Determination 1303018: IRS denies exemption to an open-source music software organization

Plain-English summary

The IRS denied tax-exempt status under IRC § 501(c)(3) to a nonprofit corporation that planned to develop open-source software and provide online education for musicians and music companies. The organization also planned to charge for hosting, consulting, and related services. The IRS concluded that the software and services primarily provided commercial advantages to musicians and music companies, rather than serving a public interest. The organization therefore failed the requirements for exemption.

Ruling snapshot

• Question: Does the nonprofit organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied.
• Key authorities: IRC §§ 501(c)(3), 170, 6110, and 7428; Treas. Reg. § 1.501(c)(3)-1.

Full text (IRS public release)

s > DEPARTMENT OF THE TREASURY
k =) INTERNAL REVENUE SERVICE
WN Ts WASHINGTON, D.C, 20224
NS REVENOY
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:

Identification Number:
Release Number: 201303018
Release Date: 1/18/2013 Contact Number:
Date: October 19, 2012
Employer Identification Number:

Form Required To Be Filed:

Tax Years:

UIL Number: 501.03-08
Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Holly O. Paz
Director, Exempt Organizations Rulings and
Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: June 19, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

LEGEND:

State:

Date 1:

Date 2:

x:

XY:

x:

Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code (I.R.C.) § 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under I.R.C. § 501(c)(3). The basis for our
conclusion is set forth below.

FACTS:

You are organized as a nonprofit corporation under the laws of a State on Date 1. You filed
Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, on Date 2.

Your Articles of Incorporation (hereinafter, “Articles”) state that you are organized and operated
exclusively for charitable, educational, and scientific purposes within the meaning of I.R.C. §
501(c)(3). In a letter dated March 19, 2010, you stated that you intend to abandon your
charitable activities and to pursue only your educational and scientific activities henceforth.
Specifically, your purpose is to create freely available open source software for the music
community at large, to provide hosted online tools designed to enhance participation in the
further development of the open source software, and to provide education about intellectual
property issues, copyright issues, and music industry best practices. You state that you are
operated to benefit musicians and music companies.

You state that your educational activities consist of instructing the public about best practices

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and current trends in the music industry. Topics include, but are not limited to: media licensing,
music management, music marketing tactics, business structures for musicians, technology
trends, and case studies of specific examples. All of your educational instruction occurs online
through your website and blog. You do not maintain an online forum where the public may ask
questions; all questions are fielded through a public e-mail address or via posts on social
networking websites. The only in-person educational events you intend to offer are seminars or
conferences, but you have not held any such event to date. You state that you spend
approximately 15 percent of your financial and personnel resources on your educational
activities.

You state that your scientific activities consist of developing open source software for music
promotion, sales, and digital distribution. X software—which include an audio player, image
galleries, and video players—allows musicians and music companies to create music and
media rich websites to sell, share, and promote their music or artists directly to fans. X software
is available for download by the public for free from your website. You provide free, informal
technical support via e-mail. Y software allows musicians and music companies to manage
media, e-mail lists, digital downloads, website security, and basic commerce provided by online
payment systems. Y software interfaces with X software to allow musicians and music
companies to analyze fan behavior. Although Y software is publicly available, it is intended for a
business or information technology audience with more powerful computing ability. Y software
may be utilized in one of two ways: as a “self-install” version hosted on the user's chosen server
or a “hosted” version on your server. Although Y software is free, you will charge a flat fee for
your hosting services. The fee will cover fixed costs such as hosting and bandwidth. You do
not report any restrictions on the amount of fees you can charge for your hosting services. The
self-install version of Y software is currently available and you anticipate the hosted version to
be available soon. You state that you spend approximately 70 percent of your financial and
personnel resources developing software.

You retain the copyright to X and Y software but distribute it under two publicly available and
commonly used open source licenses, the Berkley Software Distribution (“BSD”) license for any
code that is read by a browser (“interface code”) and the Affero General Public License
(‘AGPL”) license for all other code. In general, both licenses allow unrestricted redistribution of
either the source code or the program, with or without modification, so long as it retains or
reproduces the original copyright notice. You explain that these licenses allow third parties to
use your software’s source code for any purpose, including commercial purposes. All written or
visual material on your website, including your educational material, is distributed under the
publicly available and commonly used Creative Commons BY (“CC BY”) license, which allows
use of copyrighted information so long as attribution to the original work is provided. Any
material covered by the CC BY can be used for any purpose, including commercial purposes.
You state that you will not apply for or hold any patents. You will ask contributors to either
assign copyright to you or to declare their work to be in the public domain.

