## Facts

- An organization otherwise qualifies as a scientific organization exempt from federal income tax under I.R.C. § 501(c)(3).
- The organization regularly performs commercially sponsored scientific research under contracts with private industry sponsors.
- Sponsors pay for the research and receive rights to the research results, including ownership rights in patents arising from the projects.
- **Situation 1:** Research results, including relevant information, are generally published and made available to the interested public currently or within a reasonably short time after completion, with only limited delay to allow reasonable steps to establish patent rights (e.g., filing patent applications).
- **Situation 2:** The organization agrees either (a) to forego publication to protect processes or technical data the sponsor wants kept secret, or (b) to extend publication delays beyond the time needed to establish ownership rights so the sponsor can defer patent procedures and control the timing of public disclosure for business reasons.

## Issues

1. Whether commercially sponsored research conducted by a § 501(c)(3) scientific organization constitutes “scientific research carried on in the public interest” when (a) results are timely published (Situation 1) or (b) publication is withheld or significantly delayed for the sponsor’s business purposes (Situation 2).
2. If the research in Situation 2 is not in the public interest, whether conducting that research constitutes “unrelated trade or business” under I.R.C. § 513.

## Decision

- The IRS concluded that, in **Situation 1**, the sponsored research is scientific research carried on in the public interest for purposes of § 501(c)(3), notwithstanding commercial sponsorship and sponsor patent ownership.
- The IRS concluded that, in **Situation 2**, research whose publication is withheld or significantly delayed beyond what is reasonably necessary to establish ownership rights is not carried on in the public interest.
- The IRS further concluded that the **Situation 2** activity constitutes the conduct of an unrelated trade or business within the meaning of § 513.

## Legal Principles

- A § 501(c)(3) scientific organization must be organized and operated to serve a public rather than a private interest.
- Scientific research is in furtherance of an exempt scientific purpose when research results (including relevant information) are made available to the interested public within a reasonable time.
- Limited publication delays are consistent with the public interest when reasonably necessary to establish ownership rights (such as filing patent applications).
- Withholding publication or significantly extending delays to advance a sponsor’s private business objectives indicates the activity serves private interests rather than an exempt scientific purpose.
- Research conducted under contract for private sponsors that is not substantially related to exempt purposes (apart from raising funds) is an unrelated trade or business under § 513.

## Conclusion

Commercial sponsorship does not by itself prevent research from furthering a § 501(c)(3) scientific purpose, but timely public dissemination of results is decisive; secrecy or extended, business-driven publication delays convert the activity into non-public-interest research treated as unrelated trade or business under § 513.


Rev. Rul. 76-296, 1976-2 C.B. 142 (1976)