Open-source media tools fail the operational test

Plain-English summary

An organization sought recognition under IRC § 501(c)(3) for developing free and open-source photo, audio, and video tools. The IRS found a substantial nonexempt purpose because the tools could be used by anyone for commercial, recreational, personal, lobbying, or campaign purposes, and the organization did not limit users to a charitable class. It also rejected claims that the tools relieved the poor, promoted the arts in a charitable manner, or constituted a public work. Publishing source code, object code, user guides, and wikis did not provide the instruction or training required for an educational purpose. The IRS treated the organization's software work as routine product development incident to commercial operations rather than scientific research in the public interest, and the denial became final after no protest or Appeals request.

Ruling snapshot

• Question: Did developing and publishing open-source media tools qualify the organization for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2), 1.501(c)(3)-1(d)(3), and 1.501(c)(3)-1(d)(5); Rev. Proc. 2014-9

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Release Number: 201505040 Contact Person:
Release Date: 1/30/2015
Date: 11/06/2014 Identification Number:
UIL Code: 501.00-00
501.03-00 Contact Number:
Employer Identification Number:
Form Required To Be Filed:
Tax Years:
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. We also sent you
a letter notifying you of your right to request a review of your application by the Appeals Office,
and gave you 30 days to request review in writing. Since we did not receive a protest or request
for review within the requisite 30 days, the proposed adverse determination is now final.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. 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
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,

Tamera Ripperda
Director, Exempt Organizations

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: 05/22/2014 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
UIL: Section 501, 501.00-00, 501.03
Legend:
Date =
State =
T =
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 § 501(c)(3). The basis for our conclusion
is set forth below.

Facts

You are a State non-profit non-membership corporation formed on Date for charitable and
scientific purposes. Your Articles of Incorporation (“Articles”) state that you are organized and
operated exclusively for charitable and scientific purposes within the meaning of § 501(c)(3).
Your Articles forbid inurement and campaign intervention, limit legislative activities, and upon
dissolution your assets must be distributed to § 501(c)(3) organizations. You also have a
conflict of interest policy.

You were formed to develop free and open source software that lets users easily work with
photos, audio, and video modules in the T software environment including a photo organizing
tool, a programmer tool, an audio editing tool, and a video editing tool (i.e. the “Tools”). You
state that your specific activities are: (1) writing free and open source software, (2) maintaining
a website including online forums, a wiki, and user guide, and (3) awareness campaigns and
fundraising activities. Ninety percent (90%) of your activities are developing open source
software. The remaining ten percent (10%) is divided between fundraising and promotion of
open source software and maintaining your website.

You publish the Tools under the GNU Lesser General Public License 2.1 which grants every
person the royalty free rights “to reproduce, prepare derivative works of, sub-license, and
distribute their contributions and derivative works thereof.” It also allows any person to run,

copy, redistribute, and modify code for any purpose provided distribution of modified and
unmodified works are subject to the same license. The Tools will be included in the major T
distributions by other persons to be used by users around the world. You are not publishing or
distributing these T distributions.

You also state that the Tools are included in a free and open source software operating system
that is intended for school use. The software is assembled by private persons for distribution to
schools districts. However, you have not provided a copy of the software package, description
of the other software the Tools are bundled with, or even reported how many copies of the Tools
were distributed to school districts. You are not publishing or distributing this software package.

You describe your charitable purpose as providing free software, complete with documentation,
user-guides and responsive support and that your main activity is the promotion and
development of free and open source software that benefits the general public. Your
“production of free and open source software aims to provide a no-cost alternative to software
that can sell for as much as $1,000 a license.” You “aim to construct services and tools
provided free to all, that will allow the poor access to what would otherwise likely be
inaccessible tools” thereby providing relief to the poor or underprivileged. However, the Tools
have been downloaded many times, but you do not know who the users are or whether they use
them for exempt or private purposes. You also do not know how many users, if any, are poor or
underprivileged.

