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NJ case challenges Princeton’s tax-exempt status based on “profit” distributions to faculty

By David Schwartz
Published: September 4th, 2013

The tax-exempt status of research universities is being challenged in a case brought against Princeton University based on the school’s distribution of profits to faculty from research commercialization activity. Though the case is taking place in New Jersey, the outcome has implications for universities countrywide.

Litigants challenging university tax-exemption based on the revenues those institutions reap from “commercial activity” face an uphill battle on the federal stage, experts say. Each state’s tax laws are different, of course, and the peculiarities of each jurisdiction determine tax-exempt status within its borders. But the big question is whether licensing dollars could void exemption under the U.S. tax code, tax law professionals point out. However, tech transfer — and the income it produces — is generally recognized as part and parcel of a school’s not-for-profit mission.

In the New Jersey case, a group of Princeton residents is challenging the tax exemption of about a dozen of the vaunted university’s campus buildings, arguing that the school should be paying local property taxes on them because of the “commercial activity” that takes place therein – including a restaurant and a catering business. More importantly for TTOs, the suit also seeks to overturn the university’s overall tax exemption, largely because of the allegedly $100 million-plus Princeton reaps in licensing revenues each year — and the $25 million-plus it shares each year, through a profit distribution program in place since 2005, with the inventors who developed the technologies that produce the income.

According to the complaint: “No one suggests that Princeton’s scientists and engineers should not share in the gains the university makes from their intellectual property, but the university cannot have it both ways under New Jersey’s exemption laws — it cannot claim exemption as a non-profit organization that does not distribute profit, while intentionally commercializing for profit its intellectual property under a pre-existing policy of profit sharing with its faculty/partners.” It adds: “Under the law, they are not entitled to a tax exemption because they are engaged in commercial patent licensing, and the school gives out a percentage of profits to faculty. Under the law in New Jersey, if a nonprofit gives out profits, it is not entitled to an exemption at all.”

In the latest development in that state case, a tax court judge denied Princeton’s motion for summary judgment, so the case will move forward. A detailed article on the case appears in the August issue of Technology Transfer Tactics. To subscribe and access the full article, along with more than six years of archived best practices and TTO success strategies, CLICK HERE.

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