You also provide consulting services for a fee through which you create online projects for
musicians and music companies. You state that you only accept these projects where it will
contribute to the development of X or Y software and where the customer will allow all code to
be licensed under an open source license. You state that the fees from this activity have been
nominal, a total of $x for four projects to date. However, you do not report any restrictions on
the amount of fees you can charge for your consulting services. You state that these services
are not a major part of your long-term plan.

Your primary source of income is from gifts, grants, and contributions. You also receive some
income from membership, consulting, and other fees. In the future, you intend to allow artists to
pledge a percentage of their net income back to the organization, which will provide you with an
additional income source.

LAW:

I.R.C. § 501(c)(3) exempts from taxation any corporation organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition, or for the prevention of cruelty to
children or animals, provided no part of the net earnings of which inures to the benefit of any
private shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization

described in I.R.C. § 501(c)(3) of the Code, an organization must be both organized and

operated exclusively for one or more of the purposes specified in I.R.C. § 501(c)(3). If. an
organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated
exclusively” for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in I.R.C. § 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(i) provides that an organization may be exempt as an
organization described in I.R.C. § 501(c)(3) if it is organized and operated exclusively for one or
more of the following purposes: religious, charitable, scientific, testing for public safety, literary,
educational, or prevention of cruelty to children or animals.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private
interest. To meet the requirement of this subsection, the burden of proof is on the

organization to show that it is not organized or operated for the benefit of private interests, such
as designated individuals, the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) provides that the term educational relates to: (a) The
instruction or training of the individual for the purpose of improving or developing his
capabilities; or (b) The instruction of the public on subjects useful to the individual and beneficial
to the community.

Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii)(Example 2) provides that an educational organization
includes an organization whose activities consist of presenting public discussion groups,
forums, panels, lectures, or other similar programs. Such programs may be on radio or
television.

Treas. Reg. § 1.501(c)(3)-1(d)(5)(i) provides that a scientific organization must be organized
and operated in the public interest. Therefore, the term scientific, as used in I.R.C. § 501(c)(3),

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includes the carrying on of scientific research in the public interest. “Research,” when taken
alone, is a word with various meanings; it is not synonymous with scientific; and the nature of
particular research depends upon the purpose which it serves. For research to be scientific,
within the meaning of I.R.C. § 501(c)(3), it must be carried on in furtherance of a scientific
purpose. The determination as to whether research is scientific does not depend on whether
such research is classified as fundamental or basic as contrasted with applied or practical.

Treas. Reg. § 1.501(c)(3)-1(d)(5)(ii) provides that scientific research does not include activities
of a type ordinarily carried on as an incident to commercial or industrial operations, as, for
example, the ordinary testing or inspection of materials or products or the designing or
construction of equipment, buildings, etc.

Treas. Reg. § 1.501(c)(3)-1(d)(5)(iii) provides that scientific research will be regarded as carried
on in the public interest: (a) If the results of such research (including any patents, copyrights,
processes, or formula resulting from such research) are made available to the public on a
nondiscriminatory basis; (b) If such research is performed for the United States, or any of its
agencies or instrumentalities, or for a State or political subdivision thereof; or (c) If such
research is directed toward benefiting the public. The following are examples of scientific
research which will be considered as directed toward benefiting the public, and, therefore, which
will be regarded as carried on in the public interest: (1) scientific research carried on for the
purpose of aiding in the scientific education of college or university students; (2) scientific
research carried on for the purpose of obtaining scientific information, which is published in a
treatise, thesis, trade publication, or in any other form that is available to the interested public;
(3) scientific research carried on for the purpose of discovering a cure for a disease; or (4)
scientific research carried on for the purpose of aiding a community or geographical area by
attracting new industry to the community or area or by encouraging the development of, or
retention of, an industry in the community or area.

