Yale University Policy 1200 Post-Issuance Tax-Exempt Bond Compliance

Transcription

1 Yale University Policy 1200 Post-Issuance Tax-Exempt Bond Compliance Responsible Office Finance & Business Operations Responsible Official Vice President, Finance and Business Operations Effective Date: 6/30/2010 Last Revision: 1/31/2014 I. Organizational Responsibility... 2 II. Private Business Use... 3 A. Basic Compliance Methodology... 4 B. Category-Based Rules Ownership Lease/Use of University Property Management Contracts Utility Output Contracts Sponsored Research Agreements (SRAs) Clinical Trial Agreements (CTAs) Material Transfer Agreements and Other Research Support Agreements Corporate Researchers Working at the University Unrelated Trade or Business (UTB) Activities Naming Rights Joint Venture, Partnership and Limited Liability Company Agreements Other Actual or Beneficial Use of University Property III. Record Retention A. Basic Compliance Methodology B. Category-Based Rules IV. Arbitrage A. Rebate Policy B. Yield Restriction Policy V. Allocation of TEB Proceeds to University Expenditures VI. Refunding VII.... Extinguishment/Merger 25 VIII... Replacement Proceeds 25 A. Sinking Funds as Replacement Proceeds B. Gifts as Replacement Proceeds IX. Post-Issuance Disclosure TEBC Policy Page 1 of 32

2 X. Religious Entanglements XI. Remediation Scope This Policy sets forth the University s methodology for ensuring post-issuance compliance with Internal Revenue Service (IRS) requirements pertaining to tax-exempt bonds (TEBs). Policy Statement As a 501(c)(3) organization, the University is entitled to the financial benefits of TEBs. TEBs are available to the University to leverage its finances to achieve its tax-exempt purposes. The University recognizes its legal and ethical obligation to ensure that this tax-exemption benefit is stewarded responsibly. The University therefore practices full compliance with legal requirements pertaining to the expenditure of the TEB proceeds, the use of the resulting facilities, and required record keeping. Reason for the Policy This policy documents the principles and processes adopted by the University to ensure compliance with all TEB requirements. This Policy also provides guidance to all University units involved in tax-exempt bond compliance so they understand and are able to carry out their roles in these processes. Policy Sections I. Organizational Responsibility The Vice President for Finance and Business Operations (VP F&BO) has primary responsibility for ensuring and monitoring post-issuance compliance with TEB regulations. The VP F&BO is responsible for approving revisions to this Policy on the recommendation of the Vice President and General Counsel and for approving certain project-level decisions impacting TEB compliance. The TEBC Director is responsible for carrying out the operational responsibilities as set forth in this Policy and in the job description. This includes, but is not limited to, analyzing and approving requests to undertake activities that involve private business use or, in certain cases, forwarding a recommendation regarding such activities to the Senior Director--Tax and International Compliance, or the VP F&BO for approval. The TEBC Director also chairs the Tax-Exempt Bond Compliance Committee (TEBCC) and as such coordinates the work of the Committee and the implementation of its decisions. The TEBC Director keeps current with TEBC developments by attending training sessions and preparing presentations for internal and external groups. TEBC Policy Page 2 of 32

3 The TEBCC, whose members include representatives from the Office of the General Counsel (OGC) and the Division of Finance and Business Operations, is responsible for recommending revisions to this Policy, and for developing, approving and implementing procedures to implement this Policy. The TEBCC is authorized to revise the Policy as necessary or advisable to conform to IRS or other regulations or laws. In addition, the TEBCC is authorized to make clarifying, non-substantive revisions to improve the clarity of the Policy. The TEBCC recommends workflows, changes to staffing and job positions, IT structures, etc., as necessary to implement this Policy, all to be approved through normal channels. The TEBCC has authority to review the operations of University units to assess compliance efforts. The TEBCC provides legal, tax and technical counsel and advice to the VP, F&BO and the TEBC Director and at least every two years meets with the VP F&BO for a training/briefing session on TEBC issues. The TEBCC sets training requirements for staff, and works with the TEBC Director to deliver and implement the training. II. Private Business Use The University s TEBs, which are qualified 501(c)(3) bonds, will lose their tax-exempt qualified status if more than 5 percent of the net proceeds 1 of the bond issuance or $15 million, whichever is less, are used for any private business use (PBU). For this reason, this Policy prohibits the approval of any use of TEBs for PBU in excess of 5 percent of a bond series net proceeds or $15 million, whichever is less. Because the IRS considers the use of the bond proceeds to finance the bond issuance costs as PBU, the allowable PBU percentage is reduced by the cost of issuance percentage 2. PBU occurs when private business users are given special legal entitlements to use TEBfinanced property. Private business users include corporations other than 501(c)(3)s; 501(c)(3)s if their on-campus activities constitute unrelated trade or business for either the 501(c)(3) or the University; and government entities other than the fifty states and their subdivisions. Special legal entitlements to TEB-financed property fall into the following categories, which are discussed in more detail in the Category-Based Rules section below: 1) Ownership 2) Lease/Use of University property 3) Management contracts 4) Utility output contracts 5) Sponsored research agreements (excluding clinical trial research agreements) 6) Clinical trial agreements 7) Material transfer agreements 8) Corporate researchers working at the University 9) Unrelated trade or business activities 10) Naming rights 1 Under IRC section 150(a)(3), net proceeds means the proceeds of the issue (which under IRS Regulation generally means the sale proceeds plus investment proceeds) less proceeds held in a reserve fund. Since Yale has not set aside funds in a reserve fund, net proceeds for Yale s purposes are sales proceeds plus investments proceeds. 2 IRC Section 147(g) limits the amount of bond proceeds that may be applied to finance the costs associated with the issuance of qualified 501(c)(3) bonds to 2% of the proceeds of the bond issue. TEBC Policy Page 3 of 32

