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 of expending funds 

of the Texas Engineering Experiment Station to pay the 

Federal income tax tmposed 

by Section 422, Internal Revenue Code, eon unrelated business income of State colleges 

Dear Sir: and universities. 

You request an opinion of this 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 of the 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 about which you inquire is explained by you as follows: 

“The Texas Engineering Experiment Station, a part 

of the Texas A. and M. College System, conducts research 

projects designed to improve electric fan testing methods, 

fan construction, and consumer utilization. In connection 

with this research the Texas Engineering Experiment 

Station conducts fan testing activities for manufacturers on 

a fete basis. 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 pointy out, however, that the Bure:au of Internal Revenue has proposed the following definition of unrelated business net 

income in its order published in 14 Fed. Reg. 204, 209 (1952): 
Hon. Gibb Gilchrist, page 2 (V-1491) 

,?(iii) In the case of an organization operated 

primarily for the purpose of carrying on fundamental research (as distinguished from applied research) 

the results of which are freely available to the general public, all income derived from research performed for any person and all deductions directly 

c’onnected with such income shall be excluded in 

computing unrelated business net income. 

“‘(iv) For the purpose of this section, the term 

‘research’ does not include activities of a type ordinarily carried on as an incident to commercial or 

industrial operations, for example, the ordinary 

testing or inspection of materials or products or the 

designing or construction of equipment, buildings, 

etc. The term ‘fundamental research’ does not include research carried on for the primary purpose 

of commercial or industrial application.* 

Based upon these facts you ask the following question: 

“In order that we may comply with the State and 

Federal laws, we desire the opinion of your office as 

,to whether or not the Texas Engineering Experiment 

Station may legally expend a portion of the 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 

of the Internal Revenue Code or any other Federal law, 

beginning with the fiscal year 1952-53.” 

In answering your question we are expressing no opinion 

as to the liability of the 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 and that 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 by the Legislature 

from, the General Revenue Fund. Section 31 of Article 5 of House 

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 of the colleges 

or universities ,for, which appropriations are made 

herein’da~ deposit in the State Treasury ‘all cash 

rereipts from all so&es except auxiliary enterp&es; no*i&truct~onal services, agency and i-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 not bee required to keep separate accounts of types 

of funds deposited by~each institution. . . .” 

Section 2 of Article 5 of House Be 426, e, at p. 1462, 

provides : 

‘All balances in the institutional funds of the several State institutions named in this Article, at the close 

of the fiscal year ending August 31, 1951. including balances in their revolving funds at that time, and the entire income to said funds du.ring each of the fiscal years 

endfng August 31, 1952, and August 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,en that the funds derived from the fan testing 

activity, being local or institutfonal funds, are appropriated *for 

the operation, maintenance, and improvement* of the state institutions acquiring the funds. Should there be a liability for the income tax caused by the carrying on of activfties connected with the 

research required in the operation of the Texas Engineering Experiment Station, the payment of this liability would be required for the 

operation and maintenance of Texas Agricultural and Mechanical 

College System. The expenditure, therefore, would come within the 

appropriation and a part of the local funds derived from the activity 

causing the liability could be used for the purpose of paying the tax 

if and when duo. 
Hon. Gibb Gilchrist, page 4 (V-1491) 

SKMMARY 

Section 2 of Article V of House Bill 426, Acts 

52nd Lag., R.S. 1951, ch. 499, p. 1228 (General Appropriation Bill) authorizes the Texas Engineering 

Experiment Station of the Texas Agricultural and 

Mechanical College System to expend a portion of the 

income derived from testing activities to pay Federal 

inc:ome taxes on the funds derived from the activity, 

if and when due. 

APPROVED : 

Mary K. Wall 

Reviewing Assistant 

Charles D. Mathews 

First Assistant 

E J:wb:mf 

Yours very truly, 

PRICE DANIEL 

Attorney General 

BY K9-Jf-J 

E. Jacobson 

Assistant