TL;DR; Apparently there's a long and consistent history of administrative rulings and judgements demonstrating that you can't offer something like a commercial SaaS platform, even if it's open source, and call yourself a 501(c)(3). Fundamentally you are providing a service which is "ordinarily carried on as an incident to commercial or industrial operations" and as such doesn't fall under the "scientific" qualification.
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At first read, this seemed like a serious affront to non-profit open source development, but reading the rejection letter in full, I'm swayed by an apparent long history of rejecting applications of this type.
> I.R.C. § 501(c)(3) exempts from taxation any corporation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes,... The key term here I think is 'scientific purposes'.
> Treas. Reg. § 1.501 (c)(3)-1 (d)(5)(i) provides that a scientific organization must be organized and operated in the public interest. Therefore, the term scientific, as used in I.R.C. § 501(c)(3),includes the carrying on of scientific research in the public interest. "Research," when taken
alone, is a word with various meanings; it is not synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For research to be scientific, within the meaning of I.R.C. § 501 (c)(3), it must be carried on in furtherance of a scientific purpose. The determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical.
Now here's where I think it starts to go downhill for CASH Music:
> Treas. Reg. § 1.501 (c)(3)-1 (d)(5)(ii) provides that scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc.
The IRS, I think rightfully, is claiming that the service CASH Music provides (SaaS platform for selling and promoting music) is carried on as an incident to commercial operations.
> The following are examples of scientific research which will be considered as directed toward benefiting the public, and, therefore, which will be regarded as carried on in the public interest: (1) scientific research carried on for the purpose of aiding in the scientific education of college or university students; (2) scientific research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public; (3) scientific research carried on for the purpose of discovering a cure for a disease; or (4) scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area.
There are two examples in the case law that are cited by the IRS letter where applications for 501(c)(3) was denied which seem quite relevant:
> Rev. Rul. 65-1, 1965-1 C.B. 226, describes an organization which promoted and fostered the development and design of machinery in connection with commercial operation, and in connection therewith had the power to sell, assign, and grant licenses with respect to its copyrights, trademarks, trade names, or patent rights, that did not qualify for exemption from Federal income tax under l.R.C. § 501(c)(3). The primary purposes of the organization were to foster the development and design of labor saving agricultural machinery, including the development of new labor saving ideas and methods, and to conduct pertinent research related to this purpose. The organization was engaging in development activities of a type inc...
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At first read, this seemed like a serious affront to non-profit open source development, but reading the rejection letter in full, I'm swayed by an apparent long history of rejecting applications of this type.
> I.R.C. § 501(c)(3) exempts from taxation any corporation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes,... The key term here I think is 'scientific purposes'.
> Treas. Reg. § 1.501 (c)(3)-1 (d)(5)(i) provides that a scientific organization must be organized and operated in the public interest. Therefore, the term scientific, as used in I.R.C. § 501(c)(3),includes the carrying on of scientific research in the public interest. "Research," when taken alone, is a word with various meanings; it is not synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For research to be scientific, within the meaning of I.R.C. § 501 (c)(3), it must be carried on in furtherance of a scientific purpose. The determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical.
Now here's where I think it starts to go downhill for CASH Music:
> Treas. Reg. § 1.501 (c)(3)-1 (d)(5)(ii) provides that scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc.
The IRS, I think rightfully, is claiming that the service CASH Music provides (SaaS platform for selling and promoting music) is carried on as an incident to commercial operations.
> The following are examples of scientific research which will be considered as directed toward benefiting the public, and, therefore, which will be regarded as carried on in the public interest: (1) scientific research carried on for the purpose of aiding in the scientific education of college or university students; (2) scientific research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public; (3) scientific research carried on for the purpose of discovering a cure for a disease; or (4) scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area.
There are two examples in the case law that are cited by the IRS letter where applications for 501(c)(3) was denied which seem quite relevant:
> Rev. Rul. 65-1, 1965-1 C.B. 226, describes an organization which promoted and fostered the development and design of machinery in connection with commercial operation, and in connection therewith had the power to sell, assign, and grant licenses with respect to its copyrights, trademarks, trade names, or patent rights, that did not qualify for exemption from Federal income tax under l.R.C. § 501(c)(3). The primary purposes of the organization were to foster the development and design of labor saving agricultural machinery, including the development of new labor saving ideas and methods, and to conduct pertinent research related to this purpose. The organization was engaging in development activities of a type inc...