In August of 2016, the Internal Revenue Service (IRS) issued Revenue Procedure 2016-44 which created safe harbors for management contracts. The IRS recently released Revenue Procedure 2017-13 to clarify Revenue Procedure 2016-44 and to address certain types of compensation, the timing of payment of compensation, the treatment of land and methods of approval rates.
Section 5.02 of Revenue Procedure 2016-44 sets forth general financial requirements for management compensation arrangements eligible for the safe harbor by providing that 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 net losses from the operation of the managed property. Section 2.11 of Revenue Procedure 2017-33 clarifies that capitation fees, periodic fees and per-unit fees as well as a service provider’s payment of expenses of the operation of the managed property without reimbursement from the qualified user are not treated as providing a share of net profits.
Sections 5.02(2) and 5.02(3) of Revenue Procedure 2016-44 provides that the timing of payment of compensation cannot be contingent upon net profits or net losses from the operation of managed property. Section 2.12 of Revenue Procedure 2017-13 clarifies that compensation subject to an annual payment requirement and reasonable consequences for late payment (such as interest charges or late payment fees) will not be treated as contingent upon net profits or net losses if the contract includes a requirement that the qualified user will pay the deferred compensation within five years of the original due date of the payment.
Section 5.03 of Revenue Procedure 2016-44 provides that the term of the contract, including all renewal options) must be no greater than the lesser of 30 years or 80 percent of the weighted average reasonably expected economic life of the managed property and provides a unique calculation of economic life. After questions arose concerning the exclusion of land when he cost of land account for a significant portion of the managed property under Revenue Procedure 2016-44’s unique calculation of economic life. Section 2.13 of Revenue Procedure 2017-33 clarifies that economic life is determined in the same manner as under I.R.C. § 147(b) as of the beginning of the term of the contract. Thus, land is now treated as having an economic life of 30 years if 25 percent or more of the net proceeds of the issue that finances the managed property is to be used to finance the costs of such land.
Section 5.04 of Revenue Procedure 2016-44, provides that the qualified user must exercise a significant degree of control over the use of the managed property and that this requirement is met if the contract requires the qualified user to approve, among other things, the rates charged for use of the managed property. In addition, Section 5.04 of Revenue Procedure 2016-44 provides that a qualified user may show approval of rates charged for use of the managed property by either expressly approving such rates or by including in the contract a requirement that service provider charge rates that are reasonable and customary as determined by an independent third party. Section 2.14 of Revenue Procedure 2017-33 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 by requiring that the service provider charge rates that are reasonable and customary as determined by, or negotiated with, and independent third party.
Revenue Procedure 2017-33 applies to management contracts entered into or after January 17, 2017.