IRS private letter ruling - KPMG United States
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Hospital’s arrangement with school; management contract, no private business use

IRS private letter ruling

The IRS publicly released a private letter ruling* in which it concluded that an agreement between a county teaching hospital and a nonprofit state school, under which the hospital’s facilities will be made available for the students’ clinical rotations, will not result in private business use of the hospital.


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Specifically, the IRS determined that although the agreement did not meet the applicable safe harbor, the agreement would not result in private business use of the hospital based on all of the facts and circumstances. Read PLR 201726007 [PDF 57 KB] (dated April 4, 2017, and released June 30, 2017). 

*Private letter rulings are taxpayer-specific rulings furnished by the IRS Office of Chief Counsel in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. Pursuant to section 6110(k)(3), written determinations such as private letter rulings are not intended to be relied upon by third parties and may not be cited as precedent. These written determinations may, however, offer an indication of the IRS’s position on the issues addressed.


Tax-exempt status generally is denied for “private activity” bonds. A private activity bond is part of any bond issue that meets the private business use test and the private security or payment test. A bond falls afoul of the private business use test if more than 10% of the issue’s proceeds are to be used for any private business use. Private business use is defined as direct or indirect use in a trade or business carried on by any person other than a governmental unit.

The provision of services under a management contract does not by itself result in private business use if requirements as to compensation arrangements and other matters are satisfied. Rev. Proc. 2017-13 provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds or cause the modified private business use test for property financed with qualified 501(c)(3) bonds to be met. If a management contract meets the requirements of the revenue procedure, the contract does not result in private business use. Read additional information about Rev. Proc. 2017-13 in TaxNewsFlash-Exempt Organizations.

PLR 201726007

In PLR 201726007, the IRS concluded that despite the fact that neither the school nor the hospital would pay the other any form of compensation, the agreement constituted a management contract as defined in Treasury regulations. Accordingly, the IRS analyzed the agreement under Rev. Proc. 2017-13 to determine whether the arrangement qualified for the safe harbor provided therein. 

Without noting which of the safe harbor conditions the agreement failed to meet, the IRS concluded that the agreement did not qualify for the Rev. Proc. 2017-13 safe harbor. Nevertheless, the IRS ruled that the agreement would not result in private business use based on all of the facts and circumstances. 

Notwithstanding the inapplicability of the safe harbor, the IRS stated that the requirements of Rev. Proc. 2017-13 “are useful reference points for this analysis.” Specifically, the following factors from the revenue procedure tended to show that the agreement would not result in private business use: 

  • There is no payment of compensation from the county to the school for the services provided by the school. 
  • The school bears no share of the costs of, or losses from, the operation of the hospital. 
  • The school does not participate in the net profits from the operation of the hospital.
  • The contract has a term of five years and does not exceed the lesser of 30 years or 80% of the hospital’s remaining economic life. 
  • The county bears all risk of loss upon damage or destruction to the hospital.
  • The school is not entitled to and will not take any tax position that is inconsistent with being a service provider to the county with respect to the hospital.
  • The school has no role or relationship with the county that, in effect, substantially limits the county’s ability to exercise its rights under the agreement. 
  • Under the agreement, the school has no right to provide input on the hospital’s annual budget, capital expenditures with respect to the hospital, any disposition of hospital property, any rates charged for use of the hospital, or the general nature and type of use of the hospital property. 


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Randall Thomas | +1 202 533 3786 |

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