Supplement Form B:

Test for Unrelated Business Income Tax Attributable to Sponsored Program Activities for Commercial Sponsors

1. Purpose and Law

To eliminate unfair competition with for-profit organizations, non-profit entities are required to report activities that constitute unrelated business income. Section 513 of the Internal Revenue Code (IRC) defines an “unrelated trade or business” as an activity which is regularly conducted and not substantially related to the purpose for which the nonprofit organization was granted its exempt status. Any income from an unrelated business income activity that exceeds its allowable deductible expenses is subject to unrelated business income tax (UBIT). Annually, the university is required to report and remit any UBIT to the Internal Revenue Service (IRS).

2. Tests to Determine UBIT

The following information is provided to assist in responding to the questions within the “UBIT Research Questionnaire”. Each explanation offered below is made with specific reference to a particular question that can be found within the “UBIT Research Questionnaire.”

Question 1, 1a, & 1b—Clinical Drug Studies

The clinical testing of a drug for a commercial pharmaceutical company that will enable it to obtain FDA approval for the drug is not considered to be “scientific research,” even if the results of the test are to be made freely available for publication and the testing is performed by highly-qualified individuals. However, if the clinical drug testing is performed for the benefit of patients who suffer from diseases and the drugs were administered with the hopes that the drug would cure or, at least, stop the progression of the disease, then the testing would be considered scientific research and not be considered an unrelated business activity.

“For benefit” testing does not constitute an unrelated business activity because:

• The testing services patient medical care; It adds to the body of scientific knowledge concerning the treatment of disease through the use of particular drugs; and,
• The public benefit (i.e., patient care and addition to scientific knowledge) of the testing outweighs the private benefit (i.e., meeting FDA requirements) of the testing.
  “Not for benefit” testing does constitute an unrelated business activity because:
• The drugs were administered to test metabolic levels and toxicity levels;
• The testing does not directly relate to patient care; and,
• The private benefit (i.e., meeting FDA requirements) of the testing outweighs the public benefit (i.e., patient care and addition to scientific knowledge) of the testing.

Question 2, 3, & 4—Scientific Expertise versus Ordinary or Routine Testing

Scientific research is research that requires knowledge and the use of scientific facts, processes, and/or models in the formulation and/or verification of facts or natural laws. Ordinary or routine testing can be defined as the ordinary inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotion. Ordinary testing is basically a standard procedure in which no intellectual questions are posed, the work is routine and repetitive, and the procedure is merely a matter of quality control (i.e., the testing of blood samples or other samples from trace elements constitutes ordinary testing).

In addition, scientific research does not include activities of the type ordinarily carried on as an incident to commercial or industrial operations (e.g., the testing and inspection of materials or products and the designing or construction of equipment, buildings, prototypes, models, etc.) .

According to General Counsel Memorandum 39196, scientific research is demonstrated in the development of:

• An experimental or pilot model;
• A plant process;
• A product;
• A formula;
• An invention or similar property; and
• The improvement of already existing property.
• Questions 5a – 5e—Scientific Research

Scientific research must be conducted in the public interest and carried on in furtherance of the purpose for which the University was granted its exempt status. Research will be considered to be carried on in the public interest and will more than likely not be considered an unrelated business activity if:

The results of such research (including patents, copyrights, processes, or formulae resulting from such research) are made available to the public on a nondiscriminatory basis and without unreasonable restrictions
The research was carried on for the purpose of discovering a cure for a disease (i.e., drugs tested and administered with the hopes that a cure or, at least, regression of the disease would occur);
The research was conducted for the purpose of aiding a community or geographic area by encouraging the development of or retention of industry in the area ;
The research was directed toward benefiting the public; or
The research aids in the scientific education of university students (i.e., learning of scientific principles and/or the application of scientific knowledge by the students, and not repetitive or routine activities such as data entry or bookkeeping).

Explanatory Paragraph for Question 5f

In your own words, giving consideration to the explanations and definitions given within this guide, please describe how and why the research is scientific.

Evaluation of Completed Form—Consult Corresponding Flowchart

Question 1—Clinical Drug Studies

The following chart illustrates the possible actions that can be taken.

Questions 2, 3, & 4—Scientific Expertise vs. Ordinary Testing

The following chart illustrates the possible actions that can be taken.

Questions 5a – 5f—Scientific Research

The following chart illustrates the ONLY responses to questions #5a – #5e that would lead to a conclusive decision.

• Exception* : If ANY question (5a, 5b, 5c, 5d, or 5e) is YES, then the question #5f (explanatory paragraph) MUST be completed.

  Question “a”	Question “b”	Question “c”	Question “d”	Question “e”	ACTION
  NO	NO	NO	NO	NO	Continue with #6 UBIT

Number 6—Principal Investigator’s Signature

The principal investigator must provide his/her signature, phone number, and the date when the form was completed.

• Reg. §1.501(c )(3)-1(d)(5)(ii)
• Reg. §1.501(c )(3)-1(5)(iii)(b)
• Reg. §1.501(c )(3)-1(5)(iii)(c )
• Reg. §1.501(c )(3)-1(5)(iii)(c )
• Reg. §1.501(c )(3)-1(5)(iii)(a)