State tax-exempt bonds, patent royalties, stem cells, and the IRS

Although The Bond Buyer on November 9, 2005 made clear that California's Proposition 71 has a problem in planning to use tax-exempt state bonds in a situation involving patent royalties, the New Jersey Law Journal, in an article months later, ignored the problem.

From The Bond Buyer:

But it is becoming clear that federal tax laws governing tax-exempt
bond issuance could complicate any desire for the state to derive royalty
payments from research grants funded under Proposition 71. "Royalty or license agreements that generate revenue for the state could affect the tax status of the bonds," said a background paper prepared for a joint legislative committee hearing on the issue last week, chaired by state Sen. Deborah Ortiz, D-Sacramento.

State Treasurer Angelides: "In cases where federal law may preclude the use
of tax-exempt bonds for grants that include royalty agreements, issuing
taxable bonds would be a better financial option for the State and its
taxpayers than forgoing royalties if the anticipated royalties exceed the extra
interest costs."

from Pamela A. Maclean, New Jersey Law Journal, 20 Feb. 2006:


One of the future quandaries created by the California initiative
will arise from the negotiation of a royalty stream flowing back to the state from
newly patented technology, according to Wetherell.

The law requires that the state university, as patent owner, has to
pay the state a 25 percent share of its royalties from new inventions. He asked
whether that will increase the university's overall royalty demand from
licensing companies.

"If [the schools] expect to make a 5 percent royalty, and they have
to give back a share to the state, will they expect a 7 percent or 10 percent
royalty now?" he says. "That will have to be clarified."

Also, although New Jersey advanced some funding for stem cell research in late 2005, the New Jersey legislature did not pass a law about this. Further, a vote on a stem cell initiative went through the senate, but not the lower house, in the last session. Thus, the NJLJ is questionable in saying:

Californians' decision to put out a welcome mat to embryonic stem
cell research has prompted reaction among states that don't want to see a
brain drain in biotech. Connecticut, Massachusetts and New Jersey have passed state
laws to encourage embryonic stem cell research, according to the National
Conference of State Legislatures.

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See also my op-ed on the subject in the February 23, 2006 issue of the Trenton Times.