Exemption denied for commercial software development and private benefit

Plain-English summary

An organization sought section 501(c)(3) status for developing and supporting an open-source software platform, funding related research and applications, publishing educational materials, and making grants. The IRS found that the organization's primary work was product and software development of a kind ordinarily performed in commercial operations, not scientific research carried on exclusively in the public interest. It also concluded that the software was not a charitable public work, that the activities did not lessen a recognized government burden, and that the limited educational work did not overcome the substantial nonexempt purpose. The organization's principal contributor expected economic benefits, the organization invested in and supported related technology businesses, and grant recipients operated outside its control. Because the activities served substantial commercial and private interests, the IRS denied exemption under section 501(c)(3).

Ruling snapshot

• Question: Did developing and supporting the open-source software platform qualify the organization for section 501(c)(3) exemption?
• Outcome: Denied
• Key authorities: IRC §§ 501(a) and 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 68-489; Better Business Bureau of Washington, D.C., Inc. v. United States

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 03/22/2023
Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508
Cincinnati, OH 45201

Tax years:

Person to contact:

Number: 202324012
Release Date: 6/16/2023

UIL: 501.00-03, 501.03-00, 501.35-00

Dear

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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

cc:

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date:

February 1, 2023
Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend: UIL:

B= state 501.00-03
C = date 501.03-00
D = software 501.35-00
E = currency

f percent = number 1

g percent = number 2

h dollars = amount

J= number 2

K = platform

L =company 1

M =company 2

N = company 3

Dear
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 were formed as a corporation on C, in B. According to your amended and restated articles of incorporation
your purpose is exclusively charitable, educational, or scientific within the meaning of IRC Section 501(c)(3).

You claim that your mission is to benefit and support the broader community that aims to deliver the promise of

K, where every internet user can participate in the value they create because they have of their
and . You plan on creating to the based upon the D protocol. The D protocol is

a linked to E by its that spans the , called . This

enables D to leverage E’s security and enables D apps to use E’s state, despite being a separate .D

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


2

powers apps that run on the D instead of on a , enabling new use
cases that couldn’t exist before. You claim in your application that your activities consist of approximately f
percent research and maintenance of public infrastructure, and g percent education and grants.

Like E, D is a . There are many individuals and companies from all over the world that
contribute to and build on D. The development is open source and community driven through open messaging
platforms L and M. You create new avenues for innovation through funding research, ecosystem development,
and developer incentives.

You made a capital commitment of h dollars to a company which employs a
and has a closely aligned mission, developing K, a and

With respect to the time you spend on research, you claim:

You may support, design, conduct and publish research, potentially in collaboration with academics and
institutions, or collaborate with institutions, organizations, or individuals already conducting research, related to
a , in particular the D protocol. All results of this research and/or development of related
technology such as software or other innovations will be made available to the public gratis. Research results
related to software will be made available through publication, wherein all
will be made available to the general public under software licenses permitting n and

of the

One of the ways that you support research is by granting funds to independent researchers, contributors, and
collaborators to help build a better through research and development. According to your
grant agreements, a grant recipient’s use of a D Development Grant is entirely outside of your control or
direction. Your grant agreements also state that it is intended that benefits may accrue to your principals through
the use of the D network that has been enriched by the developments you have funded.

Your grant agreements provide samples of the projects that you have funded. These projects include an
application that acts as “your home on D.” This application allows a user to track the “meta” data of D users as
well as keep track of their own transactions. In the grant application the funded project is referred to as

” for D, providing a user with searchable and reviewable information regarding the D
Another grant was awarded for a application allowing D users to fund organizations
through E and for such organizations to manage their .A grant was awarded to create a
“peer-to-peer marketplace for services” based on the D protocol. Finally, you also provided a grant agreement
to create a program to “protect [D] users from [phishing], identity theft and other scam activities.”

With respect to maintenance of public infrastructure, you claim:

D is a designed to work as a public utility to enable the development of smart contracts on E. D is

powered by open networks (anyone with an Internet-connected computer can participate) that

internet. These networks distribute to all participants a

transactions. No party on the network acts as a or otherwise has to or
the of any participant.

