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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #7 - Sponsored Research
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Case Study #7 -

Professor Susan Star is recruited from Big State University (BSU) to become the director of the Center for the Cure for Everything (CFCFE), a major new initiative within Penn’s School of Medicine. CFCFE’s income is a substantial portion of the income for the School of Medicine and Penn. While at BSU, Professor Star had formed a company, ForeverYoung, Inc., and ForeverYoung had licensed patents from BSU that resulted from Professor Star’s research. ForeverYoung also funded research in Professor Star’s laboratory at BSU. Professor Star and her immediate family own 36% of ForeverYoung. In connection with her recruitment, Professor Star is assured that she will be permitted to maintain her association with ForeverYoung, and that the company may continue to fund her research at Penn under terms consistent with University policies.

After Professor Star starts at Penn, ForeverYoung proposes a Sponsored Research Agreement (SRA) of $2 million in direct costs per year for 5 years under which it would receive an option to license any new technology developed in Professor Star’s laboratory in the field of research it funds. Professor Star also has two NIH grants, both of which overlap Forever Young’s area of interest. The company proposes that the SRA carry an indirect cost rate of 30%, the same rate that BSU received, rather than Penn’s standard rate of 58.5%. It also requests that any license to new discoveries made under the SRA be on the same financial terms as its existing license with BSU. Penn insists that financial terms of a license be determined only after a discovery is made, but agrees to the 30% indirect cost rate. The Dean of the School of Medicine approved the transaction and the Executive Director of Research Services executed the SRA for the University.

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