally that an issue meets the private business
use test if more than 10 percent of the proceeds of the issue are to be used for any
private business use. Section 141(b)(6) defines “private business use” as use (directly
or indirectly) in a trade or business carried on by any person other than a governmental
unit. For this purpose, any activity carried on by a person other than a natural person
must be treated as a trade or business.
.03 Section 1.141-3(a)(1) of the Income Tax Regulations provides, in part, that the
10 percent private business use test of § 141(b)(1) is met if more than 10 percent of the
proceeds of an issue is used in a trade or business of a nongovernmental person. For
this purpose, the use of financed property is treated as the direct use of proceeds.
Section 1.141-3(a)(2) provides that, in determining whether an issue meets the private
business use test, it is necessary to look at both indirect and direct use of proceeds.
Proceeds are treated as used in the trade or business of a nongovernmental person if a
nongovernmental person, as a result of a single transaction or a series of related
transactions, uses property acquired with the proceeds of an issue.
.04 Section 1.141-3(b)(1) provides that both actual and beneficial use by a
nongovernmental person may be treated as private business use. In most cases, the
private business use test is met only if a nongovernmental person has special legal
entitlements to use the financed property under an arrangement with the issuer. In
general, a nongovernmental person is treated as a private business user as a result of
ownership; actual or beneficial use of property pursuant to a lease, a management

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contract, or an incentive payment contract; or certain other arrangements such as a
take or pay or other output-type contract.
.05 Section 1.141-3(b)(3) provides generally that the lease of financed property to a
nongovernmental person is private business use of that property. For this purpose, any
arrangement that is properly characterized as a lease for federal income tax purposes is
treated as a lease. Section 1.141-3(b)(3) further provides that, in determining whether a
management contract is properly characterized as a lease, it is necessary to consider
all the facts and circumstances, including the following factors: (1) the degree of control
over the property that is exercised by a nongovernmental person; and (2) whether a
nongovernmental person bears the risk of loss of the financed property.
.06 Section 1.141-3(b)(4)(i) provides generally that a management contract with
respect to financed property may result in private business use of that property, based
on all of the facts and circumstances. A management contract with respect to financed
property generally results in private business use of that property if the contract
provides for compensation for services rendered with compensation based, in whole or
in part, on a share of net profits from the operations of the facility. Section 1.141-
3(b)(4)(iv) provides generally that a management contract with respect to financed
property results in private business use of that property if the service provider is treated
as the lessee or owner of financed property for federal income tax purposes.
.07 Section 1.141-3(b)(4)(ii) defines “management contract” as a management,
service, or incentive payment contract between a governmental person and a service
provider under which the service provider provides services involving all, a portion, or

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any function, of a facility. For example, a contract for the provision of management
services for an entire hospital, a contract for management services for a specific
department of a hospital, and an incentive payment contract for physician services to
patients of a hospital are each treated as a management contract.
.08 Section 1.141-3(b)(4)(iii) provides that the following arrangements generally are
not treated as management contracts that give rise to private business use:
(A) contracts for services that are solely incidental to the primary governmental function
or functions of a financed facility (for example, contracts for janitorial, office equipment
repair, hospital billing, or similar services); (B) the mere granting of admitting privileges
by a hospital to a doctor, even if those privileges are conditioned on the provision of de
minimis services if those privileges are available to all qualified physicians in the area,
consistent with the size and nature of the hospital’s facilities; (C) a contract to provide
for the operation of a facility or system of facilities that consists primarily of public utility
property, if the only compensation is the reimbursement of actual and direct expenses
of the service provider and reasonable administrative overhead expenses of the service
provider; and (D) a contract to provide for services, if the only compensation is the
reimbursement of the service provider for actual and direct expenses paid by the
service provider to unrelated parties.
.09 Section 141(e) provides, in part, that the term “qualified bond” includes a
qualified 501(c)(3) bond if certain requirements stated therein are met. Section 145(a)
provides generally that “qualified 501(c)(3) bond” means any private activity bond
issued as part of an issue if (1) all property that is to be provided by the net proceeds of

