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Business and Policy Areas
Business and Policy Areas

IRS Expands Guidance on Private Business Use of Bond-Financed Facilities

October 30, 2014

The Internal Revenue Service's newly released Notice 2014-67 expands previous IRS guidance addressing private business use from management contracts, creating a new safe harbor that is immediately available for any governmental or qualified 501(c)(3) bond issue.

Safe Harbor for Management Contracts. The safe harbor expands existing guidance in Revenue Procedure 97-13 (Rev. Proc. 97-13) to allow a management contract that covers bond-financed facilities to have a five-year term, with no requirement that the issuer or borrower have an early termination right that can be exercised without cause or penalty, as long as the compensation under the agreement is based upon a stated amount, a periodic fixed fee, a capitation fee, a per-unit-fee, a percentage of either (but not both) gross revenues or expenses, or any combination of these types of compensation.

Incentive Compensation. Notice 2014-67 also amplifies Rev. Proc. 97-13 by stating that a productivity reward or incentive pay for services will not cause compensation under a management contract to be based on a share of the net profits of the bond-financed facility—and therefore giving rise to private business use of the facility—if:

  1. The productivity award is based on the quality of the services provided rather than increases in revenue or decreases in expenses, and
  2. The amount of the reward is a stated dollar amount, a periodic fixed fee, or a tiered system of stated dollar amounts or periodic fixed fees based solely on the level of performance achieved.

The notice specifies that this type of productivity award will be treated as a type of compensation that is eligible for the new five-year safe harbor.

Private Use and ACOs. The notice also offers interim guidance to help governmental entities or 501(c)(3) exempt organizations determine if private business use of its bond-financed facilities results from participation in the Medicare Shared Savings Program through an accountable care organization (ACO).

The notice states that those types of arrangements must be structured to avoid private business use of the facility. Also, any 501(c(3) organization using an exempt bond-financed facility must structure its participation in an ACO so that it neither jeopardizes its exempt status nor triggers unrelated trade or business under section 513(a). The notice provides several conditions under which the participation of a qualified user in the shared savings program through an ACO in itself will not result in private business use of the bond-financed facility.


Mary Bachinger
Director, Tax Policy