Commercial clinical-trial operations fail the exemption test

Plain-English summary

An organization sought section 501(c)(3) status for multiple-sclerosis research and education. About 80 percent of its activities involved clinical trials sponsored by pharmaceutical companies, which controlled study protocols, data, intellectual property, and publication timing. The organization shared space, staff, patients, directors, and contractual relationships with a related for-profit medical practice, and the submitted contracts generally named and paid that practice rather than the applicant. The IRS concluded that the work was commercial drug testing that served pharmaceutical companies and related private interests rather than scientific research conducted in the public interest. After the organization did not protest the proposed denial, the IRS made the adverse determination final.

Ruling snapshot

• Question: Does the organization qualify under section 501(c)(3) when its principal research activity consists of commercially sponsored clinical trials tied to a related for-profit practice?
• Outcome: denied; the organization was not operated exclusively for exempt purposes
• Key authorities: IRC §§ 501(c)(3), 513; Treas. Reg. §§ 1.501(c)(3)-1(a), (c), (d); Rev. Ruls. 68-373 and 76-296

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: October 13, 2016

Employer ID number:

Number: 201701022
Release Date: 1/6/2017 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-21, 501.03-24,
501.33-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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 the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at

1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: August 8, 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-21
BB = Date 501.03-24
C = Organization 501.33-00
CC = Website

D = Organization

E = Date

F = Date

G = Medication

H = Date

J = Date

K = Date

L = Organization
M = Organization
N = Organization
O = Organization

P = Year

Q = Year

R = Year

S = Organization

T = Director

U = Organization
V = Director

W = Organization
X = State

Y = Date

Z = Organization
Dear :

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You were incorporated in the state of X on Y. Article III of your Articles of Incorporation states that you are
organized and operated exclusively for charitable, educational, and scientific purposes. Articles III also states:

Within the limitations, guidelines, and restrictions of Section 501(c)(3) of the Internal Revenue Code
and regulations thereunder as the same now exist or as the same may be amended and any successor
provisions, the Corporation shall have all powers and authority permitted by the X Nonprofit
Corporation Act and shall be operated exclusively for charitable, educational, cultural, scientific, and
civic purposes and to general receive and administer gifts of property for charitable, educational,
scientific, cultural, and civic purposes as before provided and within the meaning of section 501(c)(3) of
the Internal Revenue Code, as the same now exists or as the same may be amended.

Article II of your bylaws states that your mission is to, “facilitate the development of research in multiple
sclerosis and other neurodegenerative disease, to support the development and delivery of educational
opportunities for multiple sclerosis patients, families and caregivers, and to assist in the advancement of
alternative care delivery systems for multiple sclerosis patients across the State of X.”

You state that your objectives are to:

1. Provide a medium in which neurological research can be supported within the state of X.

a. Open up the opportunity for individuals in the state of X and the surrounding region to
participate in cutting edge research in neuroscience, particularly MS and Parkinson’s Disease.
b. Help provide funding for investigator initiated research within the W.

2. Help support non-branded educational opportunities for patients of the Z and the surrounding
   community.

3. Help establish and support a MS community with innovative and research based care within the
   region.

You have a close connection with the Z. The Z is owned by your director, V, and also employs your director, T.
V is a board certified by the S and his specialties include Multiple Sclerosis and Parkinson’s Disease. You
explained that you have your own office, officers, and director and that only the medical director, V, is involved
with both organizations. V sees patients and manages their medical conditions for Z. For you, V conducts
research visits and records and submits the data for those visits. You stated that functions you perform are
clearly designated and you do not run joint events with Z. You also have your own medical record keeping.

You sublease space from Z for your activities including office use and medical research. You occupy a portion
of the facility where Z operates. The letter to the landlord requesting consent for Z to sublease the facility to you
states the following:

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

V and T, PhD, nurse practitioner, are actively involved in the research activities of the W while the
Board of Directors consists of highly regarded members of the multiple sclerosis research community.
While the W is a separate and distinct entity from Tenant, its activities and mission are closely linked.
The W will use the subleased space to conduct its research activities, including patient care. The use of
the space by the W is similar to how the Premises are used by Tenant.