Rev. Rul. 65-1, 1965-1 C.B. 226, describes an organization which promoted and fostered the
development and design of machinery in connection with commercial operation, and in
connection therewith had the power to sell, assign, and grant licenses with respect to its
copyrights, trademarks, trade names, or patent rights, that did not qualify for exemption from
Federal income tax under I.R.C. § 501(c)(3). The primary purposes of the organization were to
foster the development and design of labor saving agricultural machinery, including the
development of new labor saving ideas and methods, and to conduct pertinent research related
to this purpose. The organization was engaging in development activities of a type incident to
commercial activities and was not exempt under I.R.C. § 501(c)(3).

Rev. Rul. 66-147, 1966-1 C.B. 137, held that an organization formed to survey scientific and
medical literature published throughout the world and to prepare and distribute, free of charge,
abstracts taken from such literature qualified for exemption under I.R.C. § 501(c)(3). The
organization employed technical personnel who surveyed the world’s medical and scientific
publications as soon as they were published. These individuals then selected and abstracted
the articles appearing in the literature. The abstracts were mailed in monthly publications and
were distributed free of charge to anyone having particular interest in the subject matter. The
Service determined that the organization's activities, consisting of reviewing medical and
scientific publications and preparing and disseminating free abstracts of meaningful and
accurate reference materials based on articles appearing in such publications, advanced
education and science.

Rev. Rul. 66-255, 1966-2 C.B. 210, describes an educational organization that qualified for
providing public information. In this ruling, the organization educated the public as to a
particular method of painless childbirth. The organization utilized meetings, films, forums, and
publications to educate the public. The organization carried out its purpose through (a) public
programs of films followed by discussions with doctors and members of the organization; (b)
presentations on local radio stations; (c) meetings conducted by a doctor or a registered nurse
for expectant parents; and (d) pamphlets, manuals, and books which are distributed to libraries,
hospitals, and obstetricians.

Rev. Rul. 66-359, 1966-2 C.B. 219, held that an organization that promoted humane treatment
of laboratory animals by carrying on a program for the accreditation of animal care facilities that
supplied, kept, and cared for animals used by medical and scientific researchers qualified for
exemption under I.R.C. § 501(c)(3). The organization was created to conduct a voluntary
accreditation program for laboratory animal care facilities. The accreditation program was
intended to educate and furnish guidance for the maintenance and operation of laboratory
animal care facilities and to upgrade the standards for such facilities. The organization
prepared and published specific standards and requirements for accreditation of laboratory
animal care facilities. As part of the program, the organization furnished experts to inspect,
evaluate, and recommend improvements to applicants for accreditation. All organizations
having facilities caring for animals used for research purposes were invited to apply for
accreditation. Based on the above, the Service found that the development and publication of
standards for the operation of laboratory animal care facilities and the inspection, evaluation,
and recommendations for improvement of such facilities were activities that supported and
advanced education and science.

Rev. Rul. 67-4, 1967-1 C.B. 121, held that an organization that encouraged basic research of
specific types of physical and mental disorders, that improved educational procedures for
teaching those afflicted with such disorders, and that disseminated educational information
about such disorders qualified for exemption under I.R.C. § 501(c)(3). The organization
published a journal containing abstracts of current information about mental disorders from the
world’s medical and scientific publications. The journal was sold, below cost, to the public. The
organization’s staff consisted of leading pathologists, other medical specialists, and teachers.
The Service determined that an organization engaged in publishing scientific and medical
literature may qualify for exemption under I.R.C. § 501(c)(3) if several conditions are met: (1)
the content of the publication is educational; (2) the preparation of material follows methods
generally accepted as “educational” in character; (3) the distribution of materials is necessary or
valuable in achieving the organization’s educational and scientific purposes, and (4) the manner
in which the distribution is accomplished is distinguishable from ordinary commercial publishing
practices. The Service then held that the organization met the four requirements set forth
above.

