Re: Tax Reform Act of 1986 Herbert B. Chermside 14 Jan 1999 14:51 EST

The publications restriction problem comes from IRS definitions of
"scientific research" and its relationship to UBIT.

I am cutting and pasting at the bottom of this some material I've assembled
in creating our own "test" for UBIT (don't think the listserve handles
attachments) -- the "non-UBIT" answers are "Y" for 1 - 6 and "N" for 7 --
some "correct" answers are sufficient in themselves, but others are kin of
cumulative in their effect.

If you are getting heavily into questions of UBIT, I could fax a number of
pages of background, but it is all summarized in the material below.  Be
aware that there is likel;y to be stress between fdaculty, who want to do
any piece of work that comes down the pike, and financial/tax advisors who
want to be super careful that there can never be the least hint of UBIT.

Chuck

At 02:13 PM 1/14/99 -0500, you wrote:
>Chuck, thnx, I was aware of the IP issue, but I recently heard that
>publication restriction could also trigger a project being considered as
>"private use", and am trying to track down the veracity of that claim.
>
>L
>
>> -----Original Message-----
>> From: Herbert B. Chermside [SMTP:xxxxxx@VCU.EDU]
>> Sent: Thursday, January 14, 1999 12:59 PM
>> To:   xxxxxx@hrinet.org
>> Subject:      Re: Tax Reform Act of 1986
>>
>> Len, the problem that I deal with (and it's the only one I'm aware of)
>> is
>> burried in the committee report:
>> If an institution specifies a "price" or royalty rate for intellectual
>> property BEFORE the IP is "ready for sale", the insititution looses
>> the
>> right to issue tax free bonds.
>>
>> This was a legislative reaction to some of the big deals where some
>> insititutions committed that all future inventions from some segment
>> of the
>> institution went to a big ($M, $$M) sponsor at a set royalty rate --
>> remember that in the early 80's a number of big sponsors, some being
>> foreign, made such deals.
>>
>> I overcome the problem by NEVER putting a ROYALTY RATE into a
>> sponsored
>> program.  I will agree to "reasonable", "usual in the industry", or
>> even a
>> (abnormally high) ceiling on rate, adding that final rate will be
>> negotriated aftrer both we and sponsor have had time to evaluate the
>> specific inventions.
>>
>> Chuck
>>
>>
>>
>>
>> At 12:06 PM 1/12/99 -0500, Paplauskas,Leonard wrote:
>> >Can anyone point me to a reference on the impact of this legislation
>> on
>> >universities?
>> >
>> >Thanks,
>> >
>> >Leonard P. Paplauskas
>> >Assistant Vice Chancellor for Research
>> >University of Connecticut Health Center
>> >Farmington, CT  06030-5355
>> >860-679-3173 (voice)
>> >860-679-2670 (fax)
>> >xxxxxx@adp.uchc.edu
>> >
>> >
>> >=====================================================================
>> ========
>> >
>> Herbert B. Chermside, CRA
>> Director, Sponsored Programs Administration
>> Virginia Comonwealth University
>> PO BOX 980568
>> Richmond, VA  23298-0568
>> Express Delivery Only:
>>         Sanger Hall, Rm. 1-073
>>         11th & Marshall Streets
>>         Richmond, VA  23219
>> Voice:  804-828-6772
>> Fax     804-828-2521
>> OFFICE e-mail   xxxxxx@VCU.EDU
>> Personal e-mail xxxxxx@vcu.edu
>> http://views.vcu.edu/views/ospa/
>>
>>
>> ======================================================================
>> =======
>
>
>=============================================================================
TEST FOR UNRELATED BUSINESS INCOME TAX (UBIT)
 ATTRIBUTABLE TO SPONSORED  PROGRAM ACTIVITIES
FOR COMMERCIAL SPONSORS

Public policy requires that non-profit entities shall not use their tax
exempt status to compete unfairly with for-profit organizations.
Therefore, Congress wrote into the Internal Revenue Code that activities
which are regularly conducted and which are not substantially related to
the tax- exempt mission of a non-profit are "unrelated business".  If
income from unrelated business (UBI) exceeds expenses, the surplus is
subject to "unrelated business income tax" (UBIT).  Some of the activities
of institutions of higher education which may be subject to UBIT include:
bookstore sales of soft goods, alumni trips that are not primarily
educational, parking deck revenue from unrelated persons, and clinical
trials for commercial entities.  Annually, the University must submit a tax
return listing all UBI activities.

The questions accompanying this discussion are to assist the University in
determining whether the activity for a specific sponsored program agreement
with a commercial sponsor is unrelated business, and thus possibly subject
to UBIT.  Note that the UBIT determination is based on the purposes and
activities of the project, and not whether any surplus is used to support
exempt activities.  For example, if surplus funds from routine testing
which otherwise would be considered taxable are used for scholarships, they
 are still subject to UBIT.