You stated that the testing and research you perform is to help patients who are on medication understand the
potential side effects and efficacy of their treatment. You perform blind medical research studies on patients
who have been medically screened for participation in the drug studies. You initially indicated that your
research department has several ongoing studies being conducted at the research center and planned to enroll in
new studies. You decide which studies are appropriate for you based on staff availability, patient population,
and patient interest. The results of these studies would not be made available directly to the general public. They
would only be distributed via the pharmaceutical companies sponsoring the studies. Your research department
and the sponsoring pharmaceutical company are the only entities that will retain ownership of the information
generated from the research.

You later submitted additional information to clarify your activities. You currently conduct clinical trials
sponsored by pharmaceutical companies. You stated that your research is currently being sponsored by
pharmaceutical companies in Phase III and Phase IV studies examining interventions and quality of life
measures related to medications which have already been approved by the N and are market ready or currently
on the market. You stated that you frequently gather information from your studies that differ from the original
studies on the medications. The pharmaceutical companies are interested in the studies because they often
uncover further information such as safety issues that was not found in the initial studies.

You indicated that the sponsors do publish their research and it is available for public consumption. You
explained that after research is completed it is finalized and findings such as safety information is made
available to the public by publishing it on CC. It may also be published in professional journals or meetings.
The published information includes the objective of the study, the methods of the study, the results and the
declaration of interests if the authors have a potential conflict of interest. You stated the research for your
sponsors is as described in Rev. Rul. 76-296. You plan to eventually conduct investigator driven research.

When conducting the research activities, you occasionally use two of Z’s clinical support staff who have been
trained on the study procedures and added to the clinical trial delegation log. The majority (approximately 85-
90%) of the subjects used in the studies come from Z. Z patients are informed of the studies but are not under
any obligation to participate and can opt out at any time if they enroll in a study. The subjects are obtained when
either a clinical decision has been made to initiate a patient on a particular pharmacological intervention that is
congruous with a current trial or when a patient who is already receiving pharmacological intervention that is
congruous with a current trial is identified. You state that the clinical decision making, “is in no way whatsoever
affected by any clinical trials being conducted, the W has absolutely no influence on the decision making of the
providers.”

None of your current research projects are directly carried out for Z. However, you indicated that the projects do
benefit the Z population, and therefore the multiple sclerosis community, because the projects you participate in
directly impact the Z patient population. All of your current research is sponsored by pharmaceutical
companies. You currently conduct one research project sponsored by L and six projects that are sponsored by
M. You have an additional planned research project that will be sponsored by M. The pharmaceutical

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

companies provide you with grant payments to carry out the direct research they compile from other clinics
throughout the United States or globally. You stated that the sponsors receive the research results and hold title
to them along with you.

The first Master Clinical Trial Agreement you submitted is dated K and is between M and Z, the Institution.

The Agreement is signed by V as the President of Z. The term of the Agreement is five years. The Agreement is

for a clinical study on one of M’s investigational new drugs and states that each trial shall be conducted with the
applicable clinical research protocol prepared and provided by M. M will register each trial and post the trial

results on a publicly accessible website. It is the responsibility of Z to employ one or more physicians

(investigators) experienced in conducting clinical studies of investigational new drugs and to arrange for

qualified personnel to support its trial obligations. Z and the employed physicians are responsible for

maintaining complete and accurate records of the status and progress of each trial including case report forms,

signed subject informed consent and authorization documents, and all other records. M shall have access to all
information obtained from each trial by Z but Z shall not disclose any confidential information to any third

party. Section 8(a) of the Agreement states, “All right, title and interest in and to (i) all data collected and

databases generated in performance of a Trial, (ii) all compilations of data related to a Trial (including the
selection, coordination or arrangement of such data), that are created for a Trial, and (iii) all case report forms
and other Trial documents and reports, including copyrights in any of the foregoing, is and shall remain the sole
and exclusive property of M.” Section 8(b) states that, “M hereby grants the Institution a limited right to use the

results of a Trial generated by the Institution for publication purposes, and for the Institution’s own non-

commercial internal research, training or educational purposes, subject to the terms and provisions of Sections 7
(Confidentiality) and 9 (Publication) of this Agreement.” Finally, Section 9(a) states, “Except as otherwise

provided in this Section 9, following completion of a Trial and evaluation of the results by M, or abandonment of

a Trial, the Institution (by or through the Investigator or other Personnel) may, for non-commercial purposes

only, publish or otherwise publicly disclose the results and methods of the Trial. Notwithstanding the foregoing,

the Institution shall not disclose any of M’s Confidential Information, other than the results and methods of the

