IRS Guidelines on Management Contracts

Purdue University and the Office of Treasury Operations follow the IRS guidelines on revenue procedure for management contracts. See here for the IRS guidelines.

Safe Harbor for Management Contracts

Under IRS Revenue Proc 2017-13, certain exceptions are allowed on management contracts.

  • Applies to contracts entered into on or after August 22, 2016, and may be applied retroactively.
  • May elect to continue to apply 97-13 to a management contract that is entered into before August 18, 2017.
  • If a management contract meets all of the applicable conditions listed below, or is an eligible expense reimbursement arrangement, the management contract does not result in private business use.
    • Payments to the service provider must be reasonable compensation for the services rendered.
    • Contract must not provide to the service provider a share of net profits from the operation of the managed property.
      • Compensation will not be treated as providing a share of net profits if no element of the compensation takes into account, or is contingent upon, either the managed property’s net profits or both the managed property’s revenues and expenses
      • Payment deferral resulting from insufficient net cash flows from operations is permitted if the contract (1) requires payment of compensation at least annually, (2) imposes reasonable consequences for late payment, such as reasonable interest charges of late payment fees, and (3) requires payment of the deferred compensation and interest/fees within five years of the original due date.
      • Incentive compensation will not be treated as providing a share of the net profits if the eligibility for the incentive compensation is determined by the service provider’s performance in meeting one or more standards that measure quality of services, performance or productivity
      • A capitation fee, a per-unit fee and a qualitative incentive fee, or any combination of these, does not provide for a prohibitied share of net losses, even if the service provider pays expenses of operating the managed property and is not reimbursed. (This includes employee costs, utilities, supplies, etc.)
    • Contract must not impose upon the service provider the burden of bearing any share of net losses from the operation of the managed property.
    • Term of the contract is no greater than the lesser of 30 years or 80% of the weighted average reasonably expected economic life of the managed property;land is treated as having an economic life of 30 years if 25% or more of the net proceeds of the issue that finances the managed property is used to finance land.
    • Qualified user must exercise a significant degree of control over the use of the managed property– is met if
      • Contract requires qualified user to approve the annual budget of the managed property, capital expenditures with respect to the managed property, each disposition of property that is part of the managed property, rates charged for the use of the managed property, and the general nature and type of use of the managed property.
    • Qualified user must bear the risk of loss upon damage or destruction of the managed property.
    • Service provider must agree that it is not entitled to and will not take any tax position that is inconsistent with being a service provider to the qualified user with respect to the managed property.
  • Service provider must not have any role or relationship with the qualified user that substantially limits the qualified user’s ability to exercise its rights under the contract – safe harbor if the following are met:
    • No more than 20% of the voting power of the governing body of the qualified user is vested in the directors, officers, shareholders, partners, members and employees of the service provider,
    • The governing body of the qualified user does not include the chief executive officer of the service provider or the chairperson of the service provider’s governing body, and
    • The chief executive officer of the service provider is not the chief executive officer of the qualified user or any of the qualified user’s related parties.

Source: Susan Price, Esq., Ice Miller LLP, March 14, 2017