On June 26, 2007, the Internal Revenue Service (IRS) released new guidance providing safe harbors under which research agreements taking place in facilities financed with tax-exempt bonds will not be considered private business use. Revenue Procedure 2007-47 modifies and replaces the prior IRS guidance set forth in Revenue Procedure 97-14 to specifically cover the situation where the federal government or its agencies sponsor research.

In general, there are limits on the amount of private business use that can be associated with facilities financed with tax-exempt bonds that benefit state or local governmental entities (10 percent private use limit) or 501(c)(3) institutions (5 percent limit). Use of bond-financed facilities by the federal government (including use associated with research agreements) is considered to be private business use.

Under the Patent and Trademark Law Amendments Act of 1980, as amended (the Bayh-Dole Act), the federal government and sponsoring federal agencies receive the nonexclusive, nontransferable, irrevocable, paid-up licenses to the use of the products of federally sponsored research. They also receive certain “march-in rights” that include the granting of licenses to third parties to ensure the public dissemination and use of the products of the research where the original contractor of the research has not taken, or is not expected to take within a reasonable time, effective steps to practically apply the results of the research.

There has been a great deal of concern that the Bayh-Dole provisions, especially the march-in rights, would result in federal research agreements being treated as private use. Many groups have requested that the guidelines in Revenue Procedure 97-14 be amended to provide an exception from private use for research agreements that implement the Bayh-Dole provisions. As a result, Revenue Procedure 2007-47 now sets forth such an exception for the exercise of certain rights under the Bayh-Dole Act in addition to restating many of the requirements of Revenue Procedure 97-14.

• Corporate-sponsored research: Revenue Procedure 2007-47 follows the provisions of the earlier Revenue Procedure 97-14 stating that corporate-sponsored basic research (i.e., the advancement of scientific knowledge not having a specific commercial objective) will not result in private business use if the corporate sponsor must pay a competitive price for any license or other use of the resulting technology. Such use can be exclusive to the sponsor, but the price it pays for the license or use must be no less than the price that would be paid by any nonsponsoring party.
• Industry-sponsored research. Revenue Procedure 2007-47 also tracks the provisions of Revenue Procedure 97-14 providing that industry-sponsored governmentally performed basic research does not result in private business use as long as 1) the state or local government or 501(c)(3) institution where the research takes place (the Qualified User) selects the research to be performed and the manner in which it is to be performed, 2) title to any patent or product incidentally resulting from such research lies exclusively with the Qualified User and 3) the sponsors of the research are entitled to no more than a nonexclusive, royalty-free license to use the results of the research. Revenue Procedure 97-14 permitted this research only where it was funded by multiple, unrelated sponsors; however, the current guidelines expand this to allow research only having a single sponsor.
• Federal government-sponsored research/Bayh-Dole exceptions. Revenue Procedure 2007-47 applies the rules for industry-sponsored research above to federally sponsored research with the proviso that that the rights of the federal government and its agencies mandated by the Bayh-Dole Act will not cause a research agreement to fall outside the private use safe harbors if 1) the Qualified User selects the research to be performed and the manner in which it is to be performed, 2) title to any patent or product incidentally resulting from such research lies exclusively with the Qualified User and 3) the license granted to any party other than the Qualified User (such as the federal government) to use the product of the research is no more than a nonexclusive, royalty-free license.
  
  For example, the march-in rights of the federal government under Bayh-Dole will not violate the private use safe harbors provided that the Qualified User selects the research to be performed and the manner in which it is to be performed, title to any patent or product incidentally resulting from such research lies exclusively with the Qualified User, and the license granted to the federal government or the sponsoring federal agency (or to any third-party nongovernmental person) to use the product of the research is no more than a nonexclusive, royalty-free license. These safe harbors, however, do not cover situations where third parties receive more than nonexclusive, royalty-free licenses as the result of the exercise by a sponsoring federal agency of its rights under the Bayh-Dole Act, such as march-in rights.

Effective Date

The provisions of Revenue Procedure 2007-47 apply to research agreements entered into, materially modified, or extended on or after June 26, 2007. In addition, an issuer (which includes a 501(c)(3) or governmental conduit borrower) can electively apply these provisions to prior research agreements.

For more information, please contact:

Edward J. Rojas
212.457.5440
rojas.edward@arentfox.com

Richard A. Newman
202.857.6170
newman.richard@arentfox.com