On June 26, 2007, the IRS issued Revenue Procedure 2007-47, modifying the conditions under which the IRS will treat private or federally sponsored research agreements as not resulting in private business use under the tax-exempt bond provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Specifically, the IRS clarified that certain "march-in" and other rights granted to the federal government under the Patent and Trademark Law Amendments Act of 1980 (the "Bayh-Dole Act") generally will not result in "private business use" under the tax-exempt bond rules.
Background. Sections 141 and 145 of the Code limit the amount of "private business use" that may occur in facilities financed with tax-exempt governmental purpose bonds or qualified 501(c)(3) bonds, respectively, issued by States or political subdivisions thereof. Applicable Treasury Regulations provide that "private business use" may result from an agreement by a nongovernmental (or, in the case of qualified 501(c)(3) bonds, non-501(c)(3)) person to sponsor research performed by a governmental (or, in the case of qualified 501(c)(3) bonds, 501(c)(3)) person. For this purpose, the federal government is considered a non-governmental person (i.e., "governmental person" is limited to state and local government entities).
In 1997, the IRS issued Revenue Procedure 97-14, providing "safe harbors" under which sponsored research agreements meeting certain requirements would not be treated as resulting in private business use. Although federally sponsored research did not appear to be the intended target of these rules, concerns have been raised that the rights provided to the federal government under the Bayh-Dole Act with respect to federally sponsored research might not comply with the safe harbors of Revenue Procedure 97-14. Accordingly, there has been uncertainty as to whether federally sponsored research resulting in rights under the Bayh-Dole Act could be treated as resulting in private business use of the facilities used for the research.
New Revenue Procedure. New Revenue Procedure 2007-47 clarifies that rights of the federal government and its agencies mandated by the Bayh-Dole Act will not cause research agreements to fail to meet the IRS safe harbors for sponsored research. In a related change, the new revenue procedure also provides that the safe-harbor previously available only for cooperative research agreements with multiple, unrelated sponsors, is also available where there is only a single sponsor (including the federal government). As a result of these changes, the existence of march-in or other rights of the federal government mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the IRS safe harbors against treatment as private business use, provided that (i) the governmental or 501(c)(3) user (as the case may be) of the facility determines the subject matter of the research and the manner in which it is to be performed, and (ii) the nature of any license granted to the federal government or the sponsoring federal agency (or any other nongovernmental person) to use the product of the research is not more than a nonexclusive, royalty-free license. The new revenue procedure does not, however, address the use by third parties that actually receive more than non-exclusive, royalty-free licenses as a result of the sponsoring federal agency exercising its rights under the Bayh-Dole Act.
Effective Date. Revenue Procedure 2007-47 is effective for research agreements entered into, materially modified, or extended on or after June 26, 2007. In addition, issuers may choose to apply the new revenue procedure to any research agreement entered into prior to June 26, 2007. Thus, while the revenue procedure is generally prospective, issuers may elect to apply it retroactively.