You state that the Tools, along with the source code and user guides “enable artistic production
of non-commercial and commercial works of art” by supporting the development of digital artistic
media and is thereby promoting the arts. You do not screen the content produced using the
Tools to ensure it is not political campaign activity, lobbying, unsupported opinion, or furthering
any other prohibited purpose or limited activity.

Although not included in your Articles, you also claim exemption through educational activities.
You state that you are educating because the primary characteristic of open source software,
the required sharing of source and object code, has allowed people around the world to learn
and apply their skills by studying and improving the Tools code. Publishing the source code
allowing people to study it comprises most of your educational efforts: “Free and open source
software fundamentally has an educational component to it.” You do provide training and
educational materials without charge but that is an insubstantial amount of your efforts.

When asked to provide specific information and detail regarding your educational activities, you
provided your website address which included user guides and Wikis for the Tools and provided
links to websites for other organizations’ materials. You state that you provide, maintain and
update these educational guides for users and specifications and documentation for both users
and developers in conjunction with each of your projects. You participated in some conferences
but did not describe or provide educational materials. You state that you also intend to provide
instruction on how to use the Tools but have not provided copies of any educational or
instructional materials. You state that you provide mailing lists where the public can ask
questions and your engineers are available from time to time via Internet Relay Chat to discuss
the Tools with the public. However, these activities are an insubstantial part of your efforts.

You did not provide detailed information on how your activities further scientific purposes except

to state that a “free and open source software project creates a public domain of technical
knowledge that anyone can learn and use.” You also state that by creating programs as free
and open source software, you hope “to spur innovation and education in the computer science,
software engineering, photography, sound engineering, and video engineering fields. You do
make the Tools source code and object code available to the general public on a
nondiscriminatory basis by publishing it on your website for unrestricted downloading, subject to
the open source licenses.

You will own any copyrights to code authored by your employees. However, the Tools
incorporate code licensed to you by the authors who are the copyright holders. You require
such code be licensed to you under open source compatible licenses so you “have standing to
protect the code so that it can remain viable over the long term for the user community, ensuring
the broadest public benefit.” You do not require code authors donate copyrights to their code to
you. These copyright holders retain the power to relicense the code they own under a non-free
license.

Law

I.R.C. § 501(a) provides for the exemption from federal income tax for organizations described
in § 501(c)(3). Such organizations are recognized if they are organized and operated
exclusively for religious, charitable, educational purposes, or other exempt purposes.

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 that
accomplish one or more of such exempt purposes specified in § 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)(2) provides that the term “charitable” is used in § 501(c)(3) in its
generally accepted legal sense and includes, among other things, lessening the burdens of
government, relief of the poor and distressed or of the underprivileged, advancement of
education or science, erection or maintenance of public buildings, monuments, or works, and
promotion of social welfare by organizations designed to accomplish any of the above purposes,
or in part to defend human and civil rights secured by law.

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) provides that a scientific organization must be organized and
operated in the public interest. Therefore, the term scientific, as used in § 501(c)(3), includes
the carrying on of scientific research in the public interest. 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. 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.

Section 4.03 of Rev. Proc. 2014-9, 2014-2 I.R.B. 281 .03 requires applicants describe
“proposed activities . . . in sufficient detail to permit a conclusion that the organization will clearly
meet the particular requirements for exemption pursuant to the section of the Code under which
exemption is claimed,” that “mere restatements” of exempt purposes does not meet this
requirement, that “[t]he organization must fully describe all of the activities in which it expects to
engage, including the standards, criteria, procedures, or other means adopted or planned for
carrying out the activities. . . “, and that “[w]here the organization cannot demonstrate to the
satisfaction of the Service that it qualifies for exemption pursuant to the section of the Code
under which exemption is claimed, the Service will generally issue a proposed adverse
determination letter or ruling.”

In Rev. Rul. 65-1, 1965-1 C.B. 226, an organization that made research grants for the
development of new machinery to be used in particular commercial operations and retained all the
rights to the new developments, did not qualify for exemption under § 501(c)(3).