With respect to education, you claim:

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


You operate a website pertaining to a , D, the computing networks that power it, and
research and technologies that can be integrated into the network. You educate the public regarding D through a
variety of potential methods, including dissemination or publication of guides, manuals, and blogs, among other
possible resources. These materials are free on your website. These materials provide education on a variety of
topics, including the basics of D, the role and importance of D in society, future developments in D, and the
need for ongoing development. You also hold regular forums for discussing and solving coding problems to
help further the development of D technology. You are the home for governance of D's technology,
serving as neutral ground for various parties to come together and reach consensus on the path forward. These
activities will be conducted mostly virtually by your staff, volunteers, and grantees. You also offer free
consulting services to other to help them make the best use of the tech available to them.

You received a of J,D ( ) from N, a entity and your main contributor. N
acknowledges, in its contribution agreement with you, that it expects to receive economic benefits from this
transfer. In the contribution agreement it states in part, “Contributor believes, based upon extensive experience
in the field of development, that transferring the Contributed Assets to the Assignee will bring
economic benefits both to itself and to other persons and entities, and Contributor further believes that, although
it will not receive any specific quantifiable services from the Assignee on account of the contribution nor will it
be a customer of the Assignee, the benefits it will receive from the contribution will be commensurate
with the value of the Contributed Assets transferred to the Assignee.” The terms of the contribution agreement
place restrictions on the sale and/or transfer of for years for the benefit of D holders and other

Law

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

IRC Section 501(c)(3) provides for exemption from federal income tax of organizations organized and operated
exclusively for charitable, educational, scientific, and other purposes, provided that no part of the net earnings
inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(a)-1(c) defines a private shareholder or individual as one having a personal
and private interest in the activities of the organization.

Treas. Reg. 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 IRC Section 501(c)(3). If an organization fails to meet either the organizational or
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 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


4

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than a private interest.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in IRC Section 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. Section 1.501(c)(3)-1(d)(3) defines educational as the instruction or training of the individual for
the purpose of improving or developing their capabilities, or the instruction of the public on subjects useful to
the individual and beneficial to the community

Treas. Reg. Section 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 IRC Section 501(c)(3), includes the carrying on
of scientific research in the public interest. Research when taken alone is a word with various meanings; it is not
synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For
research to be scientific, within the meaning of Section 501(c), it must be carried on in furtherance of a
scientific purpose. 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.

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 commercial operations and retained all the rights to the new developments, did not qualify
for exemption under IRC Section 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 IRC Section 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.

In Rev. Rul. 66-358, 1966-2 C.B. 218, a corporation contributed funds and realty adjacent to its plant reception
area to an organization exempt from Federal income tax under IRC Section 501(c)(3). The exempt organization
used the funds and realty to establish a park for the use of the general public.

Rev. Rul. 68-373, 1968-2 C.B. 206, held that an organization which primarily engaged in testing drugs for
commercial pharmaceutical companies did not qualify for exemption under IRC Section 501(c)(3).

Rev. Rul. 68-489, 1968-2 C.B. 210, states that, “An organization will not jeopardize its exemption under IRC
Section 501(c)(3), even though it distributes funds to nonexempt organizations, provided it retains control and
discretion over use of the funds for Section 501(c)(3) purposes.”

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


Rev. Rul. 70-79, 1970-1 C.B. 127, describes an organization that assisted local governments of a metropolitan
area by researching solutions for common regional problems, such as water and air pollution, waste disposal,
water supply, and transportation, that was operated exclusively for the charitable purpose of relieving the
burden of government. The chief elected officers of the local jurisdictions constituted the membership of the
organization. Receipts included assessments on the local jurisdictions. The interrelationship between the local
governments and the organization indicates the existence of a burden of government in that the organization’s
membership was composed totally of government officials; persons appointed by the local governments
involved. The funding of the organization from the government assessments indicates a burden of government.
Developing regional plans and policies for regional problems is an activity normally conducted by
governmental units and indicates a burden of the government.

Rev. Rul. 70-186, 1970-1 C.B. 128, holds that an organization formed to preserve a lake used as a public
recreation facility by treating the water in the lake and otherwise improving its condition for recreational
purposes is a charitable organization within the meaning of IRC section 501(c)(3).

Rev. Rul. 71-29, 1971-1 C.B. 150, states that a grant to a city transit authority for the purpose of maintaining a
mass transportation system qualifies as a charitable disbursement in furtherance of an organization's exempt

purposes.

Rev. Rul. 85-1, 1985-1 C.B. 177, states that an activity is a burden of government only if there is an objective
manifestation by a governmental unit that it considers the activities of the organization to be its burden. it was
through participation of government officials on the governing body of the charity, the provision of funding,
and the actual use of the organization's services.

