What Was the Revenue Procedure 82-17 Safe Harbor?

Revenue Procedure 82-17 was a guideline from the Internal Revenue Service that established a “safe harbor” for management contracts involving facilities financed with tax-exempt bonds. The purpose of this safe harbor was to provide a clear framework for structuring these agreements. Following these guidelines helped ensure that a management contract did not create “private business use.” If a contract generated excessive private business use, it could jeopardize the tax-exempt status of the bonds used to finance the facility.

Core Requirements of the 82-17 Safe Harbor

The framework established by Revenue Procedure 82-17 was built upon conditions intended to limit the manager’s control and interest in the financed property. A central requirement was a strict limitation on the duration and terminability of the management contract, with several safe harbor options based on the manager’s compensation structure.

For instance, contracts where the manager received a high percentage of their compensation as a fixed fee could have longer terms. In contrast, agreements with more variable, performance-based fees were restricted to shorter terms. Regardless of the total length, the safe harbors required the facility’s owner to have the right to cancel the contract without cause or penalty at specified intervals. These provisions ensured the owner retained ultimate control.

Permissible Compensation Arrangements

The financial rules under Revenue Procedure 82-17 were centered on preventing the manager from sharing in the facility’s profits. There was a prohibition on any compensation arrangement based on a share of net profits, as this was viewed by the IRS as an indicator of an ownership-like stake in the managed property.

While net profit sharing was forbidden, the procedure did permit several other forms of compensation. A periodic fixed fee was a common arrangement. Other allowed structures included a capitation fee, which is a fixed payment per person served, and a per-unit of service fee.

The rules also allowed for compensation to be based on a percentage of gross revenues or a percentage of expenses, but not a combination of both. This distinction was important; tying compensation to both revenues and expenses could indirectly create a net profits interest.

The Modern Framework under Revenue Procedure 2017-13

Revenue Procedure 82-17 and its direct successor, Revenue Procedure 97-13, have been superseded. The current governing guidance is found in Revenue Procedure 2017-13, which applies to management contracts entered into or materially modified after January 17, 2017. This modern framework introduces a more flexible and principles-based approach compared to the rigid rules of its predecessors.

A major change under the 2017-13 safe harbor is the increased flexibility in contract length. The old restrictive term limits are gone, and contracts can now extend for up to 30 years or 80% of the useful life of the financed asset, provided certain conditions are met. This allows for greater stability and long-term planning between the facility owner and the management company.

Compensation arrangements have also been liberalized. While the prohibition on sharing in net profits remains, Revenue Procedure 2017-13 allows for a wide variety of fixed and variable compensation structures, as long as the total compensation is “reasonable” for the services provided. This reasonableness standard replaces the strict list of permitted fee types. The contract must also require the service provider to agree not to take any tax position inconsistent with its role, such as claiming depreciation on the managed property.