IRS revises safe harbor for private business use of tax-exempt bond financed property.

• Author: Vecchioni, Mike

In Rev. Proc. 2016-44, the IRS issued new safe-harbor procedures under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Sec. 141(b) or cause the modified private business use test under Sec. 145(a)(2)(B) to be met for property financed with qualified 501(c)(3) bonds.

Private Business Use of Tax-Exempt Bonds

Under Sec. 103(a), gross income does not include interest on any state or local bond. Sec. 103(b)(1) provides, however, that Sec. 103(a) does not apply to any private activity bond that is not a "qualified bond" under Sec. 141.

Sec. 141(a) generally defines "private activity bond" as any bond issued as part of an issue that (1) meets the private business use test of Sec. 141(b)(1) and the private security or payment test of Sec. 141(b)(2); or (2) meets the private loan financing test of Sec. 141(c). Under Sec. 141(b)(1), an issue generally meets the private business use test if more than 10% of its proceeds are to be used for any private business use. Sec. 141(b)(6) defines "private business use" for purposes of Sec. 141(b) as used (directly or indirectly) in a trade or business carried on by any person other than a governmental unit.

Under Regs. Sec. 1.141-3(b)(4)(i), 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.

Sec. 141(e) provides that a "qualified bond" includes qualified 501(c)(3) bonds meeting certain requirements. Sec. 145(a) defines a "qualified 501(c)(3) bond" as any private activity bond issued if:

(1) all property which is 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

(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 which do not constitute unrelated trades or businesses, determined by applying [Sec.] 513(a), and

(B) [Secs. 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.

Previous Guidance on Management Contracts and Private Business Use

Rev. Proc. 97-13, as amended by Rev. Proc. 2001-39 and amplified by Notice 2014-67, provides conditions under which a management contract does not result in private business use under Sec. 141(b).This previous IRS...