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/ ============================================================================