IRS denies exemption to a health-research and software organization

Plain-English summary

A nonprofit organization developed health-care software, conducted research projects for pharmaceutical companies, and created educational content. Its formation document did not limit its purposes to exempt purposes, and all of its revenue came from three service contracts. The IRS found that the organization failed both the organizational and operational tests for Section 501(c)(3) status. It concluded that the research and clinical-testing services were commercial activities serving private pharmaceutical-company interests, rather than scientific research carried on in the public interest. The IRS also found that offering the software free to doctors, nurses, pharmacists, and others did not itself further a charitable purpose or benefit a charitable class. The IRS therefore denied exemption under Section 501(c)(3).

Ruling snapshot

• Question: Did the health-research and software organization qualify for exemption under Section 501(c)(3)?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), and (d); Rev. Rul. 65-60; Rev. Rul. 68-373; Rev. Rul. 76-442

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Date: April 6, 2021

Employer ID number:

Form you must file:

Tax years:

Number: 202126024
Release Date: 7/2/2021

Person to contact:
Name:
ID number:
Telephone:

UIL Number: 501.00-00, 501.03-24, 501.30-30

Dear [redacted]:

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). 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 IRC Section 501(c)(3), donors
generally can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We’ll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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.

If you have questions about this letter, you can call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 1-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: February 10, 2021

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:

B = Date
C = State
D = Date
F = Software
G = Company
H = Company
J = Medication
K = Medication
L = Company
M = Countries
N = Company
P = Medication
Q = Continent
R = System
S = Product
T = Medicine
U = Disease
V = Disease

UIL:
501.00-00
501.03-24
501.30-30

Dear [redacted]:

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You formed as a Limited Liability Company on B in the state of C. You converted to a Nonprofit Corporation
on D. Your Nonprofit Corporation Charter states that you are a public benefit corporation but has no specific
purpose clause.

According to your narrative description of activities, you were formed to amplify health using technology,
education and research. You intend to improve healthcare and outcomes in all countries, starting with
[redacted]

Each of these are targets for research, quality improvement, patient care facilitation, and
education supported by you.

You currently maintain one corporate office and engage third-party contractors for various services, including
software development, some administrative tasks, and medical professional consultations.

As of the date you submitted your application for exemption, you were engaged in several research initiatives.

[redacted]

You expect to be engaged on a variety of research engagements designed to improve healthcare outcomes in
low-resource areas and help educate the world’s network of physicians about how to improve healthcare.

F is used in all aspects of education and research, including data collection, data quality controls, data
management, statistical analysis, reporting, and publication. Examples include the educational platform on your
website used to disseminate knowledge and multiple research projects that are based on having a core registry
of patients and an expandable software platform that can manage new information about those patients to gain
additional insights for patient care, quality improvement, and research. For example

[redacted]

As another example of how integrated the software is with each project, in your engagement with G (now a
division of H) providers in all the countries involved in the study enter the data for the relevant patients into F,
through which it can be analyzed by your research staff. You expect many engagements similar to the G
engagement where your software facilitates the aggregation, analysis, and reporting of the information relevant
to the study.

In addition to the use of the software for these specific studies, the software is made available for general
quality improvement and patient care, not only to participants in the study, but to anyone, anywhere, for free, as
long as they acknowledge the user agreement.

You provided a copy of the F End User License Agreement. The agreement states that users may use the
software for any purpose expressly permitted by applicable law, including treatment, payment, and health care
operations. It also provides that you may also place advertisements concerning the products and services of
third parties throughout the software, so that users see them when they use the software product. You may also
present to users, through emails, displays or advertisements, the opportunity to learn about, access, integrate
with, or otherwise use services operated by third parties. If users choose to sign-up for or utilize a third-party
service, that third-party service may be able to access the user’s information. Although you may receive
remuneration from the operators or sponsors of these third-party services, you do not endorse any of their
products.

We asked you to explain how and by whom drugs were selected on which you perform testing and research. In
your reply, you stated that most research in which you are involved focuses on improving supportive care,
reducing abandonment of treatment, and making a correct diagnosis, but did not explain how or by whom the
drugs were selected in your research contracts.

We asked if the results of your research are used in any way by the pharmaceutical companies in marketing
applications to the Food and Drug Administration (FDA). In reply, you stated that because you have a focus on
low-and middle-income countries, it would be unusual for your work to have FDA/EMA regulatory
implications, but not impossible. For example, data and publications resulting from the L project can be
combined with other data not evaluated by your team (e.g. safety data) and used to support FDA regulatory
filings.

We asked if the research you conduct is connected to any FDA requirements related to testing for safety and
efficacy. You replied that you have not conducted research related to such requirements.

You state in your application that you will retain ownership of intellectual property related to your research
services, but those trademarks will not be marketed for profit. We asked for more information about who owns
or will own the rights to intellectual property created through your research. You replied that your research does
not create intellectual property or trade secrets.

You supplied a copy of your Master Services Agreement with L.

[redacted]

You provided a copy of your Master Services Agreement with G.

[redacted]

You provided a copy of the Services Agreement between you and N.

[redacted]

All your revenue is derived from the three service contracts you described in your application; almost half is
from your contract with L. Most of your expenses are for compensation paid to employees and independent
contractors.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax to organizations organized
and operated exclusively for charitable, religious or educational 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 IRC 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(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:
(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

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 which accomplish one or more of
such exempt purposes specified in IRC 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 purpose. To meet this
requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of
private interests.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides that the term charitable includes the relief of the poor and
distressed and promotion of social welfare through charitable activities.