4 11) Joint ventures, partnerships and limited liability companies agreements 12) Other actual or beneficial use of University property Note: According to the IRS regulations, activities are PBU only if they are carried out in TEBfinanced space. This Policy, however, uses the term PBU to refer to activities that arguably meet the criteria set forth in the IRS regulations for PBU, regardless of whether they take place in TEB-financed facilities. A. Basic Compliance Methodology The University s general policy is not to engage in private business use (PBU), as defined in IRS regulations, in TEB-financed facilities. For mixed-financed facilities, it generally engages in PBU only to the extent that sufficient non-teb financing can be allocated to cover 100% of the PBU. (Note that for capital projects which fall into the Qualified Building Improvement (QBI) exception 3, there is no PBU). Any allocation of TEB financing to PBU must be approved by the Senior Director-- Tax and International Compliance or VP F&BO as an exception. The University implements this policy by: 1. Identification: establishing guidance for the University s units to enable them to identify activities that may be PBU and to report them to the TEBC Director for decision-making. The identification systems vary by category of PBU. Section B-- Category-Based Rules below specifies the identification system for each category. 2. Decision-making: specifying how the TEBC Director, often in cooperation with OGC, the Tax Office or other units, determines whether the identified activity should be treated as PBU 4 and if so, whether it should be permitted. Full information must be gathered and reported prior to decision-making, including the details and location of the (proposed) activity (including any use of ISPs or facilities used by multiple users), the financing structure of those facilities, and information about other past or present PBU in those facilities. The TEBC Director will approve the PBU activity only if: a) The proposed PBU would not make the PBU percentage of a building come close to 15 percent 5 ; and b) Any projects with TEB financing for the facilities used either: meet the Qualified Building Improvement exception; or have enough non-teb funding to allow non-teb funding to be documentably allocated to fully cover the PBU; and c) Any allocation of non-teb funding to the PBU would not use up most of the non- TEB funding available for PBU allocation for that project. 3 Per the Qualified Building Improvement exception (IRS Regulation Section (d)(6)), TEBs used for building improvements that meet certain criteria are not deemed to be used for PBU. 4 A decision to treat an activity as PBU does not mean it necessarily is PBU. If there is doubt about how to characterize the activity, it should generally be treated as PBU in order to avoid unreasonable risk. 5 One of the Qualified Building Improvement criteria is that no more than 15 percent of the improved building be used for PBU. To simplify our TEBC analysis, the University will strive to limit PBU in buildings to less than 15% so that capital projects in those buildings will fall into the Qualified Building Improvement exception (assuming the projects meet the other Qualified Building Improvement exception criteria). TEBC Policy Page 4 of 32

5 If these three conditions are not met, the TEBC Director will advise the user to explore ways to reduce or eliminate the amount of PBU or, if that is not possible, the TEBC Director will forward the request to the Senior Director, Tax and International Compliance. The Senior Director, Tax and International Compliance can approve the use of TEBs for PBU as long as the available PBU allowance for the bond series following the approval is greater than 2% of the bond proceeds. All requests that reduce the available PBU allowance to less than or equal to 2% of the bond proceeds must be approved by the VP F&BO. 3. Tracking: tracking all PBU activity by location and duration in a master database maintained by the TEBC Director. At least annually, the TEBC Director will prepare a spreadsheet showing the TEBs used for PBU by project by bond series for Series X forward as required by the IRS for Form 990 Schedule K. The capital projects to be included in this analysis are those that: (a) are financed with outstanding (i.e. nonretired) TEB series; (b) have remaining expected useful lives; and (c) do not fall into the QBI exception. If this annual review reveals that more than 5 percent of the net proceeds of the bond issuance or $15 million, whichever is less, is used for PBU 6, then the TEBC Director will work with OGC to remediate the situation in accordance with the requirements under IRS Regulation Sections and If selfremediation is not possible, then OGC will attempt to negotiate a closing agreement with the IRS (see Section XI of this Policy). 4. Training: training staff in how to identify possible PBU and refer the activity for further analysis. For each category below, appropriate staff will be trained, and the TEBC Director will monitor to ensure that training is repeated periodically and that new staff is trained as appropriate. B. Category-Based Rules Activities involving external entities are analyzed based upon the following twelve categories. An activity that fits more than one of the categories must be analyzed using the rules in each category. If it is treated as PBU in one category, the fact that it is non- PBU in another is not relevant: the University must treat it as PBU. 1. Ownership a Identification: Ownership of TEB-financed property by an entity other than the University, another 501(c)(3) or a state governmental agency is considered to be PBU 7. An exception to the ownership requirement is described in Section V.2 of this Policy. This exception permits TEB-financed capital projects in leased space under certain conditions. i. To ensure that the University s TEB-financed buildings are not sold to external parties that are neither 501(c)(3)s nor state governmental units, 6 The 5 percent or $15 million maximum can be applied to the annual PBU amount or to the average of the annual PBU amounts within the measurement period (i.e. the term of the bond issue). IRS Regulation Section (g)(3). 7 The 100% ownership requirement of IRC Section 145 requires all TEB-financed property to be owned by a 501(c)(3) or a state governmental agency. TEBC Policy Page 5 of 32

