rp-01-39.pdf

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Draft Date: 6/18/01

CASE MIS No .: RP-123009-01

# Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.601: Rules and regulations.
(Also Part I, 103, 141, 145; 1.141-3, 1.145-2.)

Rev. Proc. 2001-39

## SECTION 1. PURPOSE

This revenue procedure modifies the definitions of capitation fee and per-unit fee
in Rev. Proc. 97-13, 1997-1 C.B. 632, to permit an automatic increase of those fees
according to a specified, objective, external standard that is not linked to the output or
efficiency of a facility (for example, the Consumer Price Index).

## SECTION 2. BACKGROUND

.01 Rev. Proc. 97-13 sets forth conditions under which a management contract
does not result in private business use under 141(b) of the Internal Revenue Code.
The revenue procedure also applies to determinations of whether a management
contract causes the test in 145(a)(2)(B) to be met.

.02 Section 3 of Rev. Proc. 97-13 defines various terms, including capitation fee,
periodic fixed fee, and per-unit fee.

.03 Section 3.02 of Rev. Proc. 97-13 defines a capitation fee as a fixed periodic
amount for each person for whom the service provider or the qualified user assumes
the responsibility to provide all needed services for a specified period so long as the
quantity and type of services actually provided to covered persons varies substantially.

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A capitation fee may include a variable component of up to 20 percent of the total
capitation fee designed to protect the service provider against risks such as
catastrophic loss.

.04 Section 3.05 of Rev. Proc. 97-13 defines a periodic fixed fee as a stated
dollar amount for services rendered for a specified period of time. The definition of
periodic fixed fee provides that the stated dollar amount may automatically increase
according to a specified, objective, external standard that is not linked to the output or
efficiency of a facility.

.05 Section 3.06 of Rev. Proc. 97-13 defines a per-unit fee as a fee based on a
unit of service provided specified in the contract or otherwise specifically determined by
an independent third party, such as the administrator of the Medicare program, or the
qualified user.

.06 Neither the capitation fee definition nor the per-unit fee definition expressly
contemplates an automatic increase based on a specified, objective, external standard
not linked to the output or efficiency of the facility.

.07 This revenue procedure clarifies that a capitation fee and a per-unit fee may
be determined using an automatic increase according to a specified, objective, external
standard that is not linked to the output or efficiency of a facility (for example, the
Consumer Price Index).

## SECTION 3. SCOPE

This revenue procedure applies when, under a management contract, a service
provider provides management or other services involving property financed with
proceeds of an issue of state or local bonds subject to 141 or 145(a)(2)(B).

### SECTION 4. MODIFICATIONS

.01 Section 3.02 of Rev. Proc. 97-13 is modified to add the following text
immediately before the last sentence:

A fixed periodic amount may include an automatic increase according to a
specified, objective, external standard that is not linked to the output or
efficiency of a facility. For example, the Consumer Price Index and similar
external indices that track increases in prices in an area or increases in
revenues or costs in an industry are objective, external standards.

.02 Section 3.06 of Rev. Proc. 97-13 is modified to add the following text at the
end:

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A fee that is a stated dollar amount specified in the contract does not fail
to be a per-unit fee as a result of a provision under which the fee may
automatically increase according to a specified, objective, external
standard that is not linked to the output or efficiency of a facility. For
example, the Consumer Price Index and similar external indices that track
increases in prices in an area or increases in revenues or costs in an
industry are objective, external standards.

#### SECTION 5. INQUIRIES

For further information regarding this revenue procedure contact David White at
(202) 622-3980 (not a toll-free call).

##### SECTION 6. EFFECT ON OTHER DOCUMENTS

This revenue procedure modifies Rev. Proc. 97-13, 1997-1 C.B. 632.

###### SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for any management contract entered into,
materially modified, or extended (other than pursuant to a renewal option) on or after
July 9, 2001. In addition, an issuer may apply this revenue procedure to any
management contract entered into prior to July 9, 2001.

#### DRAFTING INFORMATION

The principal authors of this revenue procedure are Mary Truchly and Rebecca
Harrigal, Office of Chief Counsel.