Rev. Rul. 68-373, 1968-2 C.B. 206, described an organization whose principal activity was
clinically testing drugs for commercial pharmaceutical companies. These tests were required in
order to comply with Food and Drug Administration requirements that drugs be tested for safety
and efficacy before they can be marketed. The pharmaceutical companies selected the drugs
to be tested and used the results of the tests in their marketing applications to the Food and
Drug Administration. In addition, the results of the tests were freely available for publication in
various scientific and medical journals. Clinical testing is an activity ordinarily carried on as an

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incident to a pharmaceutical company's commercial operations. The fact that the testing must
be done by highly qualified professionals does not change its basic nature. Therefore, such
testing did not constitute scientific research within the meaning of Treas. Reg. § 1.501(c)(3)-
14(d)(5)(i).. The organization failed to qualify for exemption from Federal income tax under I.R.C.
§ 501(c)(3).

Rev. Rul. 69-526, 1969-2 C.B. 115, describes an organization formed by a group of physicians
specializing in heart disease, to research the causes of heart defects and publish treatments,
that qualified for exemption under I.R.C. § 501(c)(3). In this ruling, patients were referred to the
organization by physicians and welfare agencies when it appeared that their condition merited
special study and evaluation. Each patient underwent a medical examination to determine
whether their condition fell within the scope of the organization's research goals. If the patient's
case met the criteria, the patient was accepted without regard to their ability to pay. The data
collected from the patient studies is used by the organization in the development of new
methods and procedures for preventing and treating heart defects. The results of the research,
as well as any medical procedures derived, were made public through publication. The
organization’s research could only be performed by individuals with advanced scientific and/or
technical expertise -i.e., cardiologists. Patients in the organization's study underwent medical
examination pertaining to their heart defects. The medical examinations naturally entail medical
observation and experimentation to formulate and verify objective human bodily responses to
treatment. The results of the organization’s research were publicly disseminated and add to the
knowledge of internal medicine, specifically the causes and treatments for heart disease.

Based upon the above, the Service held that the organization’s research activities were
scientific under ILR.C. § 501(c)(3).

Rev. Rul. 70-129, 1970-1 C.B. 128, held that an organization formed to support research in
anthropology by manufacturing quality cast reproductions of anthropological specimens which
were sold to scholars and educational institutions in a noncommercial manner qualified for
exemption under I.R.C. § 501(c)(3). Specifically, the organization manufactured and distributed
anthropological reproductions that illustrated important developments in human evolution.
These reproductions were manufactured under the direction of qualified scientific personnel with
emphasis placed on quality control to assure accurate reproductions. The reproductions were
then sold to scholars and educational institutions in a noncommercial manner to recoup costs
and expenses. The Service determined that the examination of anthropological specimens was
an important step in anthropological education and research and that the manufacture and sale
of accurate reproductions provided an effective means for making these important research and
study aids generally available. Therefore, the Service held that the distribution of the
reproductions advanced science and education.

Rev. Rul. 70-584, 1970-2 C.B. 114, held that an organization that recruited college students for
government internship programs that related to their course of study qualified for exemption
under I.R.C. § 501(c)(3). The internship program advanced the students’ education because it
trained the individual for the purpose of improving or developing his capabilities in his chosen
field of study.

Rev. Rul. 71-506, 1971-2 C.B. 233, describes an engineering society formed to engage in
scientific research in the areas of heating, ventilating, and air conditioning (“HVAC”) for the
public that qualified as a scientific research organization under I.R.C. § 501(c)(3). The Service
found that the organization was comprised of HVAC engineers, architects, educators and others

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who have a professional interest in HVAC-with full membership in the organization limited to
persons with 8 years of experience in the science related to HVAC. The organization's research
was conducted by a full-time paid staff in the organization’s own laboratory. Typical subjects of
investigation for the organization included the effects of solar radiation through various
materials, the phenomena of heat flow and transfer, development of data on air friction, the
problems of panel heating, and the physiological effects of air conditioning upon the human
body. The organization's research was devoted exclusively to the development of data on basic
physical phenomena, which data can be used by anyone. The organization published a regular
journal and maintained a library where its data, and specifically scores of model codes of
minimal standards for HVAC, are stored for public review. The Service concluded that this
organization engaged in scientific research. Specifically, the organization used observation and
experimentation to formulate and verify facts or natural laws pertaining to HVAC —such as the
effects of solar radiation through various materials. its activities were performed by
professionals with extensive scientific and/or or technical expertise in HVAC —such as members
with a minimum of 8 years experience in HVAC science. The organization conducted
experimentation in its own laboratory. The organization's activities added to the knowledge of
HVAC science, specifically with the organization publishing scores of model codes of minimum
standards for HVAC. All the organizations data was maintained in a library and was publicly
available. Based upon the above, the Service held that the organization's research activities
were scientific under I.R.C. § 501(c)(3).