6 ii. University Properties (UP) must work with OGC on the sale documents and OGC must refer the sale to the TEBC Director for approval before the documents are executed. To prevent the possible transfer of ownership to an external party of a TEB-financed capital project in leased space, UP must contact OGC and OGC must refer to the TEBC Director for approval the termination of all long-term leases (that is, leases with an original term more than ten years). The long-term leases must be referred to the TEBC Director for approval because some of them might have TEB-financed capital projects because they fit into the exception described in Section V.2 of this Policy.. b. Decision-making: i) With respect to University-owned buildings proposed for sale, the TEBC Director will determine if the buyer is a 501(c)(3) or a state governmental agency. If the answer is yes, then the TEBC Director will approve the sale. If the answer is no, then the TEBC Director will determine whether there are any TEB-financed capital projects in the building proposed for sale. If there are not, then the TEBC Director will approve the sale. If there are, then one of the following actions will be taken in order to comply with IRC Section 145 requirement that all TEB-financed property be owned by the University, another 501(c)(3) or a state governmental agency 8. Either: 1. The TEBC Director cannot approve the sale; or 2. The University will redeem any portions of the bonds allocable to the TEB-financed improvements in the building or take other appropriate action (removal or destruction of improvements), unless the improvements are worn out, obsolete, or otherwise valueless. ii) With respect to long-term leases that will be ended, the TEBC Director will determine if the lessee is a 501(c)(3) or state governmental agency. If the answer is yes, then the TEBC Director will approve the termination of the lease. If the answer is no, the TEBC Director will determine whether there are any TEB-financed capital projects in the leased space. If there are not, then the TEBC Director will approve the termination of the lease. If there are, then either: 1. The TEBC Director cannot approve the termination of the lease; or 2. the University will redeem any portions of the bonds allocable to the improvements or take other appropriate action (removal or destruction of improvements), unless the improvements are worn out, obsolete, or otherwise valueless. c. Tracking: Not applicable. There is no PBU Ownership to track because PBU ownership of TEB-financed property is not allowed. 8 In contrast to the private business use rules in IRC Section which allow up to 5% of the net proceeds or $15 million, whichever is less, to be PBU, the 100% ownership requirement of IRC Section 145 requires all TEBfinanced property to be owned by a 501(c)(3) or a state governmental agency. TEBC Policy Page 6 of 32

7 2. Lease/Use 9 of University Property Lease or use of TEB-financed property by an entity other than the University, another 501(c)(3) or a state governmental agency is considered to be PBU. a. Nonresidential leases to or use by external entities: i. Identification: 1. At least annually, the TEBC Director will use the Facilities Building List to enter all of the buildings that are leased to external parties into the PBU Database. 2. UP, working with OGC, must refer to the TEBC Director for approval any first-time lease of Yale-owned property. 3. University departments must work with OGC to execute a use agreement whenever a University facility will be used by an external party. OGC must refer the use agreement to the TEBC Director for approval before execution of the agreement. 4. The TEBC Director, working with Financial Reporting, will periodically run reports listing all rental income institution-wide, and then compare the list of buildings with rental income to the list of all University property leased to outside persons and entities in the PBU Database. The Director will investigate any differences between the two lists and determine which such leases involve TEB-financed space. ii. Decision-making 1. Any first-time lease of space must be approved by the TEBC Director or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 prior to execution to control PBU in TEBfinanced space All use agreements must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 prior to execution to control PBU in TEB-financed space. iii. Tracking: All leases to or use by external parties deemed to be PBU will be tracked in the PBU database. b. Residential leases to or use by external entities i. Identification: 1. Dormitories and other facilities providing housing exclusively for students, faculty, staff, and members of their cohabiting families are not treated as PBU. 2. Except for student dormitories, residential leases will be treated as PBU if they are not limited to students, faculty, staff, and members of their 9 Leases are broadly defined to include licenses, rental agreements, use agreements, and other use of University space by an outside party. 10 Leases to certain tenants are not PBU: (1) leases to state government entities and (2) leases to 501(c)(3)s where the lease is not UTB for either Yale or the tenant. But such leases could nevertheless give rise to PBU if the tenant engages in PBU. Also, when that tenant leaves, the lease would be PBU if the following tenant were a private entity. For these reasons, the TEBC Director will generally treat all leases as PBU. TEBC Policy Page 7 of 32

