## T N ENERAL

August 6,, 1952

Hon. Gibb Gilchrist Chancellor Texas A. 8 M. College System C,ollege Station, Texas Opinion No. **V-1491** Re: Legality ofexpending funds ofthe Texas Engineering Experiment Station to pay the Federal income tax tmposed by Section 422, Internal **Reve** nue Code, eon

unrelated business income ofState colleges Dear Sir: anduniversities.

You request an opinion ofthis office concerning the availability of funds with which to pay Federal income taxes on income derived from fan testing activities **of** the Texas Engineering Experfment Station. Under the~provisions ofthe Internal Revenue Code, income from activities unrelated to the function of a college or university is subject to the payment of Federal income taxes. The activity aboutwhich you inquire is explained by you as follows:

“The Texas Engineering Experiment Station, a part of the Texas A. andM. College System, conducts research projects designed to improve electric fantesting methods, fan construction, and consumer utilization. Inconnection with this research the Texas Engineering Experiment Station conducts fan testing activities for manufacturers on a fetebasis. The data obtained from such tests is available for research purposes. While this research could conceivably be conducted without the testing activities, the latter are definitely a valuable adjunct to the former.” You pointyout, however, thatthe Bure:au of Internal Revenue has proposed the following definition ofunrelated business net income in its order published in 14 Fed. Reg. 204, 209 (1952):Hon. Gibb Gilchrist, page 2 (V-1491)
,?(iii) Inthe case of an organization operated primarily for the purpose of carrying onfundamental research (as distinguished from applied research) the results ofwhich are freely available to the general public, all income derived from research performed for any person and all deductions directly c’onnectedwith such income shall be excluded in computing unrelated business net income.

“‘(iv) For the purpose ofthis section, the term

‘research’ does not include activities of a type ordinarily carried onas an incident to commercial or industrial operations, for example, the ordinary testing or inspection ofmaterials or products or the designing or construction of equipment, buildings, etc. The term ‘fundamental research’ does not include research carried onfor the primary purpose of commercial or industrial application.* Based uponthese facts you ask the following question:

“In order that we may comply with the State and Federal laws, we desire the opinion ofyour office as ,towhether or notthe Texas Engineering Experiment Station may legally expend a portion ofthe net income derived from fan testing activities or any other source defined by Federal law as ‘unrelated business income’ to pay the Federal income tax imposed by Section 422 ofthe Internal Revenue Code or any other Federal law, beginning with the fiscal year 1952-53.” Inanswering your question we are expressing no opinion as to the liability ofthe Texas Agricultural and Mechanical College System or the Texas Engineering Experiment Station for the taxes in question. We are assuming, as you have assumed in your request, that there may be some liability andthat your question concerns only the availability of funds with which to meet this liability.

The funds which are derived by the Texas Engineering Experiment Station for the testing in question are local or institutional funds, that is, they are not appropriated bythe Legislature from, the General Revenue Fund. Section 31 ofArticle 5 ofHouse Bill 426, Acts 52nd Leg.,, R.S. 1951, ch. 499, p. 122s. at p. 1472 .-Hon. Gibb Gilchrist, page 3~(VLl491) 1

(General Appropriation Bill), @Mikes in part:

-he ,~ovemii$g boarda of each ofthe colleges or universities ,for,which appropriations **are** made herein’da~ deposit inthe State Treasury ‘all cash rereipts from all so&es except auxiliary enterp&es; no*i&truct~onal services, agency andi-estrkted funds,‘endc+wment funds; student ‘loan funds, and Con&it&o&l College Building’ Amendment ‘Funds. The State Treasurer is directed to credit such receipts deposited by each such institution to a separate fund account for the in&it&on depositing the receipts, buthe shall notbeerequired to keep separate accounts of types of funds deposited by~each institution.

. . .” Section 2 ofArticle 5 ofHouse Be 426, e, at p. 1462, provides :

‘All balances in the institutional funds ofthe several State institutions named in this Article, atthe close of the fiscal year ending August 31, 1951. including balances in their revolving funds atthat time, andthe entire income to said funds du.ringeach of the fiscal years endfng August 31, 1952, andAugust 31. 1953, which are not otherwise appropriated for either or both of said fiscal years, **are** hereby appropriated for the operation, mafntenance, and improvement sf said State 

### institutions during each of said fiscal years respectively.* It is thus se,enthat the funds derived from the fan testing activity, being local or institutfonal funds, are appropriated *for the operation, maintenance, and improvement* ofthe state institutions acquiring the funds. Shouldthere be a liability for the income tax caused bythe carrying on of activfties connected with the research required inthe operation ofthe Texas Engineering Experiment Station, the payment ofthis liability would be required forthe operation andmaintenance of Texas Agricultural andMechanical College System. The expenditure, therefore, would come within the appropriation and a part ofthe local funds derived from the activity causing the liability could be used for the purpose of paying the tax if andwhen duo.Hon. Gibb Gilchrist, page 4 (V-1491)

SKMMARY Section 2 ofArticle V ofHouse Bill 426, Acts 52nd Lag., R.S. 1951, ch. 499, p. 1228 (General Appropriation Bill) authorizes the Texas Engineering Experiment Station ofthe Texas Agricultural and Mechanical College System to expend a portion ofthe income derived from testing activities to pay Federal inc:ome taxes onthe funds derived from the activity, if andwhen due. APPROVED : Mary K. Wall Reviewing Assistant Charles D. Mathews First Assistant

EJ:wb:mf Yours very truly, PRICE DANIEL Attorney General

BY K9-Jf-J E. Jacobson Assistant