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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #12 - Use of Penn Property
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Dr. Shirley Wondergirl is head of the biomedical research department at Blue Ribbon University, a very large and highly regarded private university. As head of this department, Dr. Shirley manages a discrete segment and activity of the University that represents a substantial portion of its activities, assets, income, and expenses as compared to the University as a whole. Over the years, Dr. Shirley’s department has retained royalty interests on some major product discoveries that have produced very substantial cash flow streams for the University. Because of these favorable results, Dr Shirley has been given a great deal of autonomy by the leadership of the University over how she manages her department.

Together with some other professors in her department, Dr. Shirley has recently started a new biomedical company to pursue some product development outside of her University role. Although Dr. Shirley has a very interesting and prestigious position, the financial rewards have never quite measured up to her expectations. This new business venture, in which Dr. Shirley retained a 45% ownership interest, has the potential to change that. Unfortunately, the new venture is not well funded.

Dr. Shirley had some spare room in her basement that she was able to convert to the business office for her new venture. What she really needed, however, was access to a well-equipped laboratory with some very sophisticated and expensive equipment. This was essential to the company’s success. In its early stages, the company could never afford to pay for all of the expensive equipment that it needed.

Fortunately for Dr. Shirley, she already had all of the necessary facilities and expensive equipment available to her within her own department at the University. As a result of her department’s tremendous success over the years, the department had expanded its facilities and equipment somewhat beyond what was really needed. That meant that Dr. Shirley had under-utilized facilities, and it was a crime just to watch them sit empty.

Certainly, no one had more of a right to benefit from what was already there than did Dr. Shirley.

Dr. Shirley was very careful to make sure that the activities of her new venture were kept very low key and did not interfere with the normal teaching or research activities of the University. In fact, it was virtually impossible for anyone outside of her venture to ever know that the venture’s activities were not part of the University’s normal teaching and research activities. Dr. Shirley even figured out how to get students to help with some of the venture’s research and made it appear like it was just part of their normal studies. The students benefited from the experience, and Dr. Shirley’s new venture got some free labor.

Everything worked perfectly. If Dr. Shirley had to pay for access to similar laboratory facilities, it could easily cost thousands per month if she could even find such facilities available for rent. Dr. Shirley’s approach helped her new venture get off the ground. It did not cost the University a cent since the facilities were already there. Politically it was never an issue since Shirley was careful to make her venture’s activities transparent. Finally, the students ended up gaining some beneficial experiences. It was a true win/win for everyone.

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