Unrelated Business Income Tax Sponsored Research

1
Unrelated Business Income Tax Sponsored
Research

• Eric Davidson, Assistant Controller
• University Tax Services

2
Introduction

• Potential IRS Tax Issues for the University of
  Florida
• Eric Davidson, Assistant Controller, University
  Tax Services

3
Topics of Discussion

• Definition of Unrelated Business Income Tax
• Problem Areas for Colleges and Universities
• Specific UBIT Issues
• Tax Reporting Responsibilities for Sponsored
  Research
• Audits, Fines and Penalties

4
Definition of Unrelated Business Income Tax

• Conduct of a Trade or Business is any activity
  carried on for the production of income from
  selling goods or services
• Regularly Carried On Business activities of an
  exempt organization that exhibit frequency and
  continuity, and are pursued in a manner similar
  to comparable commercial activities on nonexempt
  organizations

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Definition of Unrelated Business Income Tax

• Not Substantially Related A business activity is
  not substantially related to an organizations
  exempt purpose if it does not contribute
  importantly to accomplishing that purpose
• Recommendation Document business activities and
  seek advice from University Tax Services

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Exceptions to UBI

• Substantially all Donated Material
• Substantially all the Work Performed by
  Volunteers
• Royalty Income
• Income derived from research for the U.S.
  government or any of its agencies or
  instrumentalities, or for any state or political
  subdivision
• Income derived from research for anyone in the
  case of a college, university, or hospital and of
  fundamental research units
• University is not in competition with taxable
  organizations
• Acknowledgement
• A Trade or Business for the Convenience of
  Related Parties
• Rent

7
Problem Areas for Colleges and Universities

• Corporate logos or links sponsorship vs.
  advertising
• For a payment to constitute a qualified
  sponsorship payment, there must be no arrangement
  or expectation that the sponsor will receive any
  substantial return benefit for its payment other
  than the use or acknowledgement of the sponsors
  name, logo, or product lines

8
Problem Areas for Colleges and Universities

• Advertisements Include the organization deriving
  gross income from the regular sale of advertising
  time and services to commercial advertisers in
  the manner of an ordinary commercial
• On line Campus Shops In IRS TAM 955003, 972002,
  the IRS discussed Unrelated Business Income
  pertaining to a Museum Gift Shop. Unrelated
  Business Income is produced if the items sold
  are utilitarian, ornamental, income producing,
  sold as souvenirs in nature or generally
  educational.

9
Problem Areas for Colleges and Universities

• Agreements allowing for the sale of merchandise
  to the general public
• Travel Tours
• Debt-Financed Property Rental Income (i.e.
  tax-exempt bonds)
• Links to the UF Web Page Recent comments by IRS
  officials focus on where the link leads. For
  example, if the link leads to the main web page,
  the IRS may be less likely to view this as
  advertising, and the payment may be eligible for
  treatment as a qualified sponsorship payment.
  However, if the link goes to a page where goods
  or services are sold, then the IRS may view the
  link as advertising.

10
Problem Areas for Colleges and Universities

• Recommendation
• Document all links and notify University Tax
  Services of the activity. It is reasonably safe
  to say that given recent informal remarks by IRS
  agents, the link can connect to the
  organizations main web page, but not to a page
  where commercial activity takes place

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Specific UBIT Issues

• UBIT may be imposed on UBI Research Revenues of
  both governmental and non-governmental
  universities and research affiliates, and UBI of
  non-governmental hospitals. IRC section 511(a)(2)

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Specific UBIT Issues

• Research Income is exempt from UBIT in a
  tax-exempt college, university, or hospital, and
  fundamental research units. IRC section 512
  (b)(8).
• Payments for research by any exempt organization
  performed for a governmental sponsor are exempt
  from UBIT. IRC section 512(b)(7)
• Independent Research Institutes with
  non-governmental sponsors must claim protection
  under IRC section 512(b)(9) that are operated
  primarily for the purposes of carrying on
  fundamental research where the results are freely
  available to the general public.

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Specific UBIT Issues

• Difference Between Research and Testing
• Revenues from testing are not protected from UBIT
  by IRC section 512
• Reg. Section 1.512(b)-1(f)(4) defines research
  for IRC section 512 as not including activities
  of a type ordinarily carried on as an incident to
  commercial or industrial operations. For
  example, the ordinary testing or inspection of
  materials or products or the designing or
  construction or equipment, buildings etc.

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Specific UBIT Issues

• Gross Income received from the performance of
  diagnostic laboratory testing, otherwise
  available in the community, to non-patients. (IRS
  Revenue Ruling 68-373)
• Drug testing that is performed solely to meet FDA
  requirements not contributing to student training
  or patient care. (IRS Revenue Ruling 68-373)
• Clinical testing of developmental equipment apart
  from student involvement. (IRS Revenue Ruling
  68-373)

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Specific UBIT Issues

• Pharmacy Sales to members of the general public.
  (IRS Revenue Ruling 68-374)
• Joint ventures with for profit entities where
  the University lacks effective control of the
  entire decision process. (IRS Revenue Ruling
  2004-51, Revenue Ruling 98-15)
• Joint ventures conducted in tax-exempt bond
  financed facilities.
• The sale of advertising in UFs Professional
  Journals as well as the Internet. (Internal
  Revenue Code 513 (c), IRS Revenue Ruling 76-93,
  United States v. American College of Physicians,
  US Supreme Court, 475 US 834 1986)

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UBIT Issues for Sponsored Research

• Recommendation Document and review the
  contractual service agreements pertaining to UBIT
  issues. Notify both University Tax Services and
  Legal counsel of these activities.

17
Tax Reporting Responsibility for Sponsored
Research

• Sponsored Research must report all UBI activity
  to University Tax Services on a yearly basis
• UBIT Forms are available for reporting UBI from
  University Tax Services.
• UF files IRS Form 990-T annually
• Report use of proceeds on tax-exempt bonds. IRS
  Form 8038G, Information Return for Tax-Exempt
  Government Issues

18
Audits, Fines and Penalties

• IRS periodically reviews college and university
  web pages for UBI activity.
• IRS Audit Guidelines for Colleges and
  Universities
• IRS Audit Guidelines for Hospitals Announcement
  92-83
• IRC section 6001, Regulations Requiring Records,
  Statements, and Special Returns
• IRC section 6651 Failure to File Information
  Returns
• IRC section 6651 Failure to Pay
• IRC section 6710, 6113 Failure to Disclose
• IRC section 6104 Failure to Make Return Available
• Failure to Furnish Correct Payee Statement