Rev. Rul. 65-2, 1965-1 C.B. 227 holds that a foundation operated exclusively to teach children a
sport by holding clinics conducted by qualified instructors in schools, playgrounds, and parks and
by providing free instruction, equipment, and facilities qualifies for exemption under § 501(c)(3).

Rev. Rul. 66-179, 1966-1 C.B. 139 provides illustrations under which garden clubs may establish
exemption as charitable or educational organizations, civic organizations, horticultural
organizations, or as social clubs.

Rev. Rul. 66-255, 1966-2 C.B. 210 holds that a nonprofit organization which through meetings,
films, forums, and publications educates the public in a particular method of painless childbirth is
entitled to exemption.

Rev. Rul. 70-186, 1970-1 C.B. 128, held that an organization formed to preserve a lake as a
public recreational facility and to improve the condition of the water in the lake to enhance its
recreational features qualified for exemption under § 501(c)(3) as a charitable organization that
erected or maintained a public work. The ruling determined that, by treating the water,
removing algae, and otherwise improving the condition of the water, the organization ensured
the continued use of the lake for public recreational purposes and therefore performed a
charitable activity. Furthermore, the benefits of the organization’s activities flowed principally to
the general public through the maintenance and improvement of public recreational facilities.

In Rev. Rul. 71-29, 1971-1 C.B. 150, we held that providing the city transit authority with the
funds necessary to insure that bus service for the city is continued, is a charitable disbursement
furthering exempt purposes. The charitable element in facilitating public transportation is

established in the Statute of Charitable Uses, 43 Eliz. I, c.4 (1601), which recognized as
charitable the ‘repair of bridges, ports, havens, causeways . . . and highways’.

Rev. Rul. 76-443, 1976-2 C.B. 149, a nonprofit organization that makes facilities and equipment
available to the general public for the production of noncommercial educational or cultural
television programs for communication to the public via public and educational channels of a
commercial cable television company qualifies for exemption under § 501(c)(3).

In Rev. Rul. 77-42, 1977-1 C.B. 142, the Service held that a nonprofit organization that sets up
closed-circuit radio transmitting equipment in multiple residence structures such as nursing
homes, rest homes, and convalescent homes, providing senior citizens within the buildings an
opportunity to listen to free, non-commercial and educational broadcasts concerning their
special needs, is operated exclusively for charitable and educational purposes and qualifies for
exemption under § 501(c)(3).

In Rev. Rul. 79-369, 1979-2 C.B. 226, the Service held that an otherwise qualifying organization
created to develop and promote an appreciation of contemporary symphonic and chamber
music by recording and selling, primarily to libraries and educational institutions, new works of
unrecognized composers as well as neglected works of more established composers is exempt
under § 501(c)(3). The music selected for recording has a limited commercial market and is not
generally produced by the commercial music publishing and recording industry for sale to the
public. Some records are provided free to radio stations operated by educational institutions.

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 a single non-exempt purpose, if substantial in nature,
will destroy the exemption regardless of the number or importance of truly exempt purposes.
The Court found that the trade association had an “underlying commercial motive” that
distinguished its educational program from that carried out by a university.

In Syrang Aero Club Inc. v. Commissioner, 73 T.C. 717 (1980), the tax court upheld the
Service’s position that the organization was not conducting educational activities since it did not
provide any formal instruction, it did not provide classes, lectures or instructional material. The
Court determined that the organization did not serve an “educational” or “charitable” purpose
even though it was conducting flying lessons.

American Campaign Academy v. Commissioner, 92 T.C. 1053, 1076 (1989) discussing
Columbia Park & Recreation Assn. v. Commissioner, 88 T.C. 1, 18-21 (1987), aff'd. without
published opinion 838 F.2d 465 (4th Cir. 1988).

Application of Law

You are organized exclusively for charitable and scientific purposes. However, you are not
described in § 501(a) because you are not operating for exclusively charitable or scientific
purposes. You also claim that you are organized for educational purposes, but based on the
information provided you are not operated for educational purposes. You have a substantial
nonexempt purpose. Your purpose is to produce a product. You do not to serve a charitable
class, educate individuals, or perform scientific research in the public interest.