Trial.” If a trial is part of a multi-center clinical study then Z cannot make any publication or disclosure until the

results from all centers have been received and analyzed or the trial has been abandoned at all centers. Z must

provide M with a manuscript for review of any proposed publication or public disclosure at least 60 days prior

to disclosure to any other party. All the results of the trial including any discoveries, inventions, or other

intellectual property will be owned by M.

The second agreement you submitted is an Observational Study Agreement between M, Z as the Institution, and
V as the Physician. The agreement was signed by V as President of Z on J. The Agreement states that the
Physician is experienced in conducting studies of investigational and market drugs and M desires that Z and V
conduct an observational study on one for the medicinal products it markets to collect information on safety and
document the drug utilization when used in routine medical practice in the treatment of multiple sclerosis. Z and
V shall conduct the study for M according to protocol and make the results available to M. Z shall record all
data from the study for M. Z and V shall not disclose any Confidential Information to any third party. Section
5.1 of the Agreement states, “All inventions, ideas, improvements, discoveries, enhancements, modifications,
know-how, data, designs and information of every kind and description conceived, generated, made or reduced
to practice, as the case may be, relating in any way to the performance of the Study.....shall be owned solely
and exclusively by M.” Section 6.1 states, “M and its agents shall have unrestricted access to and exclusive
rights to use all information resulting from the Study for any and all lawful purposes.” Section 6.2 states,
“Except as otherwise provided in this Article 6, following completion of the Study and evaluation the results by
M, or abandonment of the Study, the Institution (by or through its Physician or Staff) may, for non-commercial
purposes only, publish or otherwise publicly disclose the results and methods of the Study. Notwithstanding the

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

foregoing, the Institution shall not disclose any of M’s Confidential Information, other than the results and
methods of the Study.” If the study is part of a multi-center clinical study then Z cannot make any publication or
disclosure until the results from all centers have been received and analyzed or the study has been abandoned at
all centers. Z must provide M with the text relating to the study that Z plans to present or publish at least 60
days prior to disclosure to any other party. Section 7 of the Agreement shows that compensation for the study
will be paid to Z.

You submitted another Observational Study Agreement dated H between M, Z as the Institution, and V as the
Physician. The Agreement was signed by V as the President of Z. The study is on the same medical
product/drug as the Observational Study Agreement above. This 12 month observational study is to evaluate the
clinical effectiveness of the product and its impact on quality of life and health economic-related outcomes in
patients with relapsing forms of multiple sclerosis who switch to the product from G. All study results are to be
made available to M and Z shall not disclose any confidential information to any third parties. Section 5.1 of the
Agreement is the same as above and indicates that all inventions and data from the study shall be owned by M.
The publication requirements in this Agreement are also the same as those above and as above, compensation
for the study is to be paid to Z.

The next Observational Study Agreement you submitted is between M, Z, the Institution, and T, the Physician.
T signed the agreement for herself as physician as well as for Z. The study is to assess the efficacy and safety of
a medical product different from the one in the other observational studies above. The study will begin in P and
last 60 months with all results being made available to M. Z and T shall not disclose any confidential
information to third parties. Section 5 indicating that M owns all inventions and data is the same as the
agreements above. The publication requirements in Section 6 are also the same as above. Compensation for the
study is to be paid to Z.

Another Observational Study Agreement was submitted between M, Z, the Institution, and T, the Physician.
The agreement is signed by T on F for herself as physician as well as for Z. This Agreement is for two
medicinal products and the observational study is to evaluate real world clinical outcomes in relapsing-remitting
multiple sclerosis patients who transition from one medicinal product to the other. All study results are to be
made available to M and T and Z shall not disclose any confidential information to third parties. Section 5
indicating that M owns all inventions and data is the same as the agreements above. The publication
requirements in Section 6 are also the same as above. Compensation is to be paid to Z.