8 ii. iii. cohabiting families, or if they permit residents to conduct a trade or business from the premises. 3. Housing open to the general public is PBU even if it happens to be leased by a student, faculty, or staff member. Decision-making: First-time lease/use of a University property for a residential use that will be treated as PBU requires TEBC Director, or Senior Director, Tax and International Compliance, or VP F&BO approval as described in Section II.A.2. Tracking: All residential leases to or use by external parties deemed to be PBU will be tracked in the PBU database. 3. Management Contracts i. Identification: ii. a) A management contract is defined by the IRS as a management, service, or incentive payment contract with a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility. Examples would include management of a gym, a parking garage, environmental services, building maintenance, food courts, a retail unit, or package handling, where the outside company has an ongoing presence in the facility. Exemptions include contracts for janitorial services, office equipment repair, and hospital billing. b) For management agreements handled by UP: UP must work with OGC on their property management and tenant services agreements. OGC must refer all such agreements to the TEBC Director for approval before they are executed. c) For all other management agreements: Business Managers and Purchasing Department buyers are responsible for identifying whether any management contract might constitute PBU. The Purchasing Department uses checklists, guides, and/or Frequently Asked Questions (FAQs) to guide buyers as to whether management contracts might be PBU. Business Managers should refer to Purchasing any management contracts that might be PBU. d) Management contracts are not treated as PBU when: The term including the vendor s legally enforceable right to renew is 15 years or less, and The compensation is on a periodic fixed-fee basis, and The service is provided in a building that is not slated for demolition as shown in Capital Management s annual planning forecast, and The chief executive officers of the University and the vendor do not sit on the board of directors of each other; nor do the board chairs. e) Any management contract not meeting the requirements of the previous section must be forwarded to the TEBC Director. Decision-making: The TEBC Director will work with the party that identified the potentially PBU management agreement ( i.e. UP, Purchasing, or Business Manager) and with OGC to see if the contract can be structured to meet any of TEBC Policy Page 8 of 32

9 iii. the safe harbors of Revenue Procedure If not, it will be treated as PBU and must be reviewed and approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: All management contracts deemed to be PBU will be tracked in the PBU database. 4. Utility Output Contracts iv. Identification: The Director of Utilities will refer to OGC for review all contracts in which the University sells utilities (electricity, gas or water) to external entities. OGC screens for PBU. The principles used by OGC to determine whether a utilities contract is PBU include: a) Load response contracts do not create PBU, but should nevertheless be negotiated to fit within the short-term output contract exception if possible, by having a term less than three years. b) Sales to state governmental entities, or to 501(c)(3)s if their activities are not UTB for either the University or the 501(c)(3) are not PBU. c) Straightforward pay-for-the-utilities-you-use contracts do not create PBU. d) The sale of utilities as part of a lease to private entities is PBU (because the lease is PBU). Any contract deemed to be PBU by OGC must be forwarded to the TEBC Director. v. Decision-making: All sales of utilities that are treated as PBU must be reviewed and approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A2 above. vi. Tracking: All utility output contracts deemed to be PBU will be tracked in the PBU database. Where utilities are provided to a PBU lessee, the lease will be tracked in the PBU database and the corresponding percentage of utilities usage will be allocated as PBU for the generating facility. 5. Sponsored Research Agreements (SRAs) i. Identification: Note: For the purposes for this Policy, sponsored research agreements (SRAs) are agreements in which a sponsor gives Yale money to do research 11. a) Federal SRAs or federal-prime subawards: If the only intellectual property rights are the Federal Government s Bayh-Dole rights 12, then these agreements are not treated as creating PBU, per Rev. Proc IRS Regulation (b)(6) identifies research agreements as one category of private business use. This Policy breaks down research agreements as identified by the IRS regulation into the following three subcategories: Sponsored Research Agreements (Section II(B)(5)), certain Clinical Trial Agreements (Section II(B)(6)(i)(a)), and Material Transfer Agreements and other Research Support Agreements (Section II(B)(7)) C.F.R 401 TEBC Policy Page 9 of 32

10 ii. iii. Grant and Contract Administration (GCA) will identify federal SRAs that do not incorporate Bayh-Dole. Federal SRAs or federal-prime subawards with intellectual property provisions other than those of Bayh-Dole are treated the same as corporate SRAs. b) Foundation or other charitable organization sponsored research agreements: These agreements rarely, if ever, create PBU because the sponsor is a 501(c)(3) and the activity is not an unrelated trade or business for either the University or the sponsor. Thus, these agreements are not treated as PBU. c) Corporate SRAs: These agreements must either use the standard Yale Corporate Sponsored Research Agreement, or be screened by GCA to ensure they fit into the Rev. Proc safe harbor. If reasonable attempts to negotiate into the safe harbor fail, then GCA must refer the agreement to the TEBC Director for approval. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU. Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. GCA may not process the contract unless and until it is approved. Approval will be location-specific and duration-specific. Any changes in location or extensions will require reapproval. Tracking: Approved PBU contracts will be tracked in the PBU database. 6. Clinical Trial Agreements (CTAs) i. Identification a) Clinical Trial Agreements (CTAs) that GCA classifies as Organized Research for F&A purposes are considered to be SRAs for purposes of this Policy (see previous section). ii. iii. b) CTAs that GCA classifies as Other Sponsored Activities for F&A purposes are treated as being primarily for patient care, and are not considered to be SRAs and thus are not generally PBU. 13 Decision-making: Not applicable because CTAs are either (1) classified as Organized Research and subject to the process described for SRAs above; or (2) classified as Other Sponsored Activities and not PBU. Tracking: Not applicable because the patient-care CTAs subject to this section are not PBU. 7. Material Transfer Agreements (MTAs) and Other Research Support Agreements i. Identification: 13 Clinical trial research agreements that are classified as Other Sponsored Activities are by definition not research agreements, and therefore are not analyzed as research agreements under the research agreement safe harbor. Instead, they are treated as patient care agreements. There is no special category of patient care agreements for PBU analysis. Therefore, they are only PBU if they have some feature creating PBU under all the facts and circumstances. TEBC Policy Page 10 of 32

