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Use of Baylor Resources for Private Benefit

Oct. 25, 2012

As a tax-exempt, Internal Revenue Code Section 501(c)(3) organization, Baylor University must serve a public rather than a private interest. As a result, Baylor may not operate in a way that benefits private interests of designated individuals. Any private benefit must be qualitatively incidental to the public purpose, which means that the benefit must be "a necessary concomitant of the activity that benefits the public at large." Additionally, a private benefit must be quantitatively incidental when measured against the specific public benefit provided.

The potential consequences of private benefit that is not incidental to Baylor's public purpose include (i) loss of Baylor's tax exempt status and (ii) increased income tax exposure to the person who received the private benefit.

The critical inquiry is not simply about excess costs or excess benefits. The critical inquiry is about the operation, and whether the operation is consistent with the public purpose of the institution. If Baylor operations are carried on in a manner that inappropriately benefits individuals or groups of individuals who are not the intended beneficiaries of Baylor's public purpose, then there may be a private benefit. As a result, money does not even have to change hands to result in a private benefit.

The following operations may raise an issue of a private benefit:

• Excessive compensation paid to any employee or any vendor

• Business opportunities steered to a for-profit entity

• Baylor resources used for personal purposes, not Baylor purposes. This may include subsidizing a commercial activity with Baylor assets, such as computer systems or real property usage.

• Baylor benefits provided to a limited class of persons who are not the beneficiaries of Baylor's public purpose. This may include waiving fees for the benefit of a few individuals.

• Control of Baylor activities by an outside entity, which may include efforts by donors to control Baylor decisions

Unfortunately, the legal standard does not provide a bright-line test, since all the facts and circumstances are evaluated. Nonetheless, if resources are used or operational decisions are made to benefit any purpose other than Baylor's public purpose, there is a risk of a private benefit. Sound business practices mitigate the likelihood of a private benefit. For example,

• Goods and services should be obtained through competitive processes.

• Decisions must be made in Baylor's best interest, not any private interests.

• Baylor resources must be used for Baylor's public purpose and no other purpose.

• Preferential treatment of private interests should be avoided.

• Other than receipt of Baylor benefits, Baylor employees should not receive preferential treatment regarding access to and payment for Baylor's resources, goods or services.

• Private, commercial activity on Baylor property should be avoided, particularly when the activity is not in furtherance of Baylor's mission. (If in doubt, disclose such private interests through the Conflict of Interest Policy).

If you have questions about any operation, contact the Director of Tax Compliance at 8765 or the Office of General Counsel at 3821.