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Proposal calls for reform of tax-exemption rules for corporate-sponsored research at university facilities


By David Schwartz
Published: July 20th, 2021

The Day One Project, a public policy initiative led by the Federation of American Scientists, is calling for reform of the IRS rules that limit the ability of companies to sponsor research taking place in university facilities funded by tax-exempt bonds.

The group, in a proposal authored by Brian Darmody and Bill Bates, maintains that relaxing those rules will stimulate more public-private partnerships, which would dovetail with the U.S. government’s current push for infrastructure funding and post-pandemic economic renewal. Darmody is CEO of the Association of University Research Parks, and Bates is Executive Vice President of the Council on Competitiveness.

Darmody and Bates point out that The U.S. Innovation and Competition Act, recently passed by the Senate, establishes a National Science Foundation (NSF) Directorate for Science and Technology that would “identify and develop opportunities to reduce barriers for technology transfer, including intellectual property frameworks between academia and industry, nonprofit entities, and the venture capital communities.” One of those barriers, they contend, is “private use” rule regarding corporate research taking place in university facilities financed with tax-exempt bonds. The IRS prohibits “private business use” of those facilities.

Current rules require that universities wishing get around that restriction must hold the rights to almost all IP generated at campus facilities, even when the research is sponsored by private companies. “This can lead U.S. corporations wishing to retain IP rights to partner with universities overseas instead of U.S. universities,” the authors note. “Small technology companies whose business plans depend on their claim to IP rights may similarly avoid partnerships with universities.”

They continue: “As a result, universities engaged in cutting-edge, industry-relevant research face an unenviable choice: they must either (i) forego promising partnerships with the many companies unwilling to completely cede claims to IP rights, (ii) dedicate substantial time and administrative resources to track and report all specific instances of corporate-sponsored research occurring in facilities financed by tax-exempt bonds, or (iii) use funding that would otherwise be available for research to finance facilities through taxable bonds.”

While big universities may be able avoid the problem with private financing, most smaller schools can’t, causing many “to avoid corporate-sponsored research altogether,” the authors state.

In June 2021, the American Council of Education and Association of American Universities sent a letter to Congress on behalf of over 20 higher education organizations seeking a modernization of tax-exempt bond financing rules. The Day One Project’s proposal urged the Bidan administration to:

  • Eliminate the requirement that universities must retain ownership to all IP generated in university-owned facilities financed by tax-exempt bonds, instead allowing universities and companies to negotiate their own IP terms; and
  • Broaden IRS safe-harbor provisions that exempt “basic research agreements” from restrictions on private business use to include all research activities, not just basic research.

The proposal contends that “these reforms would support new public-private initiatives by the federal government (such the research hubs funded under the U.S. Innovation and Competition Act); help emerging research universities (including minority-serving institutions) grow their profiles and better compete for talent and resources; and repatriate corporate research to the United States.”

Noting that other countries don’t have these tight restrictions on tax-exempt financing, “these reforms are needed for the U.S. tech economy to remain competitive on an international scale,” Darmody and Bates assert.

Source: Day One Project

Posted under: University-Industry Engagement Week

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