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the issue is to be owned by a 501(c)(3) organization or a governmental unit, and (2)
such bond would not be a private activity bond if (A) 501(c)(3) organizations were
treated as governmental units with respect to their activities that do not constitute
unrelated trades or businesses, determined by applying § 513(a), and (B) § 141(b)(1)
and (2) were applied by substituting “5 percent” for “10 percent” each place it appears
and by substituting “net proceeds” for “proceeds” each place it appears. Section 1.145-
2 provides that, with certain exceptions and modifications, §§ 1.141-0 through 1.141-15
apply to § 145(a).
.10 Rev. Proc. 2016-44 provides safe harbor conditions under which a management
contract does not result in private business use of property financed with governmental
tax-exempt bonds under § 141(b) or cause the modified private business use test for
property financed with qualified 501(c)(3) bonds under § 145(a)(2)(B) to be met. Rev.
Proc. 2016-44 modified and superseded Rev. Proc. 97-13, 1997-1 C.B. 632; Rev. Proc.
2001-39, 2001-2 C.B. 38; and section 3.02 of Notice 2014-67, 2014-46 I.R.B. 822.
.11 Section 5.02 of Rev. Proc. 2016-44 sets forth general financial requirements for
management compensation arrangements eligible for the safe harbor. Sections 5.02(2)
and 5.02(3) of Rev. Proc. 2016-44 provide that the 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. Before the
publication of Rev. Proc. 2016-44, previously applicable revenue procedures expressly
treated certain types of compensation, including capitation fees, periodic fixed fees, and
per-unit fees (as defined therein), as not providing a share of net profits. Questions

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have arisen regarding whether these common types of compensation continue to be
treated in a similar manner under Rev. Proc. 2016-44. Related questions have arisen
about whether a service provider’s payment of expenses of the operation of the
managed property without reimbursement from the qualified user (as defined in section
4.04 of Rev. Proc. 2016-44) affects the treatment of these types of compensation. To
provide continuity with the previous safe harbors, this revenue procedure clarifies that
these types of compensation and certain incentive compensation will not be treated as
providing a share of net profits or requiring the service provider to bear a share of net
losses.
.12 Sections 5.02(2) and 5.02(3) of Rev. Proc. 2016-44 also provide that the timing
of payment of compensation cannot be contingent upon net profits or net losses from
the operation of the managed property. Questions have arisen about the effect of these
restrictions on the timing of payment of compensation. This 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.
.13. Section 5.03 of Rev. Proc. 2016-44 provides that the term of the contract,
including all renewal options (as defined in § 1.141-1(b)), must be no greater than the
lesser of 30 years or 80 percent of the weighted average reasonably expected
economic life of the managed property. For this purpose, under Rev. Proc. 2016-44,

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economic life is determined in the same manner as under § 147(b), but without regard
to §147(b)(3)(B)(ii), as of the beginning of the term of contract. Section 147(b)(3)(B)(i)
provides that generally land is not taken into account, but § 147(b)(3)(B)(ii) provides that
if 25 percent or more of the net proceeds of any issue is to be used to finance the
acquisition of land, such land shall be taken into account and treated as having an
economic life of 30 years. Questions have arisen about excluding land when the cost of
the land accounts for a significant portion of the managed property. This revenue
procedure provides that economic life is determined in the same manner as under §
147(b) as of the beginning of the term of the contract. Thus, land will be treated as
having an economic life of 30 years if 25 percent 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.
.14 Section 5.04 of Rev. Proc. 2016-44 provides that the qualified user must
exercise a significant degree of control over the use of the managed property. Section
5.04 of Rev. Proc. 2016-44 further provides that this requirement is met if the contract
requires the qualified user to approve, among other things, the rates charged for use of
the managed property. Section 5.04 of Rev. Proc. 2016-44 also provides that a
qualified user may show approval of rates charged for use of the managed property by
either expressly approving such rates (or the methodology for setting such rates) or by
including in the contract a requirement that service provider charge rates that are
reasonable and customary as specifically determined by an independent third party.
Questions have arisen about the requirement to approve the rates in various