11 ii. iii. Note: Material Transfer Agreements (MTAs) are agreements in which a sponsor gives Yale materials (e.g., a unique strain of mice), free or for a nominal charge, to do research. Note: For purposes of PBU analysis, agreements for other forms of research support are treated the same as MTAs as described below. Examples include agreements where external parties provide equipment, software, or intellectual property rights to assays or other experimental methods. a) MTAs from the federal government: If the only intellectual property rights are the Federal Government s Bayh-Dole rights, 14 then these agreements are not treated as creating PBU, per Revenue Procedure GCA will identify federal agreements that do not incorporate Bayh- Dole. Federal MTAs with intellectual property provisions other than those of Bayh-Dole are treated the same as corporate MTAs. b) Foundation or other charitable organization MTAs: These agreements rarely, if ever, create PBU because the sponsor is a 501(c)(3) and the activity is not an unrelated trade or business for either the University or the sponsor. Thus, these agreements are not treated as PBU. c) Corporate MTAs: These agreements must be screened by GCA to ensure they fit into the Rev. Proc safe harbor. If reasonable attempts to negotiate into the safe harbor fail, then GCA must refer the agreement to the TEBC Director for approval. d) Purchases: When the University pays full price for the material, the agreement is not analyzed as a research contract and thus is not treated as PBU. It is only PBU if there are special legal entitlements for the sponsor, such as assignment of space to the sponsor. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU. Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. GCA may not process the MTA unless and until it is approved. Approval will be location-specific and duration specific. Any changes in location or extensions will require reapproval. Tracking: Approved PBU MTAs will be tracked in the PBU database. 8. Corporate Researchers Working at the University i. Identification: GCA screens all research contracts for clauses authorizing a corporate researcher to work at the University. GCA requires a separate Visiting Scientist Agreement for such arrangements, which provides that any resulting Intellectual Property (IP) belongs to the University consistent with Rev. Proc s safe harbor. If reasonable attempts to negotiate into the safe harbor fail, GCA must refer the agreement to the TEBC Director for approval. ii. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU. Any PBU agreement must be approved by the TEBC C.F.R 401 TEBC Policy Page 11 of 32

12 iii. Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. GCA may not process the Visiting Scientist Agreement unless and until it is approved. Approval will be location-specific and duration-specific. Any changes in location or extensions will require re-approval. Tracking: Approved PBU contracts will be tracked in the PBU database. 9. Unrelated Trade or Business (UTB) Activities a. Background Use of bond proceeds or bond-financed property by a 501(c)(3) organization such as the University in an unrelated trade or business (UTB) activity is treated as PBU for TEBC purposes. Definition: The term unrelated trade or business means any trade or business that is not substantially related to the organization s charitable (e.g., educational, research, and patient care) purpose. An activity rises to the level of a trade or business only if it is carried on in a regular and continuous manner, is considerable in scope, and is entered into with the intent of realizing a profit. The fact that an activity does not actually produce a net profit in a given year is not sufficient to exclude it from the definition of trade or business. The scope of UTB is broader than activities that generate unrelated business taxable income (UBTI), since the latter generally excludes dividends, interest, rents, royalties, gains and other income categories. Exceptions include any trade or business (1) in which substantially all the work is performed for the organization without compensation; (2) which is carried on primarily for the convenience of members, students, patients, officers, or employees; or (3) which is the selling of merchandise received as gifts or contributions. b. UTB Category-Based Rules The following is a nonexclusive list of potential UTB activities and the specific University policies to ensure compliance with the limitation on PBU. 1. Sale of merchandise: The sale of merchandise in TEB-financed facilities can occur in permanent locations on a full-time basis (e.g. Peabody Museum Store) or in temporary locations on a temporary basis (e.g. selling Yale-insignia clothing during reunions on tables). Note: Sale of merchandise directly related to the University s educational purpose is a related activity and is thus not considered UTB. For example, book sales related to and directly preceding or following a University sponsored lecture or talk are not UTB. i. Identification: a) Permanent locations for the sale of merchandise: The TEBC Director and the Tax Office will review sales activity and determine whether the activities constitute UTB. TEBC Policy Page 12 of 32

