The California Institute for Regenerative Medicine [CIRM] faces questions of how the potential that royalties could be paid to the state as a result of public funding provided to private enterprises may complicate its efforts to issue tax-exempt debt for the program. Would such royalties and the private benefit require the state to issue taxable rather than tax-exempt debt?
Tax law answers will be longer in coming. Orrick Herrington attorney Perry Israel said the process of obtaining a private-letter ruling on the issue from the Internal Revenue Service was likely to take nine to 12 months.
Israel provided the committee with some ideas that Orrick and CIRM expect to pursue during the process.
CIRM must deal with private-activity bond laws that limit how much a private entity can benefit from bond proceeds as well as the issuer’s ability to receive a financial return on its bond investments.
The possibility that the state will require recipients of grants financed by bonds to pay the state royalties if their research is marketable appears to meet a private-activity test — but Israel said that the issue isn’t necessarily cut and dried, given the hit-and-miss nature of the research process.
from the San Francisco Chronicle:
To guard against such selective private boons, the IRS looks not only at who is benefiting from the bond money but also at who is repaying the state bond debt. If private business involvement is too high on both counts, the IRS withholds tax-exempt bond status.
The question is whether these rules could raise any barriers for the stem cell institute, whose grants can be sought by private biomedical firms as well as private research institutions and state-funded universities. The grants to businesses might not pose a problem by themselves, unless the state also repays the bonds with a significant level of revenue coming back from the businesses.
Although Prop. 71 requires the bonds to be repaid from the state's general fund, the IRS might see any royalties shared with the state by recipients of stem cell grants as a back-door method of repaying the bond debt, said Robert Feyer, an attorney who helped draft the stem cell initiative. His firm, Orrick, Herrington & Sutcliffe, also serves as the state bond counsel and has been advising the state treasurer, the Legislature and the state's stem cell institute.
Under complex technical rules, the IRS could hold that the ultimate beneficiaries of grants to state universities would be the private firms that eventually license their inventions. So those grants might also violate the IRS rules against excess business involvement if they are paired with royalties flowing back to the state.
According to a spokesperson for California state Senator Deborah Ortiz, selling $3 billion in taxable bonds rather than $3 billion in tax-exempt bonds would cost the State (and taxpayers) of California approximately $900 million more in interest payments over the life of the bonds issued.