1. You Have A Substantial Nonexempt Purpose

You have a substantial nonexempt purpose because you develop software published under
open source compatible licenses that authorize use by any person for any purpose, including
nonexempt purposes such as commercial, recreational, or personal purposes, including
campaign intervention and lobbying. In Better Business Bureau of Washington, D.C. Inc. v.
United States, 326 U.S. 279 (1945) the Supreme Court found that even though an organization
has some exempt activities, if there is one activity that is substantial and does not further an
exempt purpose, the organization will not qualify for exemption. Open source software is
published under licenses that allow any person to use the software, or parts of the software, for
any purpose including nonexempt purposes such as commercial, recreational, or personal
purposes. Therefore you have a nonexempt purpose. As developing software is your primary
activity it is a substantial activity. Accordingly, you have a substantial nonexempt purpose, and
are not exempt under § 501(c)(3).

2. Developing Open Source Software Does Not Further A Charitable Purpose

Your activities do not further a charitable purpose because you do not limit your service to a
specific charitable class. The class of people served by the Tools must be both indefinite and
have charitable characteristics. See American Campaign Academy v. Commissioner, 92 T.C.
1053, 1076 (1989) discussing Columbia Park & Recreation Assn. v. Commissioner, 88 T.C. 1,
18-21 (1987), aff'd. without published opinion 838 F.2d 465 (4th Cir. 1988). Indefinite means
that the specific members comprising the class are not fixed. The public is an indefinite class,
as are the users of the T operating system whom are the users of the Tools. The magnitude
and breath of the benefited class does not cause it to be inherently charitable. Id. The large
size of the benefited class does not diminish the need for the class to have charitable
characteristics.

Charitable characteristics are analyzed qualitatively. The court in American Campaign
Academy at 1077 stated:

Class size is only one factor to be considered in our qualitative analysis; it is not
the sole determinant. Accordingly, petitioner must show that republican entities
and candidates possess charitable characteristics in order that the entities and
candidates be deemed members of a charitable class. See § 1.501(c)(3)-1(d)(2),
Income Tax Regs., for a noninclusive list of charitable characteristics: poor,
distressed, underprivileged, religious, educational, scientific, etc. The large size
of the Republican party, which petitioner submits is ultimately benefited by its
graduates, does not diminish the need for such showing.

You have not shown that all members of public share any charitable characteristics. The
general public is by definition not poor (i.e. income <60% of the area median income),
distressed, elderly, underprivileged, or sharing any other charitable characteristic and do not
meet the definition of a charitable class. Similarly, users of the T operating system and the
Tools do not share any charitable characteristics: the only common characteristic they have is
that they are users of the T software environment. We also note that the Tools licensing allows
programmers to incorporate some or all of the Tools code into their own software programs.
You have not shown that programmers are a charitable class.

You cite Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008) to argue that “multiple agency
approvals of comparable organizations all support the charitable nature of nonprofit free
software organizations generally.” However, at issue was “the ability of a copyright holder to
dedicate certain work to free public use and yet enforce an ‘open source’ copyright license to
control the future distribution and modification of that work.” The court used terms like ‘public
use’, ‘public license’, ‘use by the public’, ‘dedicate works to the public’, and the like in the
context of Copyright law, not within the meaning of § 501, the underlying regulations, or
administrative or judicial rulings. Copyright and tax-exempt laws are not co-extensive.
Copyright owners are not a recognized charitable class.

