Patent Baristas

According to biotechTransfer week, the IRS set to look over the financial statements of public and private colleges and universities for unrelated income sources like tech transfer.

The Internal Revenue Service is looking to gather information from hundreds of US colleges, universities, and affiliated organizations such as foundations and academic medical centers about their financial practices, including those related to technology licensing, investments, and corporate sponsorship, according to the agency.

Last week, the IRS’ Exempt Organizations Compliance Unit began sending compliance questionnaires to approximately 400 U.S. colleges and universities as part of the agency’s focused effort to study key areas in the tax-exempt community.  The EOCU addresses areas of noncompliance of exempt organization. 

The college and university questionnaire will focus on unrelated business income, endowments and executive compensation practices.  The questionnaires are being sent to a cross-section of small, mid-sized and large private and public four-year colleges and institutions.  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.

Among other things, the questionnaire will gather information from the schools about how they report revenues and expenses from their trade or business activities, classify their activities as exempt or taxable activities, and calculate and report income or losses on taxable activities.  The questionnaire also will gather information regarding how the organization invests and uses its endowment funds and determines compensation of certain highly paid individuals.

The IRS said the voluntary questionnaire is part of an effort by the agency to better understand tax-exempt organizations and perhaps more intently scrutinize what it considers key areas in the tax-exempt community.  The questionnaire is not an audit and schools will not be penalized for refusing to participate.  But, the IRS reserves the right to open an investigation whether or not the universities participate.

In looking at technology-transfer, the questionnaire asks for information on the nature and amount of unrelated business income in categories such as other royalties, commercial research, patents, and copyrights and trade names or trade secrets.  These are potential sources of unrelated-business income and revenues and expenses from taxable trade or business activities must be reported on Form 990-T, Exempt Organization Business Income Tax Return.

The 33-page-long questionnaire is similar to one that it sent out in 2006 to approximately 600 hospitals, which may have given the EOCU a good insight on reviewing such activities.  The IRS said it expects to receive most of the responses within the next several months, analyze the results of the compliance questionnaire and conduct examinations of a sample of the organizations.  The IRS said it expects to issue a report on the project in 2009.

Let us know if you’ve received a questionnaire and whether or not you intend to reply.

See here for the Compliance Questionnaire – Colleges and Universities.