IRS Says