## Facts

- The Internal Revenue Service issued a revenue procedure establishing conditions under which a “research agreement” relating to bond-financed property will not be treated as private business use.
- The guidance concerns facilities financed with tax-exempt governmental bonds under I.R.C. § 103 and qualified 501(c)(3) bonds under § 145.
- The private activity bond rules treat interest as taxable if the issue satisfies both the private business use test and the private security or payment test under § 141.
- Treasury regulations provide that a research sponsorship agreement by a nongovernmental person can create private business use depending on facts and circumstances, including whether the sponsor receives special legal entitlements.
- For these purposes, the United States and its agencies are not “governmental units,” so federal sponsorship can be analyzed as involving a nongovernmental person.
- The revenue procedure modifies and supersedes prior IRS guidance that had provided sponsored-research safe harbors but left uncertainty for federally funded research subject to Bayh-Dole rights.
- The procedure is effective for research agreements entered into on or after July 16, 2007, with elective application to earlier agreements if its conditions are met.

## Issues

1. Under what conditions does a research agreement involving bond-financed facilities create “private business use” for purposes of I.R.C. § 141(b)?
2. How do the private business use limitations apply, with modifications, to qualified 501(c)(3) bonds under I.R.C. § 145(a)(2)(B)?
3. Whether federally sponsored research subject to Bayh-Dole rights (including government license and march-in rights) causes private business use, and if not, what conditions prevent that result.

## Decision

- The IRS announced safe harbors under which a research agreement will not result in private business use under § 141(b).
- The IRS addressed whether research agreements can cause the modified private business use test in § 145(a)(2)(B) to be met for qualified 501(c)(3) bonds, and provided parallel safe-harbor treatment.
- For corporate-sponsored basic research, a safe harbor applies only if any license or other use of resulting technology by the sponsor is permitted solely on terms available to unrelated, non-sponsoring parties, with the sponsor paying a competitive price determined when the technology is available for use.
- The procedure clarified that federal rights mandated by the Bayh-Dole Act do not, by themselves, cause a research agreement to fail the safe harbors, so long as the agreement otherwise satisfies the applicable conditions.
- The procedure modified and superseded prior guidance on sponsored research safe harbors.

## Legal Principles

- Interest on state or local bonds is excluded from gross income under § 103(a), but that exclusion generally does not apply to private activity bonds unless the bonds qualify under § 141(e).
- A bond issue can be a private activity bond if it meets both the private business use test and the private security or payment test under § 141(a).
- Private business use generally includes direct or indirect use of bond-financed property in a trade or business by a nongovernmental person; research sponsorship can constitute such use based on facts and circumstances.
- Safe-harbor research agreements avoid private business use when the sponsor’s rights to resulting technology do not confer below-market or preferential access; competitive-price requirements and market-timing for pricing are central where sponsors seek special rights.
- Federal statutory rights associated with Bayh-Dole (including government licenses and march-in rights) are treated as compatible with the safe harbors and do not alone create private business use.
- The guidance applies prospectively from July 16, 2007, with limited elective retroactive application conditioned on compliance.

## Conclusion

Rev. Proc. 2007-47 set IRS safe harbors for structuring sponsored research agreements involving tax-exempt bond-financed facilities so that sponsor rights—especially to intellectual property—do not create private business use under §§ 141 and 145, and it clarified that Bayh-Dole federal rights do not, standing alone, jeopardize tax-exempt bond status.


Rev. Proc. 2007-47, 2007 IRB LEXIS 570 (2007)