Rev. Rul. 75-284, 1975-2 C.B. 202, held that an organization that provided high school
graduates and college students with uncompensated work experience in selected trades or
professions qualified for exemption under I.R.C. § 501(c)(3). The program provided students
with exposure to five of twenty-five trades or professions. Such exposure advanced the
students’ education by familiarizing the students with various career fields and developing the
students’ capabilities.

Rev. Rul. 77-365, 1977-2 C.B. 192, describes an educational organization that conducted
clinics, workshops, lessons, and seminars at municipal parks and recreational areas to instruct
and educate individuals in a particular sport.

Rev. Rul. 78-310, 1978-2 C.B. 173, held that an organization that provided law students with
practical experience in exempt public interest law firms and legal aid societies qualified for
exemption under I.R.C. § 501(c)(3). The organization advanced the law students’ education by
developing or improving the students’ capabilities.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the
Supreme Court held that the presence of private benefit, if substantial in nature, will destroy an

organization's tax-exempt status regardless of the organization's other charitable purposes or
activities.

In IIT Research Institute v. United States, 9 Cl. Ct. 13, (1985), the issue before the U.S. Court of
Claims was whether certain activities of which a recognized I.R.C. § 501(c)(3) tax-exempt
scientific research organization was engaging in would constitute scientific research and thus
not be subject to unrelated business income taxation under I.R.C. § 512. The Court held that “in
the context of this litigation, ‘science’ will be defined as the process by which knowledge is
systematized or classified through the use of observation, experimentation, or reasoning.” The
Court further held that as scientific research does not include activities of a type ordinary carried

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on as incident to commercial or industrial operations, the organization was found not to be
involved “in the commercialization of the products or processes developed as a result of its
research,” as it “would only develop a project to the point where the research principles were
established.” The Court held that the projects at issue were scientific.

In Midwest Research Institute v. United States, 554 F. Supp. 1379, (W.D. Mo 1983), the issue
before the U.S. District Court was whether certain activities of which a recognized I.R.C. §
501(c)(3) tax-exempt scientific research organization was engaging in would constitute scientific
research and thus not be subject to unrelated business income taxation under I.R.C. § 512.
The Court held that “while projects may vary in terms of degree of sophistication, if professional
skill is involved in the design and supervision of a project intended to solve a problem through a
search for a demonstrable truth, the project would appear to be scientific research.” The Court
further held that as scientific research did not include activities of a type ordinary carried on as
incident to commercial or industrial operations, the organization was found not to engage in the
ordinary or routine testing of products and processes, but rather engaged in “testing done to
validate a scientific hypothesis.” The Court concluded that the projects at issue were scientific.

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court
determined that the American Campaign Academy, a training program for political campaign
professionals, operated for the private benefit of the Republican party because its curriculum
was tailored to Republican interests, its graduates worked for Republican candidates and
incumbents, and it was financed by Republican sources. The Tax Court defined private benefit
as “nonincidental benefits conferred on disinterested persons that serve private interests.”
Private benefits included “advantage; profit; fruit; privilege; gain; [or] interest.”

RATIONALE:

An organization seeking tax-exempt status under I.R.C. § 501(c)(3) must be organized and
operated exclusively for charitable or other exempt purposes with no part of its net earnings
inuring to the benefit of any private shareholder or individual. See also Treas. Reg. §
1.501(c)(3)-1(a)(1). The presence of a single non-exempt purpose, if substantial in nature, will
destroy exemption under I.R.C. § 501(c)(3) regardless of the number or importance of any other
exempt purposes. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279
(1945). The materials you submitted state that you are seeking tax-exempt status under I.R.C.
§ 501(c)(3): (1) as an educational organization for educating the public about intellectual
property issues, copyright issues, and music industry best practices; and (2) as a scientific
organization for creating open source software. Based upon a review of your activities, you are
not described in I.R.C. § 501(c)(3) as explained below.

