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IRS Taking Closer Look at Tech Transfer Offices’ Activities

Written by on Friday, October 24th, 2008

The IRS has launched an effort to review universities’ tech transfer office activities, reported Biotech Transfer Week.

The IRS began mailing out compliance questionnaires last week to four hundred (400) colleges and universities.  According to the IRS website, these compliance questionnaires will explore the following:

  • report revenues and expenses from taxable trade or business activities on Form 990-T, Exempt Organization Business Income Tax Return;
  • classify activities as exempt or taxable activities;
  • calculate and report income on losses on Form 990-T;
  • allocate revenues and expenses between exempt and taxable activities;
  • invest and use endowment funds; and
  • determine types and amounts of executive compensation.

Biotech Transfer Week reported on the IRS review as follows:

The questionnaire is not an audit, and schools will not be penalized for refusing to participate, according to the IRS. However, the agency said that it reserves “the option of opening a formal investigation, whether or not the organization agrees to participate in a compliance check.”
The 33-page-long document contains 74 questions intended for all 400 institutions and 20 additional questions applicable only to private organizations. Private nonprofit universities are generally exempt from tax under Internal Revenue Code section 501(c)(3) and, like state universities, are subject to unrelated-business income tax, the IRS said.

It seems apparent that the IRS believes that it is currently losing taxable revenue from technology transfer activities that is going unreported by universities around the country, and that perhaps all universities with a technology transfer office–whether they received a questionnaire or not– would be wise to conduct their own review in parallel to the IRS review, in order to determine what, if any, mistakes in reporting are currently being made by their institutions.

Of course, given the fact universities are typically nonprofit organizations, you might wonder what kind of taxable income exactly could arise at a university.  The IRS website explains this dichotomy as follows:

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. Form 990-T. . . .

The IRS defines “unrelated business income” as follows:

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  • It is a trade or business,
  • It is regularly carried on, and
  • it is not substantially related to furthering the exempt purpose of the organization.

IRS Publication 598 explains the issue of tax on the unrelated business income of tax exempt institutions.

It will be interesting to watch how the IRS review of technology transfer offices pans out.  As we have previously reported on the California Biotech Law Blog, technology transfer offices often generate tremendous revenue for universities.  Apparently the IRS has been watching the growth of technology transfer offices around the country and wants a larger piece of the action.

The California Biotech Law Blog  will be following this issue as it develops and will keep our blog readers posted on those developments.


Comment from Mark Chalek
Time December 4, 2008 at 2:06 pm

Since all universities and research institutes receiving Federal funding are subject to the covenants of the Bayh-Dole Act, it is difficult to imagine how technology transfer could be construed as unrelated business income. It is also common knowledge that most offices struggle to break even, so it seem that the IRS is looking for nickels that fall under the couch cushions here.

Comment from Jeff Lindsay
Time August 5, 2009 at 4:53 pm

TTOs may not break even, but there can still be activity involving the university and its partners that the IRS would like to tax. As we discuss in a chapter of Conquering Innovation Fatigue (John Wiley & Sons, July 2009), tax policy has a profound impact on university-industry relations and has added several major unintended barriers to successful innovation in partnership with universities. The quest for more revenues now could lead to an exacerbated “innovation fatigue factor” in this area.

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