Rev. Rul. 85-2, 1985-2 C.B. 178, states that an organization is lessening the burdens of government if its
activities are activities that a governmental unit considers to be its burdens, and the activities lessen such
governmental burden. The organization must demonstrate that a governmental unit considers the organization to
be acting on the government’s behalf, thereby actually freeing up government assets — human, material, and
fiscal — that would otherwise have to be devoted to the activity. This determination is based on facts and
circumstances. The fact that a government sometimes takes part in an activity will not be enough to meet the
test, nor will mere expressions of support from officials.

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 Universal Oil Products. Co. v. Campbell, 181 F.2d 451, 464 (7th Cir. 1950), it was found that a business
corporation engaging in development of refining processes was not organized nor operated exclusively for
scientific or educational purposes. The court quoted another case in nothing that: “It did not operate on the basis
of science for the sake of science. It was science for the sake of business. The fact that scientific methods were
used by the petitioner does not alter the case. Most business today uses some kind of scientific processes or
methods.”

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


6

In Retired Teachers Legal Defense Fund v. Commissioner, 78 T.C. 280, 286 (1982), the tax court defined
private benefit to include any “advantage; profit; fruit; privilege; gain or interest.”

In Columbia Park & Recreation Association, Inc. v. Commissioner, 88 T.C. 1 (1987), aff'd without published
opinion, 838 F.2d 465 (4th Cir. 1988), the petitioner argued that it had a charitable purpose to lessen the
burdens of government. According to the petitioner, it provides a wide range of services and facilities to the
residents of a large private real estate development and that if it did not provide these services and facilities the
local or state government would have to provide them. The Tax Court, in upholding an IRS ruling that the
petitioner is not organized and operated exclusively for exempt purposes within the meaning of IRC Section
501(c)(3), rejected the petitioner’s argument, saying that the mere assertion that, in petitioner’s absence,
government would have to assume the activities in question does not mean the activities are, in fact, the burdens
of government. Rather, the court said, the organization must demonstrate that the government accepts the
activities conducted by the petitioner as its responsibility and recognizes petitioner as acting on its behalf. In
addition, the organization must further establish that its activities lessen the burden of the state or local
government.

In Jacobsen v Katzer, 535 F.3d 1373 (Fed. Cir. 2008), the court held that a software owner cannot bring
infringement action as to an open source software unless the defendant acts in a manner contrary to the open
source license terms.

Application of law

IRC Section 501(a) provides for the exemption from federal income tax for organizations described in Section
501(c)(3). As stated in Treas. Reg. Section 1.501(c)(3)-1(a)(1), an organization must be both organized and
operated exclusively for purposes described in Section 501(c)(3). You do not meet the requirements under
Section 501(c)(3) because you fail the operational test as explained below.

You have not demonstrated that you are operated exclusively for exempt purposes within the meaning of IRC
Section 501(c)(3). A substantial part of your activities are in furtherance of creating a ,
which is not an exempt purpose; therefore, you are not operated exclusively for exempt purposes.

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. A

that is open source and community driven through open messaging platforms L and M does not serve an exempt
purpose. As developing and maintaining a is your primary activity, it is a substantial
activity. Accordingly, you have a substantial nonexempt purpose, and are not exempt under IRC Section
501(c)(3).

The Creation of a Does Not Further Scientific Purposes.

You do not qualify for tax-exemption as a scientific research organization for your activities related to the
research and development of a . To qualify as an IRC Section 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. Section 1.501(c)(3)-1(d)(5).

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


7

Your self-described activities of research and development of technology such as software or other innovations
are like the two organizations described in Rev. Rul. 65-1 and Rev. Rul. 68-373, in that you are engaging in, or
otherwise funding, routine software and technology 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 to be competitive in the market.

You are also like the organization in Universal Oil Products. Co. v. Campbell. The organization’s main
objective in that case was to develop and acquire oil refining processes. The court found that such activities did
not constitute scientific research. The court indicated that the organization’s activities were “science for the
sake of business.” Here your activities are for the sake of business in that what you claim to be scientific
research stands to benefit an entire industry that develops technologies.

Your activity is of a type ordinarily carried on as an incident to commercial or industrial operations. A
involves open-source software intended to replace software created by
entities. A also involves software intended to replace “ ” software
created by entities. The grant agreements that you provided indicate that your funds will be used to
create software applications that replicate programs. One grant creates a * for D. Another
grant replicates sites like or creating a “peer-to-peer marketplace for services.” And a third
guards the user from malicious internet activity. The fact that the source codes for these programs will be open
to the public (at least in their beta formats) does not remove such activity from being incidental to commercial
operations.

