Rev. Proc. 82-15

SECTION 1. PURPOSE

This revenue procedure sets forth the conditions that must be met for the Internal Revenue Service to issue an advance ruling that certain 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 hospitals, nursing homes, or similar facilities that are owned and operated by exempt persons described in section 103(b)(3) of the Code. Such facilities are sometimes used by physicians, professional corporations, or other non-exempt persons who are not employees of the exempt persons. 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 help taxpayers and their representatives prepare ruling requests. These guidelines are intended to reflect the current position of the Service on the issuance of rulings. They do not define, as a matter of law, the circumstances under which a bond issued by a state or its political subdivision is considered an industrial development bond under 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 issuing 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 in 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

The Service will usually rule that if the conditions listed below are met, facilities that are owned by an exempt person and used by a nonexempt person are not considered used in the trade or business of the nonexempt person within the meaning of section 103(b)(2)(A) of the Code. The conditions are the following:

.01 If any contract between the exempt person and the nonexempt person provides for compensation based on a percentage of fees charged for services rendered by the nonexempt person, the contract may not exceed a term of 2 years. In addition, the exempt person must be able to cancel the contract without penalty or cause by giving the nonexempt person 90 days' notice. The compensation must be reasonable, and it may not be based on a percentage of the net profits of the exempt person or a division of the exempt person. The exempt person and the nonexempt person must represent that any new percentage-of-fee contract they negotiate will also be subject to these terms.

.02 If any contract between the exempt person and the nonexempt person provides for compensation based on a periodic flat fee, the compensation must be reasonable and the contract may not exceed a term of 5 years. In addition, the exempt person must be able to cancel the contract without penalty or cause at the end of each 2-year period of the contract term. 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, or the actual percentage increases for services that result from the application of external criteria (for example, increases in rates paid by insurance companies) are illustrations of two external standards that may be used. The exempt person and the non-exempt person must represent that any new flat-fee contract they negotiate will also be subject to these terms.

.03 If a nonexempt person and an exempt person enter into a contract described in section 3.01 or 3.02 and the governing body of the exempt person numbers 5 or more members, one member of the governing body of the exempt person may be the nonexempt person or related person (as described in section 103(b)(6)(C) of the Code), an employee of the nonexempt person, or a member of the governing body of the nonexempt person. However, such nonexempt person, employee of the nonexempt person, or member of the governing body of the nonexempt person may not serve as the chief executive of the governing body of the exempt person.

SEC. 4. INQUIRIES

Inquiries about 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 Ave., N.W., Washington, D.C. 20224.