On June 26, 2007, the Internal Revenue Service (the “IRS”) released Revenue Procedure 2007-47 (the “Revenue Procedure”), which is designed to resolve the issue of whether rights granted to the federal government pursuant to research contracts, grants or cooperative agreements funded in whole or in part by the federal government will result in private business use of tax-exempt bond-financed facilities.  This long-awaited revenue procedure is of particular importance to non-profit and governmental universities that engage in a significant level of federally-sponsored research, and will enable such universities to continue to realize the benefits of tax-exempt financing for research facilities.  The Revenue Procedure will also assist universities and similarly affected institutions in monitoring compliance with federal tax law limitations on the private use of bond financed facilities and ease the risk of adverse IRS examinations.  Unfortunately, the Revenue Procedure, which modifies and supersedes guidance provided by the IRS in Revenue Procedure 97-14, as currently drafted, raises the potential for unintended consequences as described below. 
 
Congress enacted the Patent and Trademark Law Amendments Act of 1980 (the “Bayh-Dole Act”), in part, to ensure that inventions resulting from federally-sponsored research would be available to the general public.  The Bayh-Dole Act generally covers any research contract, grant or cooperative agreement between a federal agency and any person, nonprofit organization or small business firm for the performance of experimental, developmental or research work funded by the federal government. 
 
Prior to the release of the Revenue Procedure, some practitioners were concerned that the rights afforded to the federal government (a private user for tax-exempt bond purposes) pursuant to the Bayh-Dole Act might be viewed by the IRS as an arrangement resulting in private business use should the federally-sponsored research take place in tax-exempt bond financed facilities.  Practitioners were not concerned, however, that the licensing of intellectual property rights to entities that did not provide any research funding might result in private business use.
 
The Revenue Procedure states that basic research funded by federal agencies will not result in private business use of the tax-exempt bond financed facilities in which such research is conducted so long as: (1) the research institution determines the research to be performed and the manner in which it is to be performed (e.g., selection of the personnel to perform the research), (2) title to any patent or other product resulting from the federally-sponsored research lies exclusively with the research institution, and (3) no more than a non-exclusive, royalty-free license to use the product of the research is granted to any person. 
 
Therefore, as currently drafted, the Revenue Procedure requires that, in order to qualify under the revised safe harbor, the research institution will not be able to enter into exclusive licenses of intellectual property developed through federally-funded research.  That result is unintended.  The Revenue Procedure meant only to limit the type of license that would be granted to a federal agency or to another entity pursuant to an exercise by the federal agency of its rights under the Bayh-Dole Act.  Based on conversations with IRS personnel, we believe the IRS will correct this unintended consequence and we are working with the IRS to clarify the troubling language.
 
Although the primary reason for the Revenue Procedure is to address the concerns raised by the Bayh-Dole Act, the Revenue Procedure also expands the safeharbor under Revenue Procedure 97-14 that previously applied only to multiple sponsor arrangements which provide no more than a nonexclusive, royalty-free license to the sponsor to now apply to single-sponsor arrangements as well.     
 
The Revenue Procedure is effective for any research agreement entered into, materially modified, or extended on or after June 26, 2007.  Additionally, an institution may apply the Revenue Procedure to any research agreement entered into prior to June 26, 2007.
 
If you have any questions regarding the Revenue Procedure and its impact on future or outstanding tax-exempt bond financings or the manner in which post-issuance monitoring of compliance with federal tax law requirements can be implemented, feel free to contact any member of Orrick’s Public Finance Tax Group.