Whatever public good the Tools provide, it is not the type of benefit to the community
contemplated by § 501(c)(3). Not all organizations which incidentally enhance the public good
will be classified as “public” organizations within the meaning of § 501(c)(3). For example, while
political campaigns clearly provide a benefit to the community as part of the democratic process,
§ 501(c)(3) expressly prohibits participation by exempt organizations. Any amount of campaign
intervention disqualifies an otherwise exempt organization. See I.R.C. § 501(c)(3). Similarly,
commerce clearly provides an economic benefit to the community, but § 1.501(c)(3)-1(c)(1) and
§§ 511-514 limit the kinds and amounts of commerce exempt organizations may conduct. It is
significant that Congress enacted special exemption provisions for certain types of
organizations which would be unable to meet the stricter § 501(c)(3) tests which require service
to public interests rather than to private ones. Accordingly, because you do not limit use of the
Tools to a charitable class, the development and distribution of the Tools to the public under
open source licenses is not the type of benefit to the community contemplated by § 501(c)(3)
and does not further a charitable purpose.

A. You Do Not Serve the Poor Or Underprivileged

You claim that developing and publishing the Tools under open source licenses serves the poor
and underprivileged. You state that while you know how many times the Tools or components
of the Tools are downloaded, you do not know who the users are nor for which purposes they
use the Tools. You also do not know if any users are poor or underprivileged, much less the
percent of all users whom are members of a charitable class. Mere publishing under open
source licenses for all to use does not show that the poor and underprivileged actually use the
Tools. Unlike the organization in Rev. Rul. 77-42, supra, you have not shown the Tools are
focused on the special needs of the poor or underprivileged. Applicants bear the burden of
demonstrating their activities exclusively further exempt purposes. See § 4.03(3) of Rev. Proc.
2014-9, 2014-2 I.R.B. 281 (“Where the organization cannot demonstrate to the satisfaction of
the Service that its proposed activities will be exempt, the Service will generally issue a
proposed adverse determination letter or ruling.”). Because you have not shown that the Tools
in fact benefit members of a charitable class, you are not operated exclusively for charitable
purposes within the meaning of § 501(c)(3).

B. Your Tools Do Not Further A Charitable Purpose

You note the Tools “enable artistic productions of non-commercial and commercial works of art”
and therefore promotes the arts. Promotion of the arts is a charitable purpose. Unlike the
organization in Rev. Rul. 79-369, supra that promoted the arts in part by recording and

distributing performances of new works of unrecognized composers as well as neglected works
of more established composers, primarily to educational institutions you are providing the digital
equivalent of paint, paintbrushes, and canvases which artists use to create art. You do not limit
your distribution and do not know who uses the Tools much less if they use them for artistic
purposes. Unlike the organization in Rev. Rul. 76-443, supra, which provided facilities and
equipment for members of the public to use to produce noncommercial educational and cultural
content for broadcast via public and educational channels, you do not know who uses the Tools
much less what kind of content they create with the Tools.

Also, you specifically pointed to the royalty free nature of the Tools as an alternative to existing
commercial products costing up to $1,000 per license; the very antithesis of the organization in
the Rev. Rul. 79-369. You lack the essential tax characteristics that qualified the organizations
described in Rev. Ruls. 79-369 and 76-443 for exemption. Accordingly, developing and
distributing the Tools to the public under open source licenses does not promote and develop
the arts in a way that is recognized as furthering a charitable purpose.

C. Software Is Not A Public Work

You state that your “main activity in producing free and open source software is effectively the
erection of a public work” because your primary expense is “the employment of engineers to
build software tools that, through free and open source licensing, are dedicated to the public.”
The development and distribution of software is not a public work even if published under open
source or creative commons compatible licenses because software is not a facility ordinarily
provided to the community at public expense. Treas. Reg. 1.501(c)(3)-1(d)(2) defines the term
charitable to include “erecting or maintaining public buildings, monuments, or works.” This
language slightly broadens the original formulation from four centuries ago. The Statute of
Charitable Uses, 43 Eliz. I, c.4 (1601) recognized as charitable the ‘repair of bridges, ports,
havens, causeways... and highways’. Quoted in Rev. Rul. 71-29. The regulation also closely
parallels the synthesis provided by Restatement 3rd Trusts § 28 which defines charitable to
include government or municipal purposes such as the “construction or maintenance of public
buildings, bridges, streets, highways or other public facilities. . .". The charitable purpose
underlying public works is to provide the “community with facilities . . . ordinarily provided at
public expense.” See Comment (k) Restatement 3rd Trusts; Scott and Ascher on Trusts 5th ed.
§ 38.6. This same consistency of language is also found in the ordinary meaning of “public
works” defined variously as: “[s]tructures, such as roads or dams built by the government for
public use and paid for by public funds.” Black’s Law Dictionary, 7th ed.; “[a]ll works of a fixed
nature, such as highways, canals, waterworks, docks, etc., constructed by public bodies for
public use, protection, or enjoyment.” Ballentine’s Law Dictionary; and, “construction or
engineering operations carried out by or for the State or local government on behalf of the
community.” Oxford’s English Dictionary. Our rulings adhere very closely to these definitions.

