## Facts

- Illinois Institute of Technology Research Institute (IITRI) was a nonprofit research institute affiliated with the Illinois Institute of Technology.
- IITRI’s purpose and day-to-day work consisted of performing research and development for the federal government and for private industry.
- IITRI was recognized by the Internal Revenue Service (IRS) as tax-exempt under I.R.C. § 501(c)(3) as an organization operating exclusively for scientific purposes.
- IITRI did not distribute earnings to private shareholders or individuals; any revenue was retained for use in its operations.
- Most of IITRI’s research work was performed under government contracts.
- In 1977, IITRI filed its return for fiscal year 1976 and reported no unrelated-business taxable income (UBTI).
- The IRS asserted that IITRI had net UBTI under I.R.C. § 512(a) and assessed a deficiency.
- IITRI paid the assessed deficiency, filed a refund claim, and the IRS denied the refund.
- IITRI then brought suit challenging the IRS’s determination that it had UBTI.
- At trial, the IRS pointed to 24 contracts as allegedly “substantially unrelated” to IITRI’s exempt scientific activity.
- Trial testimony addressed the 24 projects, including that they were carried out by qualified engineers and scientists, IITRI was not commercializing products or processes from the work, and the 24 contracts were not substantially different from IITRI’s other research contracts.

## Issues

1. Whether IITRI’s income from the 24 identified research contracts was income from an “unrelated trade or business” and therefore taxable as UBTI under I.R.C. § 512(a) and the UBTI rules in I.R.C. §§ 511–513.
2. Whether the research performed under those 24 contracts was substantially related to IITRI’s exempt scientific purpose, so that the resulting income would not be treated as UBTI.

## Decision

- The court ruled for IITRI on the UBTI dispute regarding the 24 challenged contracts.
- The court concluded that the contract research at issue was substantially related to IITRI’s exempt scientific purpose rather than a separate unrelated commercial activity.
- Because the IRS’s UBTI determination for the challenged contracts was incorrect, IITRI was entitled to the requested refund to the extent the assessed deficiency rested on treating that contract income as UBTI.

## Legal Principles

- UBTI generally includes income an exempt organization derives from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose (aside from raising funds). I.R.C. §§ 512(a), 513.
- The UBTI inquiry focuses on the relationship between the activity producing the income and the exempt purpose; the fact that research is conducted under contract and for a fee does not by itself make the activity “unrelated.”
- Contract-funded research can be substantially related to an organization’s scientific purpose when the work performed is the kind of scientific research the organization exists to conduct.
- Evidence that the challenged projects are conducted by qualified scientific personnel, resemble the organization’s other research work, and do not involve the organization’s commercialization of products or processes supports treating the activity as related to the exempt purpose rather than an unrelated trade or business.

## Conclusion

*Illinois Institute of Technology Research Institute v. U.S.* held that IITRI’s performance of the 24 challenged research contracts was part of carrying out its exempt scientific mission, not an unrelated business operated mainly to generate income; as a result, the income from those contracts was not UBTI, and IITRI could recover the tax it paid based on the IRS’s contrary determination.


Illinois Institute of Technology Research Institute v. U.S., 85-2 USTC ¶ 9734 (1985)