Per usual with Rand, not very well. In IOTE, Rand prefers to discuss simple "perceptual concrete" concepts, like table, furniture, desk, man, animal, etc. She says very little about moral concepts. The one exception is the concept justice, which gets an entire paragraph of analysis:
What fact of reality gave rise to the concept “justice”? The fact that man must draw conclusions about the things, people and events around him, i.e., must judge and evaluate them. Is his judgment automatically right? No. What causes his judgment to be wrong? The lack of sufficient evidence, or his evasion of the evidence, or his inclusion of considerations other than the facts of the case. How, then, is he to arrive at the right judgment? By basing it exclusively on the factual evidence and by considering all the relevant evidence available. But isn’t this a description of “objectivity”? Yes, “objective judgment” is one of the wider categories to which the concept “justice” belongs. What distinguishes “justice” from other instances of objective judgment? When one evaluates the nature or actions of inanimate objects, the criterion of judgment is determined by the particular purpose for which one evaluates them. But how does one determine a criterion for evaluating the character and actions of men, in view of the fact that men possess the faculty of volition? What science can provide an objective criterion of evaluation in regard to volitional matters? Ethics. Now, do I need a concept to designate the act of judging a man’s character and/or actions exclusively on the basis of all the factual evidence available, and of evaluating it by means of an objective moral criterion? Yes. That concept is “justice.”She begins by asking which facts in reality gives rise to the concept justice, and then spends the rest of the paragraph artfully dodging the question. Instead of showing what the concept refers to, she opts instead to explain why human beings need justice, which is a different question altogether. Once again Rand makes big claims, only to let us down.
The simple fact of the matter is that IOTE does not explain how moral concepts are connected to reality. We get (vague and not entirely satisfactory) explanations of how concepts such as table and man refer to various "perceptual concretes" in reality; but on the issue of moral concepts, she is either evasive or silent. Why is this? It's really quite simple: Rand could not give a coherent explanation of how her moral values relate to reality because her moral theory is wrong.
Morality can refer to two possible elements of reality: (1) to some kind of quasi-Platonic "transcendental" values; or (2) to natural needs of each individual person, as reflected in their desires, sentiments, and other predominant emotions. Rand referred to the first type of values as intrinsic, the second type as subjective. She claimed to have discovered a third type, which she called "objective." But she never explained what this third type referred to in reality. Instead, she merely attacked both "intrinsic" and "subjective" values for being arbitrary.
Now it is not clear that "intrinsic" moral values exist (or, if they do exist, that we can know anything about them). However, if such values did exist (and we could establish and verify their existence), they would hardly be arbitrary. On the contrary, they would be fixed absolutes. What could be less arbitrary than an absolute? And even subjective values, as long as they are rooted in the natural, long-terms needs of each individual, suffer from no taint of the arbitrary. Such values are not, as Rand constantly impugned, mere whims, but are in fact important data necessary for making moral calculations. A creature who experienced no emotions, desires, sentiments would be incapable of leading a moral life. (For a more advanced treatment of this topic, see here.)
So while Rand's primary goal in her epistemology is to defend the universality and "absolute" character of moral values, the actual epistemology conspicuously fails in achieving this goal. But while IOTE may fail in terms of raw theory, in terms of practical consequence, it becomes mighty handy as a tool of rationalization. Rand may have failed in providing a coherent explanation of how her "objective" moral values relate to reality; but she could develop out of her epistemological theories useful verbalizing tricks to delight her followers and confound her enemies. The most useful of all these rationalizations relates to her view of definitions, which will require a number of posts to anatomize.