13 ii. iii. b) Temporary locations for the sale of merchandise: Business managers must identify these situations as they arise and report them to the TEBC Director. Decision-making: a) Permanent Locations: The TEBC Director and the Tax Office will determine whether the proposed sales activity constitutes UTB. Approval by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO is required to create new UTB sales locations as described in Section II.A.2 above. Expansion or relocation of existing UTB sales locations must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. b) Temporary Locations: Sales in temporary locations will be reviewed by the TEBC Director and the Tax Office for UTB. All UTB sales must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: The locations of the UTB activities from the sale of merchandise will be tracked in the PBU database. 2. Technical Service Agreements (TSAs) 15 i. Identification: By definition (see footnote 16),these agreements are UTB because they are not substantially related to the University s educational, research and patient care missions and they have a profit motive. Yale also executes a sufficient number of TSAs for it to be considered a trade or business. Therefore, GCA will forward all TSAs to the Tax Office and the TEBC Director. ii. iii. Decision-making: The Tax Office and the TEBC Director will reach agreement as to whether the TSAs are UTB. TSAs that are deemed to be UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: The TEBC Director will track all UTB TSAs in the PBU database. 3. External Sales by Internal Service Providers (ISPs) i. Identification: An ISP sale to an external client may constitute UTB if 15 Technical service agreements are agreements in which an external entity pays Yale for technical services that support the research and/or development efforts of the entity. Yale enters into the agreement primarily to generate funds and/or provide service to a corporation and secondarily to advance knowledge or provide training to the students/staff/faculty working on the project, in support of Yale s educational, research and/or patient care mission. There is no reasonable expectation of publication; no testing of the principal investigator s hypothesis; and no meaningful likelihood of expansion of generalized knowledge. Often, Yale does not retain any data or other resulting output. Yale might not take possession of input data or materials. TEBC Policy Page 13 of 32

14 ii. iii. providing the service to that client is unrelated to the University s mission and if the activity can be considered a trade or business because it is continuous, regular and considerable and is entered into with the intent of making a profit. External sales by ISPs are identified at two points. a) Before an ISP provides services to external users, the ISP must obtain approval from the University s ISP Standards committee; and b) Annually, all ISPs must report their external and internal revenues to the ISP Standards committee. A Tax Office representative and the TEBC Director are both members of the ISP Standards committee. Decision-making: Prior to approval by the ISP Standards committee, the new or existing ISP s external activities must be reviewed for UTB by the Tax Office and the TEBC Director. If deemed to be UTB, the external activities must be approved by the TEBC Director or the Senior Director. Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: Approved UTB by ISPs will be tracked in the PBU database. 4. Lease/Use of University Property i. Note: Identification. Yale Conferences & Events, Athletics, the Peabody Museum and any other department that would like to permit an external party to use University facilities must work with OGC to execute a use agreement. Before the use agreement is signed, OGC must refer the agreement to the TEBC Director for approval ii. Decision-making: The TEBC Director and the Tax Office will determine whether the proposed use is considered UTB because it does not support the University s mission and can be considered to be a trade or business because it continuous, regular and considerable and is entered into with the intent of making a profit.. Use of University facilities by external parties for educational, research or patient care purposes is a related activity and does not constitute UTB. All use of University facilities by external parties must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A2. iii. Tracking: The UTB leases and uses will be tracked in the PBU database. 5. Sponsored research agreements (SRAs) and clinical trial agreements (CTAs) i. Identification: These agreements are rarely UTB because they are generally both related and lack a profit motive. Nonetheless, GCA will identify possible UTB when it reviews proposed SRAs and CTAs and report them to the TEBC Director. TEBC Policy Page 14 of 32

15 ii. iii. Decision-making: The Tax Office and the TEBC Director will review these agreements and determine whether the SRAs and CTAs are UTB. Any agreement involving UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: The TEBC Director will track UTB SRAs and CTAs in the PBU database. 6. Activities that Generate Dividends, Interest, Capital Gains, Royalties and Rents i. Identification: These activities may be considered UTB if the activity is unrelated to the University s mission and if the activity is considered to be a trade or business because it is continuous, regular and considerable and is conducted with an intent to make a profit. The TEBC Director in cooperation with the Tax Office and Financial Reporting will monitor and review these revenues on a periodic basis to identify possible UTB activities. ii. iii. Decision-making: The Tax Office will determine whether the identified activities are UTB. All activities deemed to be UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above. Tracking: Those activities deemed to be UTB will be tracked in the PBU database. 7. Other UTB activities i. Identification: The TEBC Director in coordination with the Tax Office and Financial Reporting will monitor and review external revenues periodically, and UBTI activities reported on the Form 990-T annually, to: ii. a) identify UTB activities that should have been (but were not) preapproved by the TEBC Director, or Senior Director, Tax and International Compliance, or the VP F&BO under one of the preceding sections; and b) identify types of UTB activities that are not covered in one of the preceding sections. Decision-making: In this case, the identification of the possible UTB occurs after the occurrence so steps must be taken to ensure identification and approval before recurrence. Depending on the reason for the postoccurrence identification, the TEBC Director will take one of the following actions. a) If the department with unreported UTB activity should have reported the UTB activity according to this Policy, the TEBC Director will contact the department to inform it that either the unreported activity is retroactively approved or, if it is still ongoing, that it must be TEBC Policy Page 15 of 32