Therefore, even if your research is made available to the public, you have not demonstrated that you conduct
scientific research because your activities are an incident to commercial operations.

The Creation of a Does Not Further Charitable Purposes.

You have not shown that your activities further a charitable purpose because you do not limit your services to a
specific charitable class. You claim that a will benefit the general public; but the general
public is not a defined charitable class, as it includes all persons, not just those with charitable characteristics,
such as the poor and distressed.

Moreover, whatever public good you claim your provides, it is not the type of public
benefit contemplated by IRC Section 501(c)(3). Not all organizations which incidentally enhance the public
good will be classified as “public” organizations within Section 501(c)(3). For example, commerce clearly
provides an economic benefit to the community, but Treas. Reg. Section 1.501(c)(3)-1(c)(1) limits the kinds and
amounts of commerce exempt organizations may conduct. It is significant that Congress enacted special
exemption provisions (e.g., Section 501(c)(6)) for certain types of organizations which would be unable to meet
the stricter Section 501(c)(3) tests which require service to public interests rather than to private ones.
Accordingly, because you do not limit use of your to a charitable class, the development
and distribution of the by you to the public under open-source licenses is not the type of benefit to
the community contemplated by Section 501(c)(3) and does not further a charitable purpose.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


8
The Creation of a Does Not Lessen the Burdens of Government.
You state that you were established for the purpose of lessening the burdens of government. You must

demonstrate that the government accepts your activities as its responsibility and recognizes that you are acting
on its behalf. See Columbia Park & Recreation Association, Inc. v. Commissioner, 88 T.C. at 21.

The term “charitable” includes lessening the burdens of government. Treas. Reg. Section 1.501(c)(3)-1(d)(2).
To qualify as an IRC Section 501(c)(3) organization on the basis of lessening the burdens of the government,
you must meet a two-pronged test. The first prong requires that a government unit objectively manifest that it
considers your activities to be its burden. See Rev. Rul. 85-1 and Rev. Rul. 85-2.

You do not meet the first prong of the lessening the burdens of government test as there is no objective
manifestation by the government that it considers the development of an “ ” to be its burden. You
have not shown that you will be funded, supported by, or have a working relationship with any governmental
entity. You have not demonstrated an objective manifestation by the government recognizing that your
activities are its burden or responsibility, as required by Rev. Rul. 85-1 and 85-2.

Therefore, we must consider all relevant facts and circumstances in determining whether an objective
manifestation exists. “A favorable working relationship between the government and the organization is strong
evidence that the organization is actually ‘lessening’ the burdens of the government.” See Rev. Rul. 85-2. The
stronger the control a government has over the activities of the organization the better evidence of an objective
manifestation. See Rev. Rul. 85-1. You are not controlled, nor are you working directly with the government.
The government has no influence over your activities, no representation in your governing body, nor do they
have any right to appoint any of your officers and/or board members. They do not have any role in how you
conduct your operations.

You do not meet the second prong of the lessening the burdens of government test. To meet the second prong
your activities must actually lessen the burdens of a governmental unit. Evidence that the organization is
actually lessening the burdens of government is shown when the government could not continue to conduct its
program without the organization’s activities. See Rev. Rul. 85-2. Your activities do not alleviate any fiscal or
personnel burden of the government. There is no evidence you defray any of their expenses. Moreover, the
government has not acknowledged that the creation of a is its burden. Thus, you also fail to
meet the second prong of the test and do not qualify under IRC Section 501(c)(3) as an organization that is
lessening the burdens of the government within the meaning of Treas. Reg. Section 1.501(c)(3)-1(d)(2).

You are unlike the organization described in Rev. Rul. 70-79 where the chief elected officers of the local
jurisdictions constituted the membership of the organization. The interrelationship between the local
governments and the organization indicated the existence of a burden of government in that the organization’s
membership was composed totally of government officials.

You state the Organization for Economic Cooperation and Development (OECD) stressed the importance of an
open internet to achieve social well-being and address society’s greatest challenges, including health care and
climate change. OECD does not use the phrase “open internet” to mean a fully decentralized, open source, non-
proprietary, internet. The documents use the phrase “open internet” to describe how the internet is relatively
open and decentralized by nature. The OECD documents do not manifest the intent of any part of the
government within the meaning of IRC Section 501(c)(3) to develop an internet as you describe. The

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


9

documents also do not solely refer to the positives of internet openness, but rather, examine the pros and cons of
the relatively decentralized nature of the internet.