The regulations, restatements, treatises, cases, and our rulings are remarkably consistent with
the original formulation in the Statute of Charitable Uses (1601). In the face of such consistency
of the key characteristics over four centuries we are constrained from extending the term public
works to encompass intangibles such as software. Even if we were not so constrained, we also
conclude that software fails several other key tax characteristics of public works. First, software
is not a facility. It is not a lake, park, or like any other public work described in Rev. Ruls. 66-
358 and 70-186, supra or any of the many other tax and trust authorities we reviewed. Software

is intangible, and by its very nature software is not fixed; its perpetual existence and access by
the public relies upon private persons hosting the code on private servers, and anyone may
alter the Tools. Second, software is not “ordinarily provided at public expense.” It is not
something ordinarily constructed by public bodies for use by members of the public. Third, a
public work cannot be owned by private persons. Much of the Tools code is owned by private
persons. Fourth, even if the Tools were otherwise a public work, the benefits of the program
flow to individuals who use it to watch movies and video for nonpublic purposes. Anyone can
appropriate it or portions of its code for nonpublic uses, which you encourage. We described
above how private persons can use the Tools for nonexempt purposes. We have not found any
authority that authorizes a member of the public to use a public work for nonpublic purposes.
Finally, public works must serve a community. Open source licensing ensures the Tools are
accessible to the world. We have not found any authority for the proposition that the world is a
community within the meaning of § 501(c)(3).

You imply that because the court in Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008)
recognized that free and open software licenses are used by “software engineers ...to dedicate
certain works to the public” and Rev. Rul. 71-29, supra recognized that purposes beneficial to
the community as a whole have been deemed charitable, then open source licensed software
can be a public work. You are the copyright holder of some Tools code. Private persons are
the copyright holders of the portion of Tools code you do not own. Even if an exempt
organization copyright holder retained sufficient ownership rights via its open source license to
satisfy the public ownership requirement of public works, software cannot satisfy other essential
tax characteristics. The charitable purpose underlying public works is to provide the “community
with facilities . . . ordinarily provided at public expense.” See Restatement 3rd, supra; Scott and
Ascher 5th, supra. Software is not a facility nor is it ordinarily provided at public expense. The
fact that digital goods can, after development, be duplicated ad infinitum at a price approaching
zero does not satisfy this tax characteristic. Under Copyright law dedicating certain works to the
public appears to include mere licensing to the public that does not divest the copyright holder
of all right, title, and interest to the work. See Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir.
2008). As noted above, complete public ownership is an essential tax characteristic of “public
works” within that term’s meaning under § 501(c)(3). Therefore, even though you are the
copyright holder to a portion of Tools code, the portion of the Tools code owned by private
persons cannot be a public work within the meaning of § 501(c)(3).

Because open source software fails each of these essential tax attributes of public works, you
do not qualify under § 501(c)(3) as an organization erecting or maintaining public buildings,
monuments, or works within the meaning of § 1.501(c)(3)-1(d)(2).

