Rev. Proc. 82-14

SECTION 1. PURPOSE

The purpose of this revenue is to set forth the circumstances under which the Internal Revenue Service will issue an advance ruling that facilities are not used in the trade or business of a nonexempt person within the meaning of section 103(b)(2)(A) of the Internal Revenue Code.

SEC. 2. BACKGROUND

Section 103(a)(1) of the Code provides that gross income does not include the interest on obligations of a state or political subdivision of a state. Section 103(b)(1) provides that, with certain exceptions, industrial development bonds will not be treated as obligations described in section 103(a)(1). Section 103(b)(2) provides that an obligation is an industrial development bond if (A) a major portion of the proceeds are used in the trade or business of a nonexempt person, and (B) the payment of principal or interest on the obligations is secured by an interest in property used in a trade or business or payments in respect to such property.

Political subdivisions of states frequently issue obligations to finance facilities that are owned by exempt persons described in section 103(b)(3) of the Code. However, the exempt owners sometimes contract with a nonexempt management company for management services in the operation of the facilities. This situation requires consideration of whether the financed facilities are used in the trades or businesses of the nonexempt persons within the meaning of section 103(b)(2)(A). The Service will usually issue a ruling that a facility is not used in the trade or business of the nonexempt person if the conditions set forth in section 3 of this revenue procedure are satisfied.

The operating guidelines published in this revenue procedure are intended only to inform taxpayers and their representatives of existing standards for the issuance of private letter rulings. They do not define, as a matter of law, the circumstances under which a bond issued by a state or political subdivision thereof is an industrial development bond within the meaning of section 103(b)(2) of the Code. Thus, the operating guidelines are not to be applied in the examination of taxpayers' returns as tests for determining the taxability of bond interest.

The authority and general procedures of the National Office and the Offices of the District Directors of the Internal Revenue Service for the issuance of advance rulings and determination letters are outlined in Rev. Proc. 80-20, 1980-1 C.B. 633, as modified, clarified, and amplified by Rev. Proc. 81-33, 1981-2 C.B. 564, and section 601.201 of the Statement of Procedural Rules (26 CFR section 601.201 (1980)). Also see Rev. Proc. 79-4, 1979-1 C.B. 483, as amplified by Rev. Proc. 79-12, 1979-1 C.B. 492, as amplified by Rev. Proc. 80-1, 1980-1 C.B. 579; and Rev. Proc. 81-10, 1981-1 C.B. 647. Careful attention to all the requirements of these documents will help prevent delays in processing requests for rulings.

SEC. 3. OPERATING GUIDELINES

A ruling usually will be issued that facilities are not used in the trade or business of a nonexempt person within the meaning of section 103(b)(2)(A) of the Code (relating to the determination of whether the bonds issued by a state or political subdivision thereof to finance the facilities will be industrial development bonds) when the facilities are to be managed by a nonexempt management company, if the following conditions are met:

.01 Except as provided in section 3.02 below, any management contract must provide for compensation for the management services that is based on a periodic flat fee that is reasonable in relation to the services performed. If the contract provides for automatic increases in the periodic flat fee, the increases may not exceed the percentage increases determined by the particular external standards for computing such increases that are mutually agreed upon in the contract. The percentage increases reflected in the Consumer Price Index compiled by the Bureau of Labor Statistics, U.S. Department of Labor, illustrate one standard that may be used. The term of any management contract (including any renewal option periods provided for in the contract) between the owner of the facilities and the management company may not exceed a period of 5 years. If the term of the contract (including any renewal option periods) exceeds 2 years, the owner must be able to cancel the contract without penalty at the end of each 2-year period of the contract term. The owner and the management company must represent that if any new contract is negotiated, the new contract will be subject to the same terms as those described above.

.02 If the facilities financed with bond proceeds have not been operated for a sufficient period to establish with reasonable certainty the amount of the annual gross revenues and expenses, the management contract may provide for compensation for the management services based on a percentage of the gross revenues from the facilities. "Gross revenue" means the total revenue received from the operation of the facilities. However, the term of the percentage compensation arrangement generally may not exceed 1 year. At the end of the 1-year term, any management contract must provide for compensation to be based on a periodic flat fee as described in section 3.01 above.

.03 If the exempt owner of the facilities and the nonexempt management company enter into a contract described in section 3.01 or 3.02 and the governing body of the exempt owner numbers 5 or more members, one member of the governing body of the exempt owner may be an employee or member of the governing body of the management company. Similarly, if the governing body of the management company number 5 or more members, one of those members may be an employee or member of the governing body of the exempt owner of the facilities. However, the employee or member of the governing body of the management company may not serve as the chief executive of the governing body of the exempt owner, and the employee or member of the governing body of the exempt owner may not serve as the chief executive of the governing body of the management company. Members of the governing body of the exempt owner of the facilities may not own a controlling interest in the management company.

SEC. 4. INQUIRIES

Inquiries regarding this revenue procedure should refer to its number and should be addressed to the Assistant Commissioner (Technical), Attention: T:I:I, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.