16 iii. discontinued. The TEBC Director will also inform the department of the reporting and approval requirements of this Policy to avoid unreported UTB activities in the future. b) If the UTB activity was not reported because it was not included in this Policy, the TEBC Director will recommend that the Policy be amended to include the omitted type of UTB. The TEBC Director, in coordination with the TEBCC, is authorized to develop and impose interim procedures and requirements to address types of UTB not reflected in this Policy while such a policy amendment is pending. Tracking: The locations of any income generating activities that constitute UTB will be tracked in the PBU database. 10. Naming Rights i. Identification ii. a) When the University enters into a contractual agreement giving a party legal entitlement to name a TEB- financed facility, or portion thereof, after a for-profit entity, such contract may give rise to PBU with respect to the named space. This also applies when the space is named after an individual or nonprofit entity whose name overlaps with the name of a commercial business with which such individual or nonprofit is associated (e.g. Donald Trump or the Donald J. Trump Foundation, and The Trump Organization.) b) If a facility is named after a for-profit entity other than pursuant to a legally binding commitment e.g., in gratitude for the donation of an unrestricted gift such naming opportunity might not be treated as PBU, but this will depend on the facts and circumstances. c) The following naming opportunity will not be treated as PBU: If a facility is named for an individual or nonprofit entity whose name does not overlap with the name of a for-profit entity with which the person or nonprofit is associated (e.g., Bill Gates and Microsoft Corporation). d) The Office of Development will identify all naming opportunities that do not fall within the exclusion described in sub-paragraph (i)(c) above and will refer them to the TEBC Director for review and approval prior to any final decision or the execution of any enforceable agreement. Decision-making: Any naming opportunity identified by the Office of Development and referred to the TEBC Director under paragraph (i)(d) above will be reviewed for purposes of determining whether such opportunity gives rise to PBU. If the TEBC Director determines that such naming opportunity would give rise to (or should be treated as giving rise to) PBU, it will be referred to the VP F&BO for approval. TEBC Policy Page 16 of 32

17 iii. Tracking: Naming opportunities that are referred to and approved by the VP F&BO will be tracked in the PBU database following execution of the final agreement. 11. Joint Venture, Partnership and Limited Liability Company (LLC) Agreements Identification: Yale University s Policy 3411 on Joint Ventures defines certain arrangements between the University and external parties as joint ventures. According to Policy 3411, the proposer of a joint venture is responsible for reviewing it with the University s Tax Department, OGC and TEBC Director. In general, an arrangement may be PBU if it is a joint venture, partnership, or LLC agreement that includes at least one entity that is not a 501(c)(3) and that involves the use of space in a University facility. Also note that joint ventures might be UTB and result in unrelated business taxable income (UTBI). Decision-making: The TEBC Director, in conjunction with the Tax Office and OGC if appropriate, will determine if the use constitutes PBU. All PBU use of University property must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2. Tracking: Those activities deemed to be PBU will be tracked in the PBU database. 12. Other Actual or Beneficial Use of University Property i. Identification: Any other arrangement that conveys special legal entitlements for beneficial use of University property or that creates priority rights to the use or capacity of a facility must be reported to the TEBC Director for approval. ii. iii. Decision-making: The TEBC Director, in conjunction with OGC if appropriate, will determine if the use constitutes PBU. All PBU use of University property must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2. Tracking: Those activities deemed to be PBU will be tracked in the PBU database. III. Record Retention A. Basic Compliance Methodology The University will retain all records for the length of time required to comply with IRS TEB regulations or the Tax Regulatory Agreements (TRAs) associated with each bond issuance, whichever is longer. Currently, records of TEB issuances and related post issuance compliance documentation must be maintained for the life of the bond (which, TEBC Policy Page 17 of 32

18 for the University, has ranged from 25 to 40 years) plus three years per IRS regulations and for the life of the bond plus six years per the TRAs. For refundings, the record retention period includes the original issuance. The TEBC Director is responsible for identifying the documents to be retained, for identifying and training the person responsible for retaining each type of document, for maintaining records showing the responsible person and the exact location of the records (either physical or electronic), and for periodically auditing the records. If records are moved from the location recorded by the TEBC Director (e.g. sent to an offsite storage facility or moved to a different server), notice of such relocation must be given to the TEBC Director in advance, describing the destination of the records and providing sufficient information to permit prompt retrieval of the records. If hard-copy records are transferred to electronic storage, advance approval must be obtained from the TEBC Director. All electronic files and information must satisfy the IRS s requirements for electronic storage systems. No employee shall discard or destroy any information identified in the TEBC Director s inventory during the period such records are required to be maintained. B. Category-Based Rules The following categories of documents evidencing use of facilities will be retained as follows: 1) Research Contracts and Grants 16 GCA s electronic record retention system will retain the contract and grant documents along with key identifying fields, such as, for example, PBU status (Y/N), beginning and end dates, primary locations, and principal investigator. GCA and the TEBC Director will reach agreement on the key identifying fields and field information to be retained. The TEBC Director will have access to those documents and field information. 2) Management Contracts The Purchasing Services Department s electronic record retention system will retain the contract and associated field documents along with key identifying fields, such as, for example, PBU status (Y/N), beginning and end dates, primary locations, and the University approver. Purchasing Services and the TEBC Director will reach agreement on the key identifying fields and field information to be retained. The TEBC Director will have access to those documents and field information. 3) Leases University Properties will retain the lease and sublease documents along with a summary document with key identifying fields, such as, for example, address, beginning and end dates, and square footage. University Properties and the TEBC Director will determine whether other key identifying fields and field information 16 For purposes of this section, research contracts and grants includes sponsored research agreements, clinical trial agreements, material transfer agreements, visiting scientist agreements, technical service agreements and other types of agreements handled by GCA that could involve PBU. TEBC Policy Page 18 of 32