3. Publishing Source Code, Object Code, and User Manuals Is Not Educational

You also claim that you are entitled to exemption because you engage in educational activities
by publishing, developing, maintaining and updating source code, object code, user guides,
manuals, and wikis. These activities related to “free and open source software enables people
to learn how software actually works.” However, these activities are not educational because
you do not instruct or train people. Treas. Reg. 1.501(c)(3)-1(d)(3) defines educational as the
instruction or training of the individual for the purpose of improving or developing his
capabilities; or the instruction of the public on subjects useful to the individual and beneficial to
the community. Unlike the organizations in Rev. Ruls. 65-2, 66-179, and 66-255, supra, which

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provided instructional training, lectures, workshops, exhibits and presentations, your method is
to publish the Tools source code with user manuals without any additional activity. First, the
purpose of source code is so that people can modify the code and compile it into object code
that controls a computer to perform tasks. Anything learned by people studying the source code
is incidental. Second, the purpose of publishing object code is so that users can avoid
compiling the source code and just install the program on their computer. Third, the purpose of
the user manuals is to provide information about your product to the public. By publishing
source code, object code, and user manuals you are not providing training or instruction like the
organizations in Rev. Rul. 65-2, Rev. Rul. 66-179, or Rev. Rul. 66-255, supra.

You are similar to the organization described in Syrang Aero Club Inc. v. Commissioner, 73 T.C.
717 (1980) because you provide a product with an insubstantial amount of classes, lectures or
instructional materials. The organization in Syrang Aero Club Inc. provided airplanes for use
without any classes, lectures, or instructional materials. Even though you provide user guides
on your website, you do not provide any formal or informal instruction on how to use the Tools
or other open source software. Accordingly, your activities are not educational within the
meaning of § 1.501(c)(3)-1(d)(3).

4. Scientific Purposes: Developing Open Source Software Is An Activity Ordinarily
   Carried On As An Incident To Commercial Or Industrial Operations

You also claim to qualify for tax-exemption as a scientific research organization for your
activities related to the continued research and development of the Tools. To qualify as a

§ 501(c)(3) scientific research organization, an 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.
See Treas. Reg. § 1.501(c)(3)-1(d)(5).

The information you have provided shows that you are developing software far beyond the point
where research principles, if any, are established. You are manufacturing products ready for
use. To the extent you are testing the software you are just fixing errors in programming and
not testing to validate scientific hypotheses. These activities can best be described as routine
product development, which are a type incident to commercial operations. Your self-described
activities of developing and improving the Tools are also similar to the two organizations
described in Rev. Ruls. 65-1, and 68-373, supra in that you are engaging in routine software
design, development, testing, and distribution, similar to that which a commercial software
company engages in to create new products or adapt their products to new uses in order to be
competitive in the market. In fact, you describe your Tools as “a no-cost alternative to high-cost
systems created by for-profit companies,” which places you in direct competition with those
companies. As such, your activities are incidental to commercial operations and do not further a
§ 501(c)(3) scientific purpose.

To the extent that your research, if any, is scientific research it does not benefit the public. You
do not publish the results of scientific research. Rather, you make the Tools source code,
object code, and documentation, not the results of your research, if any, available to the public.
The release of the Tools software’s source code is akin to the release of a commercial product
and the release of object code is just like the release of a commercial product, not like the
publication of scientific research. Therefore, your software development is not directed to

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benefiting the public.

You have failed to describe what scientific research you conduct, what research methods you
use and why they constitute scientific research within the meaning of the regulations. You have
failed to show that the Tools are not incident to commercial or industrial operations. You have
not shown that developing the Tools is in the public interest within the meaning of § 501(c)(3).
You have only stated that “a free and open software project creates a public domain of technical
knowledge anyone can learn from and use.” Substantially all of your activity is designing and
developing specific software. Accordingly, you are not a scientific research organization exempt
under §501(c)(3).

Conclusion

Based on the foregoing, we have determined that you were formed for the purpose of creating,
developing, and publishing a specific product. Substantially all of your activities do not serve a
charitable class, further an educational purpose, or further a scientific purpose. Therefore, you
are not operated exclusively for exempt purposes described in § 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, I declare that I 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.

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
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. 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.

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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
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,

Michael Seto
Manager, Exempt Organizations
Technical