1. Educational Purpose

You are not described in I.R.C. § 501(c)(3) as an educational organization for providing
information on your website relating to best practices and current trends in the music industry.
The term “educational”, as used in I.R.C. § 501(c)(3) relates to (a) the instruction or training of
the individual for the purpose of improving or developing his capabilities; or (b) the instruction of
the public on subjects useful to the individual and beneficial to the community. Treas. Reg. §
1.501(c)(3)-1(d)(3)(i). The regulations provide several examples of organizations that qualify as
educational organizations, including ‘organizations whose activities consist of presenting public
discussion groups, forums, panels, lectures, or other similar programs.” See Treas. Reg. §

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1.501(c)(3)-1(d)(3)(ii), example (2). One such educational organization was described in Rev.
Rul. 66-255, 1966-2 C.B. 210, which describes an organization formed to educate the public as
to a particular method of painless childbirth. The organization carried out its purpose through
(a) public programs of films followed by discussions with doctors and members of the
organization; (b) presentations on local radio stations; (c) meetings conducted by a doctor ora
registered nurse for expectant parents; and (d) pamphlets, manuals, and books which are
distributed to libraries, hospitals, and obstetricians. Another example of a qualifying educational
organization was described in Rev. Rul. 77-365, 1977-2 C.B. 192, in which the organization
qualified for its activities of conducting clinics, workshops, lessons, and seminars at municipal
parks and recreational areas to instruct and educate individuals in a particular sport. Here, you
are not conducting any of the activities described above. You do not conduct any public
discussion groups, forums, panels, lectures or similar programs; all of your educational
instruction occurs online on your website and blog. These activities are best described as
providing product information and are analogous to a product manual, which does not rise to the
level of educational as required under |.R.C § 501(c)(3).

Furthermore, you are not described in I.R.C. § 501(c)(3) as a charitable organization for
providing information on your website relating to best practices and current trends in the music
industry. The revenue rulings provide several examples of organizations that advance
education. For example, the organization described in Rev. Rul. 70-584, 1970-2 C.B. 114,
recruited college students to participate in a government internship program, the organization
described in Rev. Rul. 75-284, 1975-2 C.B. 203, provided high school graduates and college
students with uncompensated work experience in selected trades and professions, and the
organization described in Rev. Rul. 78-310, 1978-2 C.B. 173, provided law students with
practical experience in exempt public interest law firms and legal aid societies. Here, you are
not conducting any of the activities described above.

2. Scientific Purpose

You also claim to qualify for tax-exemption as a scientific research organization for your
activities related to the development open source software. For an organization to qualify as an
ILR.C. § 501(c)(3) scientific research organization, the organization must (1) engage in scientific
research; (2) the scientific research must not include activities that are incident to commercial or
industrial operations; and, (3) the scientific research must be undertaken in the public’s interest.
Treas. Reg. § 1.501(c)(3)-1(d)(5).

Under the first element, the organization seeking exempt status as a scientific research
organization must be engaging in scientific research. Treas. Reg. § 1.501(c)(3)-1(d)(5). For
research to be “scientific,” within the meaning of I.R.C. § 501(c)(3), it must be carried on in
furtherance of a ‘scientific’ purpose. Treas. Reg. § 1.501(c)(3)-1(d)(5)(i). Although the
Regulations provide that research that is scientific can be practical or applied as well as
fundamental or theoretical, the term “scientific” is not clearly identified in either the Code or the
Treasury Regulations. However, several revenue rulings and cases have interpreted “science”
and “scientific” in terms of scientific research for I.R.C. § 501(c)(3) purposes.

For example, in Rev. Rul. 71-506, 1971-2 C.B. 233, the Service held that an engineering society
qualified as a scientific research organization under I.R.C. § 501(c)(3). The organization was
operated to engage in scientific research in the areas of heating, ventilation, and air conditioning
(‘HVAC’) for the public benefit. The organization was comprised of HVAC engineers,

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architects, and others who had a professional interest in HVAC. Its main activity was research
conducted by highly skilled personnel in the organization’s own laboratory, which personne!
used observation and experimentation to formulate and verify facts or natural laws pertaining to
HVAC—such as the effects of solar radiation through various materials, the phenomena of heat
flow and transfer, development of data on air friction, the problems of panel heating, and the
physiological effects of air conditioning upon the human body. The organization published its
results, along with papers related to its findings in its journal. These results became model
codes of minimum standards for HVAC. The organization’s research was devoted exclusively
to the development of data on basic physical phenomena, which data could be used by anyone,
and not on the development or improvement of particular products or services. The testing and
improvement of commercial products was forbidden by the organization's charter. The
organization's activities added to the knowledge of HVAC science.