The next Observational Study Agreement you submitted is between D who was contracted by M, C, the
institution, and V as the physician affiliated with C. V signed the Agreement on B. The Chief Operating Officer
of C signed for C. The observational study is to be conducted on one medicinal product according to the
protocol given with results going to D and M. C and V shall not disclose any confidential information to third
parties. Sections 5 and 6 relating to inventions, data ownership, and publication are similar to those above. Per
Section 7, compensation is to be paid to C.

The last Observational Study Agreement you submitted is dated E and is between M, U, the institution, and T as
the physician. The study is on a medicinal product marketed by M. All confidentiality, invention and data
ownership, and publication requirements are the same as above. T signed the agreement for U and as
physician/nurse practitioner.

The final agreement you submitted is a Master Clinical Trial Agreement dated BB between O as the sponsor
and Z as the institution. The Agreement is signed by V as President of Z. The Agreement is to establish an

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

ongoing arrangement between O and Z for the conduct of one or more clinical studies. Clinical studies will be
described in separate work orders which will set for the clinical trial protocol, the study budget, the name of the
drug to be investigated, the name of the investigator, and any other terms and conditions. Each executed work
order will become part of the Agreement. Per the Agreement, Z agrees to conduct the study in accordance with
the protocol. O will pay Z for the services rendered. Z and its study personnel shall not use confidential
information for any purpose other than the study and shall not disclose confidential information to any third
party except as permitted. Z and the investigator have the right to publish or present the results of their activities
under the Agreement and work order, including study data, in accordance with the requirements set forth in the
Agreement. Any presentation or publication should be submitted to O for review at least 30 days before
submitting the information for publication. If the study is part of a multi-center study then Z shall not
independently publish information until a multi-center publication is published. Any inventions or discoveries
made by Z and/or the study personnel and/or O during the performance of the study will become the sole
property of O. Any other inventions or discoveries made in relation to work under the Agreement should be
disclosed to O. Z and/or the study personnel may jointly own rights to any such jointly made other inventions.
O has the first option to obtain a worldwide, exclusive license to Z’s and the study personnel’s rights in any
other inventions. The license will be offered on commercially reasonable terms that are customary for similar
inventions in the pharmaceutical industry. O does grant Z a perpetual, non-exclusive, non-transferable, paid-up
license, without right to sublicense, to use inventions for Z’s internal, non-commercial research and educational
purposes.

Work Order No. 1 was submitted with the Master Clinical Trial Agreement. The Work Order is between O, Z as
the institution, and V as the investigator. The Work Order was signed by V as President of Z and as the
investigator. The Work Order is for a study to be performed on a study drug. The study is a clinical-setting
study to describe the efficacy, tolerability, and convenience of the study drug treatment using patient reported
outcomes in relapsing multiple sclerosis patients. O shall pay Z for services rendered.

You stated that the name on the contracts is Z because the studies or their contracting originated prior to your
existence.

You stated that approximately 80% of your activities are devoted to research. You also previously conducted
free educational sessions/seminars for the public on topics related to improving the quality of life. You have
educated patients with multiple sclerosis and families on navigating disability benefits for patients with multiple
sclerosis, exercise, and physical activity. You have also sponsored a holiday lights tour to raise funds and allow
patients with multiple sclerosis to have a fun and educational evening.

The majority of your revenue from your date of formation to the end of P came from research income payments
received from pharmaceutical companies for patients that are enrolled in studies that have completed the set
protocols. You generally receive these payments quarterly from the sponsoring companies for study activities
that occurred the previous quarter. These activities may have included subjects coming in for study related visits
including physical assessments, blood draws, or questionnaires. Additionally the Research Coordinator would
be responsible for completing data entry. You show just under 10% of your revenue from donations. The
majority of your expenses were for salaries and wages, occupancy expenses, and laboratory fees. Your expected
expenses for Q and R are similar to those in 2014. However, you show no anticipated revenue from donations.
All of your revenue is expected to be from income payments from pharmaceutical companies. You also state
that you plan to conduct four fundraising events per year as well as solicit donations from merchants, the
pharmaceutical industry, and vendors at your health fair. You will use funds raised to support research or for
educational activities or the support of innovative care initiatives.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Law