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circumstances in which it may not be feasible to approve each specific rate charged,
such as for a physician’s professional services at a § 501(c)(3) hospital or hotel room
rates at a governmentally-owned hotel. This 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.
SECTION 3. SCOPE
This revenue procedure applies to a management contract (as defined in section
4.03 of this revenue procedure) involving managed property (as defined in section 4.04
of this revenue procedure) financed with the proceeds of an issue of governmental
bonds (as defined in § 1.141-1(b)) or qualified 501(c)(3) bonds (as defined in § 145).
SECTION 4. DEFINITIONS
For purposes of this revenue procedure, the following definitions apply:
.01 Capitation fee means a fixed periodic amount for each person for whom the
service provider or the qualified user assumes the responsibility to provide all needed
services for a specified period so long as the quantity and type of services actually
provided to such persons varies substantially. For example, a capitation fee includes a
fixed dollar amount payable per month to a medical service provider for each member of
a health maintenance organization plan for whom the provider agrees to provide all
needed medical services for a specified period. A fixed periodic amount may include an
automatic increase according to a specified, objective, external standard that is not

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linked to the output or efficiency of the managed property. For example, the Consumer
Price Index and similar external indices that track increases in prices in an area or
increases in revenues or costs in an industry are objective, external standards. A
capitation fee may include a variable component of up to 20 percent of the total
capitation fee designed to protect the service provider against risk such as risk of
catastrophic loss.
.02 Eligible expense reimbursement arrangement means a management contract
under which the only compensation consists of reimbursements of actual and direct
expenses paid by the service provider to unrelated parties and reasonable related
administrative overhead expenses of the service provider.
.03 Management contract means a management, service, or incentive payment
contract between a qualified user and a service provider under which the service
provider provides services for a managed property. A management contract does not
include a contract or portion of a contract for the provision of services before a managed
property is placed in service (for example, pre-operating services for construction
design or construction management).
.04 Managed property means the portion of a project (as defined in § 1.141-6(a)(3))
with respect to which a service provider provides services.
.05 Periodic fixed fee means a stated dollar amount for services rendered for a
specified period of time. For example, a stated dollar amount per month is a periodic
fixed fee. The stated dollar amount may automatically increase according to a
specified, objective external standard that is not linked to the output or efficiency of the

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managed property. For example, the Consumer Price Index and similar external indices
that track increases in prices in an area or increases in revenues or costs in an industry
are objective external standards. Capitation fees and per-unit fees are not periodic
fixed fees.
.06 Per-unit fee means a fee based on a unit of service provided specified in the
contract or otherwise specifically determined by an independent third party, such as the
administrator of the Medicare program, or the qualified user. For example, a stated
dollar amount for each specified medical procedure performed, car parked, or
passenger mile is a per-unit fee. Separate billing arrangements between physicians and
hospitals are treated as per-unit fee arrangements. A fee that is a stated dollar amount
specified in the contract does not fail to be a per-unit fee as a result of a provision under
which the fee may automatically increase according to a specified, objective, external
standard that is not linked to the output or efficiency of the managed property. For
example, the Consumer Price Index and similar external indices that track increases in
prices in an area or increases in revenues or costs in an industry are objective, external
standards.
.07 Qualified user means, for projects (as defined in § 1.141-6(a)(3)) financed with
governmental bonds, any governmental person (as defined in § 1.141-1(b)) or, for
projects financed with qualified 501(c)(3) bonds, any governmental person or any
501(c)(3) organization with respect to its activities which do not constitute an unrelated
trade or business, determined by applying § 513(a).