Treas. Reg. Section 1.501(c)(3)-1(d)(4) defines the term "testing for public safety" as used in IRC Section
501(c)(3) to include the testing of consumer products, such as electrical products, to determine whether they are
safe for use by the general public.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(i), in defining the term "scientific", provides that since an organization
may meet the requirements of IRC 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(ii) further 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.

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 benefitting the public.

Revenue Ruling 65-60, 1965-1 C.B. 231, discusses an organization formed for the primary purpose of
developing and disseminating a body of new knowledge relating to the social sciences. The organization’s
professional research staff consists of persons qualified by education and experience to perform scientific
research in these fields. Activities of the organization consist of the performance of scientific research under the
contracts with governmental agencies and the conduct of seminar courses attended by qualified members of the
public. It performs no contract research for the private benefit of any person or organization, as distinguished
from performing scientific research in the public interest. Results of the organization’s research activities are
communicated to the public through seminar courses, lectures, and public discussions, and through publications
distributed free to depositary libraries. Held, the organization qualifies for exemption from federal income tax
as an educational and scientific organization described in IRC Section 501(c)(3).

Rev. Rul. 68-373, 1968-2 C.B. 206, holds that a nonprofit organization primarily engaged in testing drugs for
commercial pharmaceutical companies does not qualify for exemption under IRC Section 501(c)(3). The
organization’s principal activity is clinically testing drugs for commercial pharmaceutical companies. These
tests are required in order to comply with FDA requirements that drugs be tested for safety and efficacy before
they can be marketed. The pharmaceutical companies select the drugs to be tested and use the results of the tests
in their marketing applications to the FDA. In addition, the results of the tests are freely available for
publication in various scientific and medical journals. All the organization’s income is derived from the
pharmaceutical companies in payment for testing services.

Rev. Rul. 76-442, 1976-2 C.B. 148, states that a nonprofit organization whose primary activity is the offering of
free legal services for personal and estate planning to individuals who wish to make current and deferred gifts to
charity as part of their overall tax and estate planning does not qualify for exemption under IRC Section
501(c)(3).

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 IRC Section
501(c)(3).

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 IRC
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 F.2d 340 (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 IRC Section 501(c)(3),
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

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information you provided in your application and supporting
documentation, we conclude that you fail both tests.

Your Articles of Incorporation do not include a clause that limits your purposes to one or more exempt
purposes. Therefore, you have not satisfied the organizational test described in Treas. Reg. Section 1.501(c)(3)-
1(b)(1)(i).

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; providing software to facilitate private practices of doctors, nurses, pharmacists; and creating
educational content under contract for a fee, none of which are in furtherance of exempt purposes.

A substantial part of your activities are research projects for sponsoring pharmaceutical companies. You are
providing a service for a fee for the pharmaceutical companies which is supplemental to their commercial
operations and to the marketing of their products. Clinical testing to determine the efficacy of 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 with the meaning of Treas.
Reg. Section 1.501(c)(3)-1(d)(5)(i).

Until a drug is approved for marketing by the FDA, it is not a "consumer product" available for general use by
the public. The clinical testing of a drug for safety and efficacy in order to enable the manufacturer to meet
FDA requirements for marketing is not "testing for public safety" as defined by Treas. Reg. Section 1.501(c)(3)-
1(d)(4), but is merely a service performed for the manufacturer. Per Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii),
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. Your research is not regarded as being carried
out in the interest of the public because you are limited to when and what you are 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. See Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iii).

You are operating in a manner similar to the organization described in B.S.W. Group, Inc. The contracts you
submitted show that you conduct research for pharmaceutical companies for a fee. While you do create some
educational content yourself,

[redacted]

Your primary purpose is therefore not scientific, but rather commercial.

You are like the organization described in Rev. Rul. 68-373 because a substantial part of your operations
consists of conducting clinical trials for pharmaceutical companies.

[redacted]

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 operations. Clinical testing is an activity that is
normally carried on as an incident to a pharmaceutical company’s commercial operations.

[redacted]

Therefore, the testing you conduct is not
considered scientific research under IRC Section 501(c)(3). You are not like the organization in Rev. Rul. 65-
60, who conducted research for governmental agencies.

Similar to Old Dominion Box Co., your operations benefit private parties and constitute a substantial
nonexempt purpose. You are also similar to the organizations in Better Business Bureau of Washington D.C.,
Inc. and Schoger Foundation 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, 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.

As described in Treas. Reg. Section 1.501(c)(3)-1(d)(2), your activities do not exclusively further charitable
purposes. Like the organization in Rev. Rul. 76-442, you are providing free software, F, to the public. Although
it is available for free, the provision of this software to the public does not further a charitable purpose itself nor
is it directed toward benefitting a charitable class. As in Rev. Rul. 76-442, you are providing a commercially
available product to individuals and businesses that can afford it. Doctors, nurses, and pharmacists can use the
software to operate and improve their private practices. The fact that it is available to everyone for free does not
make it a charitable activity or one that promotes social welfare within the meaning of Treas. Reg. Section
1.501(c)(3)-1(d)(2).

Conclusion

Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an
organization described in IRC Section 501(c)(3). You are not organized or operated exclusively for exempt
purposes as set forth in Section 501(c)(3). Your formation document does not limit your purposes to those
described in Section 501(c)(3), causing you to fail the organizational test. You fail the operational test because
you are formed to provide services for a fee in a commercial manner to pharmaceutical companies for their
private benefit. Your activities are not considered scientific research. The software you provide also does not
further an exclusively charitable purpose, as it can be used by anyone interested. For these reasons, you do not
qualify for exemption under Section 501(c)(3).

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.

If you don't agree

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

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference

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

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:

Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest

Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K