19 needs to be retained. The TEBC Director will have access to those documents and field information. An exception to the preceding paragraph is made for one-year leases for graduate student, faculty and staff housing. Because it is infeasible to retain the high volume of these short-term leases for the life of the bond series, University Properties, the Office of Graduate Housing, OGC and the TEBC Director agreed upon an alternative strategy for documenting compliance. Annually, University Properties and the Office of Graduate Housing certify, in writing, that (1) the residential facilities were only leased to Yale graduate students, faculty and staff and (2) the leases prohibited lessees from operating a business from the Yale facilities. These certifications are supported by a copy of the lease and addendum, if any, that were in use during the prior year. IV. Arbitrage TEBs lose their tax-exempt status if they are classified as arbitrage bonds. In general, arbitrage is earned when the gross proceeds of a bond issue are used to acquire investments that earn a yield that is materially higher than the yield on the bonds issued. The Internal Revenue Code contains two separate sets of requirements that must be complied with to ensure that TEBs are not arbitrage bonds. They are: Yield Restriction requirements, which generally provide that in the absence of an applicable exception, bond issue proceeds may not be invested at a yield in excess of the bond yield; and Rebate requirements, which generally provide that when arbitrage is earned on an issue in excess of permitted amounts, the excess earnings must be paid to the U.S. Department of Treasury, even if an exception to the yield restriction requirements applies. In general, the University will seek to comply with certain exceptions to these requirements, as described below. A. Rebate Policy 1) The University will seek to comply with the Construction Exception to the rebate requirements for all construction bond issues. 17 Pursuant to this exception, Capital Management must ensure that all available construction proceeds will be allocated to expenditures within the time periods indicated below (measured from the issue date of the bonds): At least 10% within 6 months; At least 45% within 12 months; At least 75% within 18 months; and 17 A construction bond issue is one for which Yale reasonably expects as of the date of issue that at least 75% of available construction proceeds will be allocated to construction expenditures. Available construction proceeds means, in general, the sale and investment proceeds of the bonds, excluding any sale proceeds used to fund a reserve fund or pay costs of issuance, but including any earnings on a reserve fund during the two-year period following issuance (or during the construction period, if shorter) and any earnings on proceeds used to pay the costs of issuance. Construction expenditures means, in general, capital expenditures allocable to the cost of real property or constructed personal property, including the cost of construction, reconstruction, or rehabilitation of such property (but not including the cost of acquiring any interest in land or other existing real property). TEBC Policy Page 19 of 32

20 100% within 24 months (subject to certain limited exceptions). 2) For purposes of this Section A, available construction proceeds will be deemed to have been allocated to expenditures at the time the University pays for the expense with University funds. While not required, it is the University s practice to expend funds and submit requisition requests to CHEFA well in advance of these deadlines 18. 3) If an issue is not a construction bond issue or if the University fails to satisfy the requirements of the Construction Exception in connection with a construction bond issue, Capital Management should consult OGC regarding complying with alternative exemptions from the rebate requirements or making appropriate rebate payments. B. Yield Restriction Policy 1) To the extent the University issues construction bonds and satisfies the requirements of the Construction Exception, the University will in all likelihood also satisfy the less stringent requirements of the Reasonable Temporary Period Exception to the yield restriction requirements. 19 2) If the University complies with the Reasonable Temporary Period Exception, the net sale proceeds and investment proceeds of the issue may be invested until needed for the project in higher yielding investments for a reasonable temporary period of three years (or a special five-year period if a licensed architect or engineer certifies that such longer period is necessary to complete the project). 3) If an issue is not a construction bond issue or is a construction bond issue that fails to satisfy the requirements of the Construction Exception, Capital Management should consult with OGC to develop a plan to comply with the Reasonable Temporary Period Exception or some other applicable exemption from the yield restriction requirements or, in the alternative, to ensure that the University makes appropriate yield reduction payments. V. Allocation of TEB Proceeds to University Expenditures There are a number of federal requirements that must be met when allocating TEB proceeds to University expenditures. These requirements relate to what kind of University expenditures can be financed with TEBs, what documents must be created and retained to document the allocation, and the timeframes within which the allocations must be made. Capital Management allocates TEBs to University expenditures and thus has primary responsibility for ensuring that this allocation complies with the following federal requirements and University policies. 18 CHEFA has recommended that Yale do so in order to enable CHEFA, in turn, to draw down the proceeds by the deadlines, which will make it easier for CHEFA to prove to its auditors based on its own records that Yale has satisfied the Construction Exception. 19 The Reasonable Temporary Period Exception generally requires a borrower to reasonably expect the following as of the issue date of the bonds: (a) net sale proceeds and investment proceeds of the issue will be used for capital projects; (b) at least 85% of net sale proceeds will be spent within three years of the issue date; (c) it will incur a binding obligation to spend at least 5% of the net sale proceeds on the projects the bonds were issued to finance within six months of the issue date; and (d) it will proceed with due diligence towards expending the proceeds on and completing the projects. TEBC Policy Page 20 of 32