For purposes of the private business use test , both the federal government and nonprofit organizations are considered to be private persons .
Types of Private Business Use Arrangements
In general , private business use can arise from either actual or beneficial use by a private user that results is a special legal entitlement to use bond-financed property . Common examples of actual or beneficial use include :
Ownership . Subject to certain limited exceptions , a private user ’ s ownership of a bond-financed asset results in private business use .
Leases . Subject to certain limited exceptions , a lease of bond-financed property to a private user results in private business use . Determining whether an arrangement constitutes a lease is based on all of the facts and circumstances , including the degree of private business control over the financed property and whether the private business bears risk of loss on the financed property .
Management / Service Contracts . Contracts under which a private user provides management or certain other services ( but not incidental services such as janitorial support ) with respect to a bond-financed facility are analyzed for private business use based on a facts-and-circumstances standard . Under the general rule , a management / service contract creates private business use if the contract provides for compensation based , in whole or in part , on net profits from the operation of the facility . There are IRS safe harbors that , if met , provide comfort that the management / service contract will not be seen as creating private business use . For more information , please refer to The Issue Spot on “ Qualified Management Contracts .”
Research Agreements . Most common in university and hospital settings , certain contractual arrangements pursuant to which a private user agrees to sponsor scientific research to be conducted at a bond-financed facility can result in private business use . In many cases , however , a research agreement can be negotiated such that it complies with safe harbors that , if met , provide that the research agreement does not create private business use .
Output Contracts . In the case of bond-financed property used for ( or related to ) electric and gas generation , transmission , distribution or water collection , storage and distribution , certain contractual arrangements – such as take-or-pay contracts – can convey the benefits and burdens of ownership to a private use and , therefore , result in private business use .
Other Special Legal Entitlements . There is a “ catch all ” for arrangements that might not fit within the categories above , but the facts and circumstances of which nonetheless result in private business use . One example of a special legal entitlement that may ( but may not , depending upon the particular facts ) give rise to private business use is a naming rights agreement in which a private business user pays a governmental user for the right to have a facility referred to by a certain name .
Special Economic Benefit . If bond-financed property is not available for use by the general public , private business use can arise out of facts and circumstances that result in a private user deriving some special economic benefit from the property , even if there is no contractual use with respect to the property . The IRS will look at factors such as proximity of the bond-financed property to the private user ’ s property and the total number of users benefitted from the bond-financed property .
The more an arrangement transfers the benefits / burdens of ownership or other control to a private user , the more likely that it might be characterized as private business use .
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