VCU's mission statement includes the following goals:   Provide
undergraduate education ... offer nationally and internationally recognized
professional and graduate programs ... expand the boundaries of knowledge
and understanding through research, scholarship and creative expression ...
provide an optimal environment for educating and training health care
professionals, for conducting research to improve health care and delivery,
and for meeting the needs of patients and the community in a comprehensive
health care setting.   The discussion below provides additional information
regarding each question.  It has been developed from the limited rulings
and court cases applicable to this area and has been reviewed by the
University's tax advisor.  As more attention is devoted to this area by the
IRS, interpretation of law by the IRS and Courts may help clarify the
issues.  The Assistant Controller (8-5470) is available to discuss these
guidelines or your specific set of circumstances.

The Nature of the Sponsor.              IRS regulations state that research performed
for governmental agencies and, except in very unusual cases, for non-profit
agencies, is "scientific research" and thus does not create UBI.  Research
funded by a commercial entity may generate UBI.

Educational/Training involvement.     Ordinarily, an activity will not be
subject to UBIT if students, trainees or post graduate professionals are
involved as part of their educational process.  If the participation is a
degree, certification, or program requirement, then the activity is clearly
not UBI.  That a learner is merely employed, or an experimental subject, on
a project will not qualify as educational/training involvement unless some
educational benefit can be clearly demonstrated.

Involvement of patients.     Medically related projects, including clinical
trials, may produce UBI if  they are not meeting the needs of patients.
Studies are exempt from UBIT if they serve patient care purposes.  This
means that the test drugs or products are offered to patients who have the
disease or condition for which eventual commercial use of the particular
drugs or products are intended.  This holds true even if some subjects in
the study, e.g., control subjects, do not have the condition.

Study Is to Improve Health Care.     Studies, including clinical trials,
concerned with new applications of products or drugs in order to improve
the ability to treat various diseases and  conditions are not subject to
UBIT if they are scientific research in the public interest, and are not
mere quality control programs or ordinary testing solely for certification
purposes.

Results of Research Available to Public.     In general, if the benefit of
the knowledge gained in research that is conducted for  a commercial
activity is restricted to the commercial sponsor only and not made
available for the benefit of the general public, that research is an
unrelated business activity.  Unreasonable restrictions on publication or
the distribution of the research results causes the income to be classified
as unrelated business income.  Reasonable restrictions on publication
include delays necessary to obtain patent ownership, or to allow all
parties in a multi-center study to have input to the manuscript.

Qualifies as Scientific Research, Not Ordinary Testing.     All scientific
research for the benefit of the general public is excluded from unrelated
business.  The term scientific research, for tax purposes, is the
development of an original idea or process, rather than mere routine
testing.  It is testing done to validate a scientific hypothesis, as
distinguished from generally repetitive work done by scientifically
unsophisticated employees for the purpose of determining whether the item
tested met certain specifications or a known standard.  For tax purposes,
testing to satisfy a federal or state regulation requiring such an
evaluation before a product may be marketed is presumed to be ordinary
testing, and would be subject to UBIT, unless excluded in accordance with
standards described above.

Clinical Trials to Satisfy Pre-Marketing Requirements.          The IRS presumes
that clinical trials to meet FDA requirements for marketing products are
"ordinary testing" and not "scientific research"  This presumption can be
rebutted by other factors showing that the activity is in support of the
institution's exempt purposes.
 Test to Determine if Commercially Sponsored Programs Are
Subject to Unrelated Business Income Tax (UBIT)

1.      Is the sponsor a governmental or non-profit entity?

 Yes ____    No ____

2 .      Are students, trainees or post graduate professionals involved in the
project as part of the educational mission of the University and not solely
as employees or subjects?

Yes ____    No ____

3.      Are any test drugs or products offered to patients who have the disease
or condition for which eventual use of the particular drugs or test
products is intended?

Yes ____    No ____

4.      Is the study concerned with new applications of products or drugs in
order to improve the ability to treat various diseases and  conditions?

 Yes ____    No ____

5.      Are the results of the research made available to the public on a
nondiscriminatory basis and without unreasonable restrictions on publication?

 Yes ____    No ____

6.      Does the project qualify as scientific research involving  testing to
validate a scientific hypothesis, rather than routine testing to determine
if the item meets a certain specifications?

 Yes ____    No ____

7.      Does the sponsor's agreement identify that the study is a clinical
trial, for the purpose of an FDA approval?

 Yes____    No ____

Completed by:_______________________________________            Date __________
 Principal Investigator    (Print Name)

Department/School   __________________________________

Herbert B. Chermside, CRA
Director, Sponsored Programs Administration
Virginia Comonwealth University
PO BOX 980568
Richmond, VA  23298-0568
Express Delivery Only:
 Sanger Hall, Rm. 1-073
 11th & Marshall Streets
 Richmond, VA  23219
Voice:  804-828-6772
Fax     804-828-2521
OFFICE e-mail   xxxxxx@VCU.EDU
Personal e-mail xxxxxx@vcu.edu
http://views.vcu.edu/views/ospa/

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