The Creation of a is Not a Public Work.

You state that you are creating a public work by developing a designed to work as a public utility.
fail several 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. Rul. 66-358 and Rev. Rul.70-186. are

, and by their very nature, are not fixed; their perpetual existence and access by the
public relies upon private persons the on private servers, and anyone may the
Second, of this nature are not “ordinarily provided at public expense.” It is not something
ordinarily constructed by public bodies for use by members of the public. Third, anyone can appropriate it or
portions of it for nonpublic uses. For instance, private persons can use it for nonexempt purposes.

In Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), the court recognized that free and open software licenses
are used by “software engineers ... to dedicate certain works to the public” and Rev. Rul. 71-29, recognized that
purposes beneficial to the community as a whole have been deemed charitable. 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 Scott and Ascher on Trusts, 5th ed. Section 38.6. 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. As noted above, complete public ownership is an essential tax characteristic of “public
works” within that term's meaning under IRC Section 501(c)(3).

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

The Creation of a Does Not Further Educational Purposes

You claim you are developing and maintaining a and that you will publish some
educational materials. Treas. Reg. Section 1.501(c)(3)-1(d)(3) defines educational as the instruction or training
of the individual for the purpose of improving or developing their capabilities, or the instruction of the public on
subjects useful to the individual and beneficial to the community. While you may conduct some activities with
educational aspects, you are not operated exclusively for exempt purposes, and you are operated for substantial
nonexempt purposes. Unlike the organizations in Rev. Rul. 65-2, 66-179 and Rev. Rul. 66-255, which provided
instructional training, lectures, workshops, exhibits and presentations, you primarily develop and distribute
open-source software. You state that your activities consist of approximately 20% education and grants. Even if
20% of your activities exclusively further educational purposes, a substantial portion of your activities are not
primarily educational and are not otherwise exempt.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


10
Private Benefit

An organization is not organized or operated exclusively for one or more exempt purposes unless it serves a
public rather than private interest. See Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). In Retired Teachers Legal
Defense Fund, the tax court defined private benefit to include any “advantage; profit; fruit; privilege; gain or
interest.” You are operated for a substantial private interest in that you promote the private interest of your
initial and primary donor, a entity, and the private interests of companies in the

tech space. Your main contributor, a entity, acknowledges it expects to receive economic benefits
from its contribution to the organization. In the contribution agreement it states in part, “Contributor believes,
based upon extensive experience in the field of development, that transferring the Contributed
Assets to the Assignee will bring economic benefits both to itself and to other persons and entities, and
Contributor further believes that, although it will not receive any specific quantifiable services from the
Assignee on account of the contribution nor will it be a customer of the Assignee, the economic benefits it will
receive from the contribution will be commensurate with the value of the Contributed Assets transferred to the
Assignee.”

You admitted in your application that your goals are closely aligned with those of some entities. You
made investments in some of these entities. You also make grants to entities and to
individual entrepreneurs. According to your grant agreements, use of grant funds is entirely outside of your
control or direction. Rev. Rul. 68-489 provides that for such grants to further a charitable purpose you must
retain control and discretion over these funds.

You haven’t established that your free consulting services to entities excludes entities.

Throughout your application for recognition of exemption you have acknowledged that your efforts will provide
economic benefits to private shareholders or individuals as defined in Treas. Reg. Section 1.501(a)-1(c). Your
contribution contract states that the contributor, which is a entity, expects economic benefits both to
itself, equal to its contribution, and to other persons and entities. You invest and support the development of

and technologies; technologies which are ordinarily used and developed for commercial
purposes. And your grant agreements acknowledge that you, or your principals, may benefit from the use of the
funded applications.

For the above reasons, you benefit private interests, and such benefit is not merely incidental to exempt
purposes. Per Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii), an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest.

Conclusion

Based on the foregoing, we have determined that you were formed for the purpose of creating, developing, and
publishing a specific product. You are operated for substantial non-exempt purposes and for the private benefit
of contributor and other entities. In addition, you do not further a scientific purpose, do not serve a
charitable purpose, are not a public work, and do not further an educational purpose or serve a charitable class
as described in IRC Section 501(c)(3). Therefore, you do not qualify for exemption under Section 501(c)(3) and
donations to you are not deductible by the donor.

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


11

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 Determination 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: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

PO Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K


12

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K