In another example, the Service held that an organization formed by a group of physicians
specializing in heart disease to research the causes of heart defects and publish treatments,
qualified under I.R.C. § 501(c)(3). Rev. Rul. 69-526, 1969-2 C.B. 115. Patients were referred to
the organization by physicians and welfare agencies when it appeared that their condition
merited special study and evaluation. The data collected from the patient studies was used by
the organization in the development of new methods and procedures for preventing and treating
heart defects. The results of the research, as well as any medical procedures derived, were
made public through publication. The medical examinations entailed medical observation and
experimentation to formulate and verify objective human bodily responses to treatment. The
results of the organization’s research was publicly disseminated and added to the knowledge of
internal medicine, specifically the causes and treatments for heart disease.

Furthermore, two court cases have interpreted “science” and “scientific” in terms of scientific
research for I.R.C. § 501(c)(3) purposes. Specifically, the Court of Claims in iiT Research
Institute v. United States, 9 Cl. Ct. 13, 20 (1985), held that “in the context of this litigation,
‘science’ will be defined as the process by which knowledge is systematized or classified
through the use of observation, experimentation, or reasoning.” The court further held that as
scientific research does not include activities of a type ordinary carried on as incident to
commercial or industrial operations, the organization must not be involved in the
commercialization of the products or processes developed as a result of its research, but rather
must only “develop a project to the point where the research principles are established.” Id at

21. Whereas, the District Court in Midwest Research Institute v. United States, 554 F. Supp.
    1379, 1386 (W.D. Mo 1983), aff'd 744 F2d 635, found that “while projects may vary in terms of
    degree of sophistication, if professional skill is involved in the design and supervision of a
    project intended to solve a problem through a search for a demonstrable truth, the project would
    appear to be scientific research.” The Court further held that as scientific research does not
    include activities of a type ordinary carried on as incident to commercial or industrial operations,
    the organization was found not to engage in the ordinary or routine testing of products and
    processes, but rather engaged in “testing done to validate a scientific hypothesis.” !d.

Based upon the above law, you do not meet the first and second elements for recognition as a
scientific research organization under I.R.C. § 501(c)(3) because you do not engage in scientific
research and your development activities are of a type incident to commercial or industrial
operations. Unlike the organizations described above, you are not utilizing objective scientific
methods to formulate or verify facts or natural laws, or to search for a demonstrable truth. You
do not propose a hypothesis pertaining to the verification of facts or natural laws. You do not

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utilize scientific methods to test this hypothesis and objectively record the results of your
experimentation. Finally, you do not objectively evaluate your research results and publish the
findings for the public to utilize. Instead, you describe your scientific research activities as
developing open source software. These activities can best be described as routine product
development, which are a type incident to commercial operations. Under Treas. Reg. §
1.501(c)(3)-1(d)(5)(ii), scientific research does not include activities carried on as an incident to
commercial or industrial operations, such as the design or improvement of goods or services.
For example, in Rev. Rul. 65-1, 1965-1C.B, 226, the Service held that an organization operated
to research, design and develop labor saving agricultural machinery was not a scientific
organization under I.R.C. § 501(c)(3) but rather was engaging in product development incident
to commercial purposes. Similarly, in Rev. Rul. 68-373, 1968-2 C.B. 206, the Service held that
an organization that engaged in clinical testing of pharmaceuticals by highly qualified personnel
was not a scientific research organization under I.R.C. § 501(c)(3) but rather was engaging in
ordinary testing necessary to comply with standards to bring the pharmaceuticals to market.
Here, you are engaging in routine software development similar to what a commercial software
company engages in to develop new products to be competitive in the market. As such, your
activities are incident to commercial operations and are not exempt under I.R.C. § 501(c)(3).

