It is the policy of Washington University in St. Louis (the “university”), whenever engaging in a joint venture with one or more taxable persons, to take such steps as are necessary to ensure that the joint venture is organized and operated in accordance with applicable federal, state and local law.
In particular, the university shall ensure that the organization and operation of the joint venture does not adversely affect the university’s federal tax-exempt status and does not generate excessive unrelated business taxable income (“UBIT”).
The terms of a joint venture must be fair and reasonable for the university and must include safeguards of the university’s tax exempt mission. Such safeguards include: sufficient control over the venture to assure that it furthers the exempt purpose of the university, priority for furtherance of the university’s exempt purposes over profit maximization for other member(s) of the venture, assurance that the venture will not engage in activities that would jeopardize the university’s exempt status, and such other safeguards as determined necessary to protect the exempt status of the university. All proposed joint ventures must be reviewed and recommended by the vice chancellor for finance, the Office of the Executive Vice Chancellor and General Counsel and the dean whose school will manage the joint venture on behalf of the university. The university will not enter into a joint venture with a taxable person without review and approval by the Board of Trustees.
For purposes of this policy, the term “joint venture” shall mean any joint ownership or 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 treated as a partnership for federal income tax purposes, or as an association, or corporation for federal income tax purposes. In general, it is the policy of the university that its joint venture activity with for-profit entities will be limited so that it is not in any single case or in aggregate a substantial portion of the university’s exempt activities.
The following factors shall be taken into consideration in the negotiation of any transactions or arrangements and implemented as appropriate to effectuate this policy:
A. The University Has Majority Control over Voting Rights
If the university has majority voting rights in a governing body or as a member, partner or shareholder of a joint venture, it will likely have sufficient control to ensure that its participation in the joint venture is exclusively for charitable purposes, thereby preserving exemption and avoiding UBIT. This protection comes from the ability to initiate charitable activities in the joint venture as well as through the ability to veto any action proposed by the for-profit co-venturer that would be inconsistent with the university’s charitable purposes. If the university desires to structure the joint venture in this fashion, the university should ensure that there are no reserved rights for the for-profit party, or any supermajority votes required on any substantive matter, which would act to dilute the university’s majority control. The finance and legal departments of the university will examine a variety of other important, specific “control” factors present or absent in any particular proposed joint venture as part of their determination whether to recommend the venture to the Board of Trustees.
B. The University Has 50/50 Voting Rights
If the university has 50/50 voting rights in the governing body of the joint venture entity, it will need, at a minimum, to maintain sufficient control over the charitable aspects of the joint venture to ensure that its participation in the joint venture is exclusively for charitable purposes, thereby preserving exemption and avoiding UBIT. Protection will come from granting the university the exclusive right to approve the charitable activities of the joint venture (through the organizing documents) or the right to veto any action proposed by the other party for the joint venture that would be inconsistent with the university’s charitable purposes. In practice, achieving the “exclusive right to approve” should not require granting the university the sole right to initiate the undertaking of charitable activities by the joint venture. It could also be exercised through a veto power if the organizing documents so provide. In either case, this right would be created by requiring a majority vote of the full governing board of the joint venture as to these items. The finance and legal departments of the university will examine a variety of other important, specific “control” factors present or absent in any particular proposed joint venture as part of their determination whether to recommend the venture to the Board of Trustees.
C. The University Has Minority Voting Rights
In this scenario, the university is unable or unwilling to assume either majority or equal voting rights in the joint venture. Under these circumstances, the university will need to acquire control rights through the organizing documents by making provision for certain unilateral rights to be held by the university and/or requiring that specified major actions receive a supermajority vote for approval so that the university can effectively exercise veto power. This essentially brings the university into the same position it would be in with 50/50 voting rights as to those issues essential to the university’s tax exemption and avoidance of UBIT. The finance and legal departments of the university will examine a variety of other important, specific “control” factors present or absent in any particular proposed joint venture as part of their determination whether to recommend the venture to the Board of Trustees.
D. The University Has a Minority Interest for Investment Purposes
If the university’s equity interest in a joint venture is so small that it is more in the nature of an investment interest rather than an active participation, it is not necessary to have initiation and veto powers, although it should nevertheless seek to protect its charitable interests to the extent possible. While there is no specific IRS benchmark for evaluating when an interest is small enough to constitute only an investment interest, an equity interest in a joint venture of less than 20 percent can generally be properly characterized as an investment rather than active participation. Such joint ventures should be considered on a case-by-case basis.
E. Ventures or Arrangements Outside the Policy
Generally, the university will consider participating in joint ventures only if they advance its charitable purposes and are not large enough to threaten its tax exempt status or create excessive UBIT. The university will invest in joint ventures that do not fall within paragraphs A through D above only if both of the following conditions are met:
- 95 percent 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) (including unrelated debt-financed income).
- The primary objective of the university’s contribution to, or investment or participation in, the venture or arrangement is the production of investment income or appreciation of property. The determination of whether the university will proceed with participation in a joint venture will be made by the chief financial officer and executive vice chancellor and general counsel in consultation with university personnel proposing the investment.
Effective May 1, 2010