IRS Issues Guidance on Municipal Bond Management Contract Safe Harbor: Rev. Proc. 2016-44 expands the safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under section 141(b) or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under section 145(a)(2)(B) to be met. In certain circumstances, a management contract can result in a “private business use” of property financed by a bond that would otherwise be a tax-exempt bond. Rev. Proc. 97-13 (as modified by Rev. Proc. 2001-39 and amplified by Notice 2014-67) provided safe harbor conditions under which a management contract will not cause an otherwise tax-exempt bond to fail to be tax-exempt. Rev. Proc. 2016-44 modifies this original safe harbor. The modified safe harbor is intended to take a more flexible and less formulaic approach toward variable compensation for longer-term management contracts of up to 30 years. Furthermore, the modified safe harbor includes constraints on net profits arrangements and the relationship between the parties (as under the original safe harbors), but is intended to apply a more principles-based approach focusing on governmental control over projects, governmental bearing of risk of loss, economic lives of managed projects, and consistency of tax positions taken by the service provider.
Members of Congress Expand on Concerns About Proposed Section 385 Regulations: Republican members of the House Ways and Means Committee and Orrin G. Hatch (R-UT), the chairman of the Senate Finance Committee, wrote letters to Secretary Lew expanding on certain “grave concerns” with the proposed section 385 regulations. For DTU coverage of previous congressional correspondence on these proposed regulations, click here.
The letter from the Republican Ways and Means members states that, after holding a discussion with tax policy officials at Treasury, they have concluded that “at a minimum, a complete overhaul of the current proposal would be necessary to ensure that any rules in this area appropriately target abusive tax-planning without interfering with normal business financing arrangements.” The letter also expresses the view that the proposed regulations would constitute a “major rule” under the Congressional Review Act, which would require a cost-benefit analysis before the regulations can be made effective.
Senator Hatch’s letter expresses concern over the “unprecedented pace” that Treasury is attempting to follow in adopting the proposed regulations, seeks confirmation that the regulations will be submitted to the Office of Information and Regulatory Affairs for a determination as to whether they constitute a major rule, and asks that the rules be re-proposed in a “thoughtful, prudent, and legal manner.”