Overview of facts and circumstances test for private commercial use after Rev. proc. 2017-13

The IRS recently issued PLR 201726007, the first private letter ruling to interpret the revised Safe Harbor Management Agreement in Rev. proc. 2017-13. At one level, the PLR ​​is quite simple – it concludes that a teaching agreement between a hospital and a school to provide clinical practice for pharmacy students does not result in private commercial use. On another level, it is somewhat surprising that such a PLR has been issued and the analysis takes interesting turns. Read below for more information.

As we have already discussed on the blog, there are two layers to analyzing a management contract. First, does it fit into a safe harbor with respect to private commercial use? If not, the bond attorney will often concede the issue, measure the private use of the contract, and decide whether an unqualified opinion can be given or whether an issuer should take corrective action if the bonds are already issued. . However, the Safe Harbor failure is not technically the end of the story. An agreement outside of a safe harbor is subject to a “facts and circumstances” test to see if it creates private commercial use, so the analysis of facts and circumstances is no longer separate from the analysis to determine whether a management contract satisfies the safe harbor of the private sphere. Commercial use. Previously, we noted that much of the old analysis of facts and circumstances was pushed into Rev. proc. 2017-13. We have our first answer to this theory in the form of PLR 201726007.

The facts of the PLR ​​are as follows. A county hospital with outstanding tax-exempt bonds offers training programs for nursing students, medical residents, and other healthcare professionals attending local colleges and universities. The hospital entered into such an agreement with a school to allow the school’s pharmacy students to participate in clinical rotations. Under the contract, the school would take care of the educational and other matters you would expect of a school – selecting students and faculty; develop a curriculum; maintain school records; ensuring compliance with licensing requirements; ensure that students follow hospital rules and regulations; maintenance of insurance. The hospital allows faculty and students access to its facilities but does not guarantee such access and may immediately expel students and faculty for cause, such as endangering the health and safety of patients, visitors or staff. No compensation is paid under the agreement. The county bears the risk of loss to the hospital and the school is not able to control the county, for example, through seats on the county board.

At first glance, it’s somewhat surprising that anyone even asked for a private letter ruling on such a routine deal. Almost all the teaching hospitals in the country have many agreements like this with various schools. The hospital gets relatively cheap (or possibly free) labor, and the school provides its students with valuable experience and often a prerequisite for obtaining a medical license. The complete absence of any compensation under the agreement might have been considered reason enough to move on to the next contract in the pile.

Curiously, on the facts above, the IRS simply concluded that the contract “does not meet all the conditions of the safe harbor”. The decision does not say why. We are left to guess, and the process of elimination is really the only way to do it. Continuing the interpretative approach taken by the IRS in the PLRs under Rev. proc. 97-13 to contracts that did not quite meet a safe harbor, the IRS used the elements of the safe harbor under Reverend Proc. 2017-13 as a practical tool in determining whether the contract in this decision resulted in private commercial use based on all facts and circumstances.

However, if you follow how the PLR ​​dutifully runs through the elements of the safe harbor as a guide for testing facts and circumstances, it superficially appears that all of the elements of the safe harbor are satisfied. Even though the PLR ​​ends on a happy note, bringing the transmitter to the same place with the test of facts and circumstances that perhaps he should have been able to reach through the safe harbor, he us It remains to be speculated what was missing – why ‘Does the contract satisfy the safe harbor as such, if it satisfies all the elements as applied by the test of facts and circumstances?

Could this be because the service provider has not “agreed that it is not entitled to take and will not take any tax position inconsistent with being a Services ? The PLR’s analysis simply notes that the “[s]The school has no right and will not take any fiscal position inconsistent with being a service provider”, which is not quite the same as agreeing not to take such position in the written terms of a contract. Or, instead, even more bizarrely, did the IRS rule that the contract violated safe harbor because there was no compensation under the agreement? The PLR ​​notes that Safe Harbor requires that “payments to the service provider under the contract shall be reasonable compensation for services rendered” and that under the contract, “there is no payment of compensation”, which, once again, is not quite the case. same thing.

In some previous posts, we questioned if there was anything left of the test of facts and circumstances after Reverend Proc. 2017-13 stuffed most of the content that previously existed in the Safe Harbor facts and circumstances test. This decision seems to be the atomic particle that still exists on the periphery of the Venn diagram between the test of facts and circumstances and Rev. proc. 2017-13.