Finally, you do not meet the third element for a scientific research organization, which requires
that scientific research to be directed toward benefiting the public. Treas. Reg. § 1.501(c)(3) -
1(d)(5)(iii). Your research does not benefit the public. First, you do not publish the results of
your research. See Treas. Reg. § 1.501(c)(3)-1(d)(5)(iii)(a). Rather, you make X and Y
software’s source code and documentation, not the results of your research, available to the
public. The release of X and Y software’s source code is akin to the release of a commercial
product, not the publication of scientific research. Second, your research is not performed for
the United States. See Treas. Reg. § 1.501(c)(3)-1(d)(5)(iii)(b). Third, your research is not
carried on for the purpose of aiding in the scientific education of college or university students;
obtaining scientific information, which is published in a treatise, thesis, trade publication, or in
any other form that is available to the interest public; discovering a cure for a disease; or aiding
a community or geological by attracting new industry to the community or area or by
encouraging the development of, or retention of, an industry in the community or area. See
Treas. Reg. § 1.501(c)(3)-1(d)(5)(iii)(c). Production of X and Y software benefits musicians and
music companies, not the public generally. Therefore, you do not qualify under I.R.C. §
501(c)(3) as a scientific research organization.

You also are not described in I.R.C. § 501(c)(3) as a charitable organization advancing science
for your activities related to the continued research and development of open source software.
Activities that advance science include reviewing medical and scientific publications and the
disseminating the abstracts of those articles for free, conducting a voluntary accreditation
program for laboratory animal care facilities, publishing a journal with current technical literature
relating to physical and mental disorders, and selling quality cast reproductions of
anthropological specimens to scholars and educational institutions. Rev. Rul. 66-147, 1966-1
C.B. 137; Rev. Rul. 66-359, 1966-2 C.B. 219; Rev. Rul. 67-4, 1967-1 C.B. 121; Rev. Rul. 70-
129, 1970-1 C.B. 128. Here, you are not conducting any of the activities described above.
Therefore, your activities will not be regarded as advancing science within the meaning of I.R.C.
§ 501(c)(3).

3. Private Benefit

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An organization is not organized or operated exclusively for one or more exempt purposes
unless it serves a public rather than private interest. Treas. Reg. § 4.501(c)(3)-1(d)(1) (ii).
Private benefit has been defined as “nonincidental benefits conferred on disinterested persons
that service private interests.” American Campaign Academy v. Commissioner, 92 T.C. 1053
(1989). “Prohibited private benefit may include an ‘advantage; profit; fruit; privilege; gain; [or]
interest.” Id. It is the organization’s burden to establish that it is not organized or operated for
the benefit of private interests such as designated individuals, the creator or his family,
shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

You benefit the private interests of musicians and music companies by providing open source
software tools assisting with the promotion, sale, and distribution of the musicians’ music. X
and Y software are broadly available to the public under two commonly and widely used open
source licenses. Both licenses allow redistribution of the source code or the software, with or
without modification, so long as the subsequent product retains or reproduces the original
copyright notice. Both licenses allow for the commercial use of the original source code or
software. Thus, anyone may download X or Y software and redistribute it, with or without
modification, for a fee. However, both programs target a specific audience—musicians and
music companies. That audience derives a commercial advantage from your open source
programs because, in its absence, the musician or company would either need to develop their
own software or would have to purchase commercial software. Thus, by providing open source
software, you reduce or eliminate production costs and provide musicians and music companies
with a distinct commercial advantage. Furthermore, musicians and music companies profit from
being able to redistribute your open source programs, with or without modification, for a fee.
Thus, you are operated for private rather than public interests in violation of I.R.C. § 501(c)(3).

CONCLUSION:

Based on the above, we have determined that you fail to meet the requirements necessary to
be recognized as a tax-exempt organization under I.R.C. § 501(c)(3). You have the right to file
a protest if you believe this determination is incorrect. To protest, you must submit a statement
of your views and fully explain your reasoning. You must submit the statement, signed by one
of your officers, within 30 days from the date of this letter. We will consider your statement and
decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, | declare that | have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

This declaration must be signed by an elected officer, a member of the board of
directors, or a trustee rather than an attorney or accountant.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done

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so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:

Internal Revenue Service
TE/GE (SE:T:EO:RA:T3)

1111 Constitution Ave, N.W.
Washington, DC 20224

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Holly O. Paz
Director, Exempt Organizations Rulings and
Agreements