Public Finance Advisory: IRS Releases Clarifying Management Contracts Rules

by Sherman & Howard L.L.C.

Sherman & Howard L.L.C.

For the third time in as many years, the Internal Revenue Service (the “IRS”) has issued guidance for determining whether a management contract will result in private business use for property financed with governmental or qualified 501(c)(3) tax-exempt bonds. Revenue Procedure 2017-13, released on January 17, 2017, modifies, amplifies and supersedes the management contract safe harbor provisions set forth in Revenue Procedure 2016-44 (see Sherman & Howard’s client advisory dated August 30, 2016) to address certain questions raised by the National Association of Bond Lawyers concerning certain “old school” types of compensation, the timing of payment of compensation, the treatment of the economic life of land and the methods of approving rates applicable to management contracts. This client advisory should be read in conjunction with our August 30, 2016 client advisory.

General Background

In August of 2016, the IRS released Revenue Procedure 2016-14 to provide a “more flexible and less formulaic approach” for issuers and 501(c)(3) borrowers entering into long-term management contracts for the management and operation of facilities financed with the proceeds of tax-exempt bonds. The guidance set forth in Revenue Procedure 2016-44 drastically changed the longstanding guidance set forth in Revenue Procedures 97-13. Revenue Procedure 2017-13 generally restates the entirety of Revenue Procedure 2016-44, but includes the following specific revisions and clarifications to the safe harbor provisions of the Revenue Procedure 2016-44.

  1. Types of Compensation
    • Rev. Proc. 2016-44 Safe Harbor Provision: 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 the net loss from the operation or management of the financed facility.
    • Rev. Proc. 2017-13 Clarification: The new Rev. Proc. clarifies that certain types of compensation that have traditionally been blessed under Rev. Proc. 97-13 and its progeny – capitation fees, periodic fixed fees, per unit fees and some forms of incentive fees (all of which had been permitted under Rev. Proc. 97-13) do not provide a share of net losses and, accordingly, qualify for safe harbor treatment.
  2. Timing of Compensation
    • Rev. Proc. 2016-44 Safe Harbor Provision: The timing of compensation cannot be contingent on net profits or net losses arising from the operation of the managed property.
    • Rev. Proc. 2017-13 Clarification: Rev. Proc. 2017-13 clarifies that compensation subject to an annual payment requirement and reasonable consequences for late payment (such as reasonable interest or late charges) will not be treated as contingent upon net profits or net losses insofar as the contract includes the requirement that the qualified user will pay the deferred compensation within five years of the original due date of the payment.
  3. Treatment of Land
    • Rev. Proc. 2016-44 Safe Harbor Provision: Rev. Proc. 2016-44 additionally provided the term of the management contract, including the renewal thereof, cannot be greater than the lesser of 30 years or 80% of the weighted average reasonably expected economic life of the managed property. Additionally, Rev. Proc. 2016-44 provided that the economic life of property is determined under Section 147(b) of the Internal Revenue Code, without regard to Section 147(b)(3) (B)(ii), which provides that if 25% or more of the net proceeds of any issue is to be used to finance the land, such land will be taken into account and shall be treated as having an economic life of 30 years.
    • Rev. Proc. 2017-13 Clarification: Rev. Proc. 2017-13 clarifies that economic life is determined in the same manner as under Section 147(b) as of the beginning of the management contract term. Therefore, land is treated as having an economic life of 30 years if 25% or more of the net proceeds of the issue which financed the managed property is used for the purchase of land.
  4. Methods of Approving Rates
    • Rev. Proc. 2016-44 Safe Harbor Provision: Rev. Proc. 2016-44 provided that the qualified user must exercise a significant degree of control over the managed property. If the contract provided that the qualified user must approve, among other things, rates charged for the use of the managed property, this requirement was considered met.
    • Rev. Proc. 2017-13 Clarification: Rev. Proc. 2017-13 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 requiring that the service provider charge rates that are reasonable and customary as specifically determined by, or negotiated with, an independent third party.

Effective Date

Revenue Procedure 2017-13 applies to any management contract that is entered into on or after January 17, 2017, and may be applied to any management contract that was entered before such date. In addition, issuers may apply the safe harbor provisions of Revenue Procedure 97-13, as modified by Revenue Procedure 2001-39 and amplified by Notice 2014-67, to a management contract entered into on or before August 18, 2017 which is not thereafter materially altered.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sherman & Howard L.L.C. | Attorney Advertising

Written by:

Sherman & Howard L.L.C.

Sherman & Howard L.L.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.