Illinois Institute of Technology Research Institute v. U.S.

The Illinois Institute of Technology Research Institute (IITRI) (plaintiff) was a nonprofit research institute affiliated with the Illinois Institute of Technology. IITRI existed to perform research and development for government and private industry. As a nonprofit organization, IITRI did not distribute any earnings to private shareholders or individuals; instead, IITRI used any revenue to grow and improve its operations. IITRI received tax-exempt status from the Internal Revenue Service (IRS) as an organization operating exclusively for scientific purposes. Most of IITRI’s research was conducted pursuant to government contracts. In 1977 IITRI filed its taxes for the fiscal year 1976, and it reported no unrelated-business taxable income. The IRS responded by asserting that IITRI did have net unrelated-business taxable income. Internal Revenue Code (I.R.C.) § 512(a) defined unrelated-business taxable income as the income derived from any unrelated trade or business. After paying the deficiency assessed, IITRI requested a refund, which was denied. IITRI filed suit, arguing that the IRS wrongfully determined that it had unrelated-business taxable income. At trial, the IRS alluded to 24 contracts as being substantially unrelated to IITRI’s exempt activity. There was testimony as to the nature of the 24 projects, including that (1) the projects were carried out by qualified engineers and scientists; (2) IITRI was not commercializing any products or processes; and (3) the 24 challenged contracts were not substantially different from IITRI’s other work contracts.