12 April 2018 Organization promoting open source software for physicians fails to qualify for tax-exempt status under Section 501(c)(3) In PLR 201814010, the IRS has ruled that an organization that promotes an open source software to assist physicians with running their medical offices does not qualify for tax-exempt status under Section 501(c)(3) because the organization does not operate exclusively for exempt purposes, as more than an insubstantial part of its activities are devoted to non-exempt purposes. The organization at issue (ORG) was formed to support an open source software project with respect to software that is used by physicians' offices. The software includes functions to enable physicians to schedule patient appointments, remind patients of their appointments, record patient histories, order pharmaceutical drugs and diagnostic tests, and issue bills. By facilitating various tasks, the software assists physicians with operating their medical offices and complying with certain federal requirements. The software is free to download and openly available to any organization. ORG's website describes the software and solicits donations to support the open source software, including improvements and certifications related to the software. The website also describes support options for the software. In addition to including free online support forums and guides, the website provides a list of and links to several vendors and developers from whom users may purchase professional support relating to software installation, maintenance and customization. Some of the professional support companies listed on the website are affiliated with board members of ORG. The IRS determined that ORG does not qualify as a Section 501(c)(3) organization because it is not operating exclusively for exempt purposes. ORG promotes and supports software that helps physicians run their medical offices and meet compliance regulations. In so doing, ORG does not support a public interest, but rather the private interests of physicians as well as the professional vendors to whom it refers the physicians for software support. The IRS stated that maintaining a website to promote open source software is not an exempt purpose. The physicians who use the software derive a commercial advantage from the free and openly available software because they would otherwise have to purchase or develop their own software. The professional software vendors listed on ORG's website, some of whom are affiliated with ORG's board members, also benefit from ORG's activities. The IRS concluded that these private benefits demonstrate that ORG is operating for a substantial non-exempt purpose by operating primarily for the benefit of private individuals. The IRS also noted that although the promotion of health is a recognized charitable purpose, not every activity that promotes health furthers a charitable purpose. (See Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff'd, 625 F.2d 804 (8th Cir. 1980).) Although ORG's open source software may help to promote health, the software fails to exclusively further an exempt purpose and simultaneously provides a private benefit to doctors, medical officers and vendors. This ruling offers further support that the IRS considers open source technology as an activity that substantially benefits private interests because use of such technology is not directed toward benefitting a charitable class. In recent PLRs, the IRS has ruled that organizations using open source technology purporting to develop bionic devices to aid individuals with amputations (see Tax Alert 2018-0459), and now medical software, provide private benefits that are not insubstantial, even though the organizations operate in part to further a traditional exempt purpose — the promotion of health. In both of these PLRs, the organizations did not demonstrate that they conducted sufficient charitable activity to overcome the level of substantial private benefit provided through their operations. The IRS noted that although open source technology can benefit tax-exempt medical facilities, such technology also benefits commercial enterprises because it is available to any organization in the public sphere. The organizations in these recent PLRs also provided additional private benefit beyond the benefits made available to the public through the use of the open source technology. In each PLR, the organization at issue provided direct benefits to disqualified persons. In PLR 201814010, board members of ORG were affiliated with software maintenance companies that offered their services through the open source software, and in PLR 201808019, the initial device was being created for a family member of an officer of the organization. Organizations seeking to secure tax-exempt status from the IRS must establish that they truly operate exclusively for exempt purposes, ensuring that their net earnings do not inure to the benefit of private shareholders or individuals. A private letter ruling is a written statement issued to a particular taxpayer that interprets and applies tax laws to the taxpayer's specific, represented set of facts, and may not be used or cited as precedent by other taxpayers or by IRS personnel. Thus, although the ruling is instructive on how the IRS might rule regarding a particular matter, organizations are cautioned not to rely on the ruling as authority and to consult with their tax advisors to determine the tax consequences of their own facts and circumstances. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
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