The Internal Revenue Service recently announced a major change in its treatment of management contracts related to facilities financed by tax-exempt bonds. Such contracts are entered into by governmental entities and nonprofit associations that are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (collectively, issuers). Issuers use these contracts to outsource the management of a variety of facilities, including hospitals and water and wastewater facilities. The new rules are set forth in Revenue Procedure 2016-44, and generally will apply to any management contract entered into on or after Aug. 22, although issuers may elect to continue to apply the old rules until Aug. 18, 2017.

The treatment of management contracts has been a focus of the IRS for decades, as it has long taken the position that the use of the facility by the service provider may result in “private business use” of the facility. This is significant, as the presence of private business use in a facility financed with tax-exempt bonds may result in the underlying bonds losing their tax-exempt status. While the private business use rules are very complex, generally speaking, if more than 10 percent—5 percent in the case of facilities owned by 501(c)(3) nonprofit associations and for certain unrelated or disproportionate uses of facilities owned by governmental entities—of a bond-financed facility is tainted by private business use, the IRS may determine the bonds to be taxable private activity bonds.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]