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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #6 - Sponsored Research
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Professor Sytek is the chair of a major department in the School of Medicine and head of the department’s clinical practice. As such, he has considerable influence over all activities of the department, including budgetary decisions and capital expenditures. The activities of his department represent a substantial portion of the activities of Penn and the School of Medicine. Professor Sytek is the inventor of a technology that has been assigned to and patented by the University. The Center for Technology Transfer (CTT) considers the invention a “platform” technology of potentially broad application and decides that the best way to commercialize the technology is through a start-up company. Professor Sytek has already had discussions with several investors associated with the Capital Group about starting a company around his technology. CTT convinces the Capital Group to start a company, Panacea, Inc., and to provide initial funding for the venture. Capital Group is 60% owned by Bill Penfriend, a long-time supporter of the University and a member of the Penn Medicine Board of Trustees.

Under the arrangement negotiated with Capital Group and approved by the Managing Director of CTT, the University licenses the patent to Panacea in exchange for 20% of the company and a royalty of 2% of product sales. The transaction also provides that Professor Sytek will receive 10% of the company for his role as a co-founder and that he will serve on Panacea’s scientific advisory board. In addition, the Vice Provost for Research reviewed and approved the entire transaction.

Panacea becomes a successful company. Five years after entering the license with the University, Panacea has an initial public offering. Based on the price of Panacea shares after the IPO, the University’s holdings in Panacea have a value of $10 million, and Professor Sytek’s holdings have a value of $5 million.

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