Approval Process for Joint Ventures with Taxable Entities
Effective Date: April 23, 2012
The purpose of this Policy is to protect the University’s tax-exempt status in situations in which it may enter into a joint venture with one or more parties that are not exempt from federal income taxation. This Policy provides guidelines to consider when making decisions about whether the University will enter into a joint venture, and, if such an arrangement is entered into, how it may be structured to protect the University's tax-exempt status. For the purpose of this Policy, all references to the "University" shall be deemed to include the affiliated exempt entities of the University, as appropriate.
This Policy applies to any joint venture or similar arrangement between the University and one or more taxable entities.
For purposes of this policy, a Joint Venture means any joint ownership or contractual arrangement through which there is an agreement to jointly undertake a specific business enterprise, investment, or exempt-purpose activity without regard to: (1) whether the University controls the venture or arrangement; (2) the legal structure of the venture or arrangement; or (3) whether the venture or arrangement is taxed as a partnership or as an association or corporation for federal income tax purposes.
For purposes of this Policy, the term Joint Venture does not include a venture or arrangement where (a) 95% or more of the venture's or arrangement's income for its tax year ending with or within the University’s tax year is described in sections 512(b)(1)-(5) of the Internal Revenue Code (concerning certain forms of passive income including interest, dividends, royalties, rents from real property, revenues from the sale of property, and unrelated debt-financed income), and (b) the primary purpose of the University's contribution to, or investment or participation in, the venture or arrangement is the production of income or appreciation of property.
III. COVERED MEMBERS OF THE UNIVERSITY COMMUNITY:
This Policy applies to all University trustees, officers and employees.
1. Joint Venture Review and Approval
Prior to either entering into a Joint Venture or amending the terms of an existing Joint Venture, all documents proposed to be executed by or otherwise binding on the University, including, without limitation, the Joint Venture operating agreement or similar document ("Joint Venture Documents"), together with a brief written summary, shall be submitted to the University's Joint Venture Committee for review and approval or disapproval. Expedited review of a proposed Joint Venture shall be granted upon demonstration by the University employee requesting such a review that the expedited process is required and that failure to do so would result in the loss of the proposed Joint Venture. Potential Joint Ventures that involve the Drexel University College of Medicine shall be submitted to their board of trustees for prior review and approval, in accordance with that organization's existing by-laws.
2. Joint Venture Tax Exemption Requirement
In the negotiation and review of proposed Joint Ventures and Joint Venture Documents, the University must evaluate its participation in such Joint Ventures under applicable federal tax law and take steps to safeguard the University’s tax-exempt status with respect to such Joint Ventures. The University shall negotiate in its Joint Ventures such terms and safeguards adequate to ensure that the University's tax-exempt status is protected. Such safeguards should be set forth in the Joint Venture Documents and, whenever feasible under the particular circumstances of the proposed Joint Venture, include statements that:
- Assure that the Joint Venture furthers the tax-exempt purpose of the University;
- Provide that the University has sufficient control over the Joint Venture to ensure that the Joint Venture at all times shall be operated and managed in a manner that furthers the tax-exempt purpose of the University;
- Require any duty that the Joint Venture participants, the members of the Joint Venture’s governing bodies or the Joint Venture’s officers may have to maximize the Joint Venture’s profits or to take, or refrain from taking, any other action, is overridden by the duty to faithfully satisfy the exempt purposes of the University without regard to the consequences for maximizing profitability;
- Assure that the Joint Venture shall not cause the University to act other than exclusively in furtherance of its tax-exempt purpose or adversely affect its tax-exempt status;
- Assure that the Joint Venture does not directly or indirectly engage in any activities that would jeopardize the University's exemption (such as political intervention, substantial lobbying or direct political contributions or support);
- Provide that the University receives ownership interests in the Joint Venture that are proportional and equal in value to the ownership interests to be received by the other Joint Venture participants;
- Require debt of the Joint Venture not be guaranteed by the University in a manner that could cause the University to be responsible for more than its proportional share; and
- Require that sufficient operating controls be implemented at the Joint Venture to assure all contracts and transactions involving the University and the Joint Venture are on an arms-length basis (or more favorable to the University).
Any proposed amendments to the Joint Venture Documents or changes in the manner or method of the Joint Venture’s governance or operation must be reviewed by the Joint Venture Committee.
4. Monitoring and Reporting Responsibilities
- If the proposed Joint Venture is approved and implemented, the EVP for Finance, Treasurer and CFO, or her/his designee, is charged with responsibility to ensure that the Joint Venture and its operation adheres to the items set forth in Item 2 above.
- Each Joint Venture must submit the following items to the EVP for Finance, Treasurer, and CFO, or her/his designee, within six months after each year end (unless otherwise approved by the EVP for Finance, Treasurer and CFO or her/his designee):
- Schedule K-1 for the University
5. Document Retention
A fully executed original of each of the Joint Venture Documents and all other significant documents and agreements relating to the Joint Venture, including, without limitation (as applicable), Articles of Incorporation or Organization, Bylaws, Operating Agreement, Partnership Agreement, Management Agreement, Service Agreements and Leases, and a fully executed original of all amendments to any of the foregoing, and if available, electronic copies of each of the foregoing shall be maintained by the department originating the Joint Venture, and shall be maintained in accordance with the University’s Record Management Policy, OGC-6. Executed Originals may include facsimile or electronic signatures if permitted by the document so executed.
V. VIOLATION OF THIS POLICY:
Violation of this policy and procedure or failure to timely cooperate in complying with its provisions may result in disciplinary action up to and including dismissal.