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.08 Service provider means any person other than a qualified user that provides
services to, or for the benefit of, a qualified user under a management contract.
.9 Unrelated parties means persons other than either: (1) a related party (as defined
in § 1.150-1(b)) to the service provider or (2) a service provider’s employee.
SECTION 5. SAFE HARBOR CONDITIONS UNDER WHICH MANAGEMENT
CONTRACTS DO NOT RESULT IN PRIVATE BUSINESS USE

.01 In general. If a management contract meets all of the applicable conditions of
sections 5.02 through section 5.07 of this revenue procedure, or is an eligible expense
reimbursement arrangement, the management contract does not result in private
business use under § 141(b) or 145(a)(2)(B). Further, under section 5.08 of this
revenue procedure, use functionally related and subordinate to a management contract
that meets these conditions does not result in private business use.
.02 General financial requirements.
(1) In general. The payments to the service provider under the contract must be
reasonable compensation for services rendered during the term of the contract.
Compensation includes payments to reimburse actual and direct expenses paid by the
service provider and related administrative overhead expenses of the service provider.
(2) No net profits arrangements. The contract must not provide to the service
provider a share of net profits from the operation of the managed property.
Compensation to the service provider will not be treated as providing a share of net
profits if no element of the compensation takes into account, or is contingent upon,
either the managed property’s net profits or both the managed property’s revenues and

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expenses (other than any reimbursements of direct and actual expenses paid by the
service provider to unrelated third parties) for any fiscal period. For this purpose, the
elements of the compensation are the eligibility for, the amount of, and the timing of the
payment of the compensation. Incentive compensation will not be treated as providing a
share of net profits if the eligibility for the incentive compensation is determined by the
service provider’s performance in meeting one or more standards that measure quality
of services, performance, or productivity, and the amount and the timing of the payment
of the compensation meet the requirements of this section 5.02(2).
(3) No bearing of net losses of the managed property.
(a) The contract must not, in substance, impose upon the service provider the
burden of bearing any share of net losses from the operation of the managed property.
An arrangement will not be treated as requiring the service provider to bear a share of
net losses if:
(i) The determination of the amount of the service provider’s compensation and
the amount of any expenses to be paid by the service provider (and not reimbursed),
separately and collectively, do not take into account either the managed property’s net
losses or both the managed property’s revenues and expenses for any fiscal period;
and
(ii) The timing of the payment of compensation is not contingent upon the
managed property’s net losses.
(b) For example, a service provider whose compensation is reduced by a stated
dollar amount (or one of multiple stated dollar amounts) for failure to keep the managed

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property’s expenses below a specified target (or one of multiple specified targets) will
not be treated as bearing a share of net losses as a result of this reduction.
(4) Treatment of certain types of compensation. Without regard to whether the
service provider pays expenses with respect to the operation of the managed property
without reimbursement by the qualified user, compensation for services will not be
treated as providing a share of net profits or requiring the service provider to bear a
share of net losses under sections 5.02(2) and 5.02(3) of this revenue procedure if the
compensation for services is: (a) based solely on a capitation fee, a periodic fixed fee,
or a per-unit fee; (b) incentive compensation described in the last sentence of section
5.02(2) of this revenue procedure; or (c) a combination of these types of compensation.
(5) Treatment of timing of payment of compensation. Deferral due to insufficient net
cash flows from the operation of the managed property of the payment of compensation
that otherwise meets the requirements of sections 5.02(2) and 5.02(3) of this revenue
procedure will not cause the deferred compensation to be treated as contingent upon
net profits or net losses under sections 5.02(2) and 5.02(3) of this revenue procedure if
the contract includes requirements that:
(a) The compensation is payable at least annually;
(b) The qualified user is subject to reasonable consequences for late payment,
such as reasonable interest charges or late payment fees; and
(c) The qualified user will pay such deferred compensation (with interest or late
payment fees) no later than the end of five years after the original due date of the
payment.

