Skip to Main Content
Services Talent Knowledge
Site Search


Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

August 26, 2016

Qualified Management Agreements: New IRS Guidelines

The Internal Revenue Service has released IRS Revenue Procedure 2016-44 relating to qualified management agreements. Effective for management agreements entered into on or after August 22, 2016, Revenue Procedure 2016-44 adds a safe harbor for projects financed by governmental bonds issued by State or local government or tax-exempt bonds issued for projects owned by Section 501(c)(3) organizations. Revenue Procedure 2016-44 adds flexibility to the existing guidelines that apply to the compensation and term of management or service contracts for bond-financed improvements.

Compensation based on net profits is still prohibited, but formulas based on the type of compensation and term no longer apply. The new safe harbor is based on principles of control of the bond-financed improvements by the governmental issuer or Section 501(c)(3) organization. Revenue Procedure 2016-44 will supersede the existing safe harbors under Revenue Procedure 97-13 (as modified) for contracts entered into or materially modified or extended on or after February 18, 2017.

One of the requirements for interest on governmental bonds to be and remain tax-exempt (that is, excluded from income of the owner of the bonds for federal income tax purposes) is that bond-financed improvements cannot be used for impermissible private business use. Impermissible private business use may arise if more than 10% of the bond proceeds allocated to the bond-financed improvements are used, directly or indirectly, in the trade or business of a person other than a state or local governmental unit ("Private Business Use"). Use by a Section 501(c)(3) organization is considered use in a trade or business. A similar condition applies to 501(c)(3) bonds except bond-financed improvements must be owned by a Section 501(c)(3) organization; qualified use can be by a state or local government or a 501(c)(3) organization (not engaged in unrelated business activities); and 10% is reduced to 5%. The consequences of impermissible Private Business Use include loss of tax-exempt status of interest on governmental or 501(c)(3) bonds.

Actual and beneficial use of bond-financed improvements may result in Private Business Use. For example, Private Business Use can arise from a lease of all or a portion of bond-financed improvements by the governmental issuer (or Section 501(c)(3) organization) to a third party. Management or service contracts under which a service provider provides services involving all, a portion or a function of the bond-financed improvements constitute use of bond-financed improvements and must be on terms that do not give rise to Private Business Use. Examples of management or service contracts include contracts with a nongovernmental service provider for operation of a campus bookstore, a community center or a cafeteria located in bond-financed improvements.

The safe harbor under Revenue Procedure 2016-44 requires that compensation is reasonable and not contingent on net profits. Compensation may be fixed or variable. The term of the management or service contract cannot exceed the lesser of 30 years or 80% of the weighted average reasonable expected economic life of the bond-financed improvements.

Control by the governmental issuer or Section 501(c)(3) organization over operation of the bond-financed improvements is a critical element in determining whether the contract satisfies the safe harbor. To satisfy the safe harbor and avoid  Private Business Use, the governmental issuer or Section 501(c)(3) organization must retain the benefits and burdens of ownership of the bond-financed improvements by (1) exercising control over the operation of the managed space and functions including approval of the annual budget, capital expenditures, disposition of property, rates charged by the service provider and the general nature and type of services, and (2) bearing the risk of loss. The service provider must agree not to take a tax position which is inconsistent with ownership by the governmental issuer or Section 501(c)(3) organization such as claiming depreciation or an investment tax credit for the property. Revenue Procedure 2016-44 retains the limitations on the relationship between the service provider and the governmental issuer or Section 501(c)(3) organization that are set forth in Revenue Procedure 97-13 relating to overlapping boards and officers.

Revenue Procedure 2016-44 adds significant flexibility for management and service contracts involving property financed with governmental or 501(c)(3) bonds. Bond counsel will review the facts and circumstances of each contract to ensure that contracts do not result in impermissible Private Business Use.

If you would like further information or have any questions with respect to the impact of these new IRS guidelines, please feel free to contact Connie Cahill at (518) 429-4296 or, Jean Everett at (202) 582-0601 or, or Amanda Mirabito at (315) 425-2872 or


Click here to sign up for alerts, blog posts, and firm news.

Featured Media


The New York FY 2025 Budget – CDPAP FIs Under Threat


Website Accessibility Lawsuits: Several "Tester" Plaintiffs—Anderson, Beauchamp, Murray, Angeles, Monegro, and Bullock—Targeting Businesses in Recent Flurry of Lawsuits


Updated Bulletin on Tracking Technologies in the Health Care Industry


NYS Board of Regents Adopts Regulations on the Mental Health Diagnostic Privilege


First Department Clarifies Pleading Requirements Under NYS Child Victims Act


Beneficial Ownership Reporting Requirements Under the CTA: Quarterly Reminder

We're Growing in DC!

We’re excited to announce Barclay Damon’s combination with Washington DC–based Shapiro, Lifschitz & Schram. SLS’s 10 lawyers, three paralegals, and four administrative staff will join Barclay Damon while maintaining their current office in DC’s central business district. Our clients will benefit from SLS’s corporate, real estate, finance, and construction litigation experience and national energy-industry profile, and their clients from our full range of services.

Read More

This site uses cookies to give you the best experience possible on our site and in some cases direct advertisements to you based upon your use of our site.

By clicking [I agree], you are agreeing to our use of cookies. For information on what cookies we use and how to manage our use of cookies, please visit our Privacy Statement.

I AgreeOpt-Out