Section 501(c)(3) of the Internal Revenue Code exempts from federal income tax corporations organized and
operated exclusively for charitable, educational, scientific, and other purposes, provided that no part of its net
earnings inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more
of the purposes specified in such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Section 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 section 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. Section 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. Thus, to
meet the requirement of this subdivision, it is necessary for an organization 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. Section 1.501(c)(3)-1(d)(5)(i) provides that since an organization may meet the requirements of
section 501(c)(3) only if it serves a public rather than a private interest, a "scientific" organization must be
organized and operated in the public interest. The term "scientific" therefore includes the carrying on of
scientific research in the public interest.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(ii) states 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. Section 1.501(c)(3)-1(d)(5)(iii) provides, in part, that scientific research will be regarded as carried
on in the public interest if the results of such research (including any patents, copyrights, processes, or formulae
resulting from such research) are made available to the public on a nondiscriminatory basis, 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 if such research is directed toward benefiting the public.

Rev. Rul. 68-373, 1968-2 C.B. 206, holds that an organization which performs clinical testing of drugs for
commercial pharmaceutical companies according to specifications and procedures set out by the pharmaceutical
companies is not engaged in scientific research, but is engaged in testing incident to normal commercial
operations.

Rev. Rul. 76-296, 1976-2 C.B. 141, holds that commercially sponsored research otherwise qualifying as
scientific research under section 501(c)(3) of the Code, the results of which, including all relevant information,
are timely published in such form as to be available to the interested public, constitutes scientific research
carried on in the public interest. Research, the publication of which is withheld or delayed significantly beyond

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

the time reasonably necessary to establish ownership rights, however, is not in the public interest and constitutes
the conduct of unrelated trade or business within the meaning of section 513.

Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), held that the presence
of a single nonexempt purpose, if substantial in nature, will preclude tax exemption under section 501(c)(3) of
the Code.

In B.S. W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the organization provided consulting services for
a fee to various tax-exempt and non-profit organizations. The organizations fees were set at or close to cost.
The court concluded that those activities are not inherently charitable because they are of the type typically
conducted by for-profit organizations. Even though the organization argued that its fees may in fact be lower
than those charged by other firms, the court concluded that it was not enough to prove that organization’s
purposes are primarily exempt. The Court concluded that the petitioner is not an organization described in
section 501(c)(3) because its primary purpose is neither educational, scientific, nor charitable, but rather
commercial.

In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981) it was held that if an activity serves a substantial
nonexempt purpose, the organization does not qualify for exemption even if the activity also furthers an exempt

purpose.

In Old Dominion Box Co. v. United States, 477 F2d 344 (4th Cir. 1973) cert. Denied 413 U.S. 910 (1973), the
court held that operating for the benefit of private parties constitutes a substantial non-exempt purpose.

In Washington Research Foundation v. Commissioner, T.C. Memo 1985-570 (1985), the Tax Court held that an
organization that facilitates transfer of technology from nonprofit organizations' labs for public use through
licensing arrangements with private industry did not qualify for exemption under section 501(c)(3) of the Code,
because the immediate benefit of its activities rebounds to private industry and the nonprofit research
institutions and only indirectly to the general public. It was found that these activities are commercial in nature
and not in direct furtherance of exempt purposes.

Application of law

You are not described in section 501(c)(3) of the Code because you are not operated exclusively for an exempt
purpose under section 501(c)(3) of the Code. (Treas. Reg. Section 1.501(c)(3)-1(a)(1)) Per Treas. Reg. Section
1.501 (c)(3)-1 (c)(1), you are not operated exclusively for one or more exempt purposes because more than an
insubstantial part of your activities involves providing research services in a commercial manner which is not in
furtherance of an exempt purpose.

While you plan to eventually conduct investigator driven research, your only research activities thus far have
been for the sponsoring pharmaceutical companies. You are providing a service for the pharmaceutical
companies which is incident to their commercial operations and to the marketing of their products. Clinical
testing to determine the efficacy of the drugs is merely a service performed for the pharmaceutical companies
and serves the private interests of the pharmaceutical companies rather than an exclusively public purpose and
is not scientific research within the meaning of Treas. Reg. Section 1.501(c)(3)-1(d)(5)(1).

Operating in a manner similar to a for profit corporation is not an exempt charitable activity for the purposes of
section 501(c)(3) of the Code. See B.S.W. Group, Incorporated_v. Commissioner, supra. The contracts you
submitted show that you conduct research for pharmaceutical companies for a fee. Your primary purpose is

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

therefore not scientific, but rather commercial.

