Unrelated Business Income Tax Sponsored Research

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Unrelated Business Income Tax Sponsored Research Powered By Docstoc
					        Unrelated Business Income Tax
             Sponsored Research

                      Eric Davidson, Assistant
                      University Tax Services

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

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             Topics of Discussion
   Definition of Unrelated Business Income
   Problem Areas for Colleges and
   Specific UBIT Issues
   Tax Reporting Responsibilities for
    Sponsored Research
   Audits, Fines and Penalties
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    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
    organization’s 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

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Problem Areas for Colleges and
   Corporate logos or links: sponsorship vs.
   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 sponsor’s name, logo,
    or product lines

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Problem Areas for Colleges and
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
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.
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Problem Areas for Colleges and
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.

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Problem Areas for Colleges and
   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 organization’s 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-
   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
   Joint ventures conducted in tax-exempt bond financed
   The sale of advertising in UF’s 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

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             UBIT Issues for Sponsored

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

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             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
                     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

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        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

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