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.03 Term of the contract and revisions. The term of the contract, including all
renewal options (as defined in § 1.141-1(b)), must not be greater than the lesser of 30
years or 80 percent of the weighted average reasonably expected economic life of the
managed property. For this purpose, economic life is determined in the same manner
as under § 147(b) as of the beginning of the term of the contract. A contract that is
materially modified with respect to any matters relevant to this section 5 is retested
under this section 5 as a new contract as of the date of the material modification.
.04 Control over use of the managed property. The qualified user must exercise a
significant degree of control over the use of the managed property. This control
requirement is met if the contract requires the qualified user to approve the annual
budget of the managed property, capital expenditures with respect to the managed
property, each disposition of property that is part of the managed property, rates
charged for the use of the managed property, and the general nature and type of use of
the managed property (for example, the type of services). For this purpose, for
example, a qualified user may show approval of capital expenditures for a managed
property by approving an annual budget for capital expenditures described by functional
purpose and specific maximum amounts; and a qualified user may show approval of
dispositions of property that is part of the managed property in a similar manner.
Further, for example, a qualified user may show approval of rates charged for use of the
managed property by expressly approving such rates or a general description of the
methodology for setting such rates (such as a method that establishes hotel room rates
using specified revenue goals based on comparable properties), or by requiring that the

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service provider charge rates that are reasonable and customary as specifically
determined by, or negotiated with, an independent third party (such as a medical
insurance company).
.05 Risk of loss of the managed property. The qualified user must bear the risk of
loss upon damage or destruction of the managed property (for example, due to force
majeure). A qualified user does not fail to meet this risk of loss requirement as a result
of insuring against risk of loss through a third party or imposing upon the service
provider a penalty for failure to operate the managed property in accordance with the
standards set forth in the management contract.
.06 No inconsistent tax position. 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 to the qualified user with respect to the managed property. For example, the
service provider must agree not to claim any depreciation or amortization deduction,
investment tax credit, or deduction for any payment as rent with respect to the managed
property.
.07 No circumstances substantially limiting exercise of rights.
(1) In general. The service provider must not have any role or relationship with
the qualified user that, in effect, substantially limits the qualified user’s ability to exercise
its rights under the contract, based on all the facts and circumstances.
(2) Safe harbor. A service provider will not be treated as having a role or
relationship prohibited under section 5.07(1) of this revenue procedure if:

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(a) No more than 20 percent of the voting power of the governing body of the
qualified user is vested in the directors, officers, shareholders, partners, members, and
employees of the service provider, in the aggregate;
(b) The governing body of the qualified user does not include the chief executive
officer of the service provider or the chairperson (or equivalent executive) of the service
provider’s governing body; and
(c) The chief executive officer of the service provider is not the chief executive
officer of the qualified user or any of the qualified user’s related parties (as defined in
§1.150-1(b)).
(3) For purposes of section 5.07(2) of this revenue procedure, the phrase “service
provider” includes the service provider’s related parties (as defined in §1.150-1(b)) and
the phrase “chief executive officer” includes a person with equivalent management
responsibilities.
.08 Functionally related and subordinate use. A service provider’s use of a project
(as defined in § 1.141-6(a)(3)) that is functionally related and subordinate to
performance of its services under a management contract for managed property that
meets the conditions of this section 5 does not result in private business use of that
project. For example, use of storage areas to store equipment used to perform
activities required under a management contract that meets the requirements of this
section 5 does not result in private business use.
SECTION 6. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2016-44 is modified, amplified, and superseded.

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SECTION 7. DATE OF APPLICABILITY

This revenue procedure applies to any management contract that is entered into on
or after January 17, 2017, and an issuer may apply this revenue procedure to any
management contract that was entered into before January 17, 2017. In addition, an
issuer may apply the safe harbors in Rev. Proc. 97-13, as modified by Rev. Proc. 2001-
39 and amplified by Notice 2014-67, to a management contract that is entered into
before August 18, 2017 and that is not materially modified or extended on or after
August 18, 2017 (other than pursuant to a renewal option as defined in § 1.141-1(b)).
SECTION 8. DRAFTING INFORMATION

The principal authors of this revenue procedure are Johanna Som de Cerff and
David White of the Office of Associate Chief Counsel (Financial Institutions & Products).
For further information regarding this revenue procedure, contact David White on (202)
317-6980 (not a toll free call).