You research is not regarded as being carried on in the interest of the public because you are limited to when
and what you will be allowed to publish. Further, you have no rights to the resulting intellectual property
created through your research. It remains the sole property of the sponsoring pharmaceutical company. (Treas.
Reg. Section 1.501(c)(3)-1(d)(5)(iii) of the Regulations)

You are similar to the organization described in Rev. Rul. 68-373, because a majority of your operations consist
conducting clinical trials for pharmaceutical companies. You state that the research you are currently
conducting is Phase III and Phase IV studies examining interventions and quality of life measures related to
medications which have already been approved by the N and are market ready or currently on the market.
However, since the studies are Phase III and Phase IV studies, it appears that you are assisting the
pharmaceutical companies in meeting N requirements for marketing. Treas. Reg. Section 1.501(c)(3)-1(d)(5)(i)
states that scientific research does not include activities of a type ordinarily carried on as an incident to
commercial operations. Clinical testing is an activity that is normally carried on as an incident to a
pharmaceutical company’s commercial operations. You are conducting testing based on the specifications of the
pharmaceutical companies. The pharmaceutical companies have given you the experimental methods and
procedures to follow. Therefore, the testing you conduct is not considered scientific research under section
501(c)(3) of the Code. Additionally, you are providing a service for a fee to the pharmaceutical companies and
therefore serving the private interests of the pharmaceutical companies rather than the public interest.

Rev. Rul. 76-296 pertains to research that has already been deemed to be scientific. Although you indicated that
your research results are published on CC, you research is not considered scientific as indicated above so Rev.
Rul. 76-296 would not apply. Your testing is operated in a manner that precludes it from being recognized as
“scientific research” because it related to normal commercial operations of the for-profit pharmaceutical
companies. Rev. Rul. 76—296 addressed itself to research of a scientific nature, it was not intended to modify
Rev. Rul. 68—373.

Similar to Old Dominion Box Company v, your operations benefit private parties and constitute a substantial
nonexempt purpose. You are also similar to the organizations in Better Business Bureau and Schoger
Foundation v. Commissioner because your activities serve substantial nonexempt purposes and because you
have failed to establish that you are organized or operated exclusively for the benefit of public interests rather
than those of the pharmaceutical companies you are working for. As in Washington Research Foundation v.
Commissioner, the immediate benefit of your activity rebounds to private industry. Treas. Reg. Section
1.501(c)(3)-1(d)(5)(iii) provides, in part, that scientific research will be regarded as carried on in the public
interest if such research is directed toward benefitting the public. The majority of your activities consist of drug
testing and evaluations for the sponsoring pharmaceutical companies. Your research is therefore directed toward
benefitting the pharmaceutical companies, not the public.

Additionally, you are not operated for one or more exempt purposes because you have not clearly shown that
you are not serving the private interests of your director, V, and the related for-profit entity owned by him, Z.
(Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii)) Z also employs your director, T. You sublease space from Z for
your activities including office use and medical research. You occupy a portion of the facility where Z operates.
The letter to the landlord requesting consent for Z to sublease the facility to you states your activities and
mission are closely linked. You perform blind medical research studies on patients who have been medically
screened for participation in the drug studies. When conducting the research activities, you occasionally use two
of Z’s clinical support staff who have been trained on the study procedures and added to the clinical trial

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

delegation log. The majority (approximately 85-90%) of the subjects used in the studies come from Z. Of
further note, while you state in the application that you are the one conducting the research and that the
functions you perform are clearly designated, you are not listed as a party on any of the research contracts
submitted. Z is named as the institution in all but one of the contracts. U is named in that contract. V is listed as
the physician in some contracts and T is listed as the physician in others. The contracts show that compensation
is paid to Z. There is no clear separation between you and the related for-profit entity Z and it appears these
contracts serve the private interests of Z.

Conclusion

Based on the facts and information submitted, you are not operated exclusively for exempt purposes. Your
operations do not further an exempt purpose, but rather, substantially promote the nonexempt business purpose
of for-profit entities. Therefore, you are not described in section 501(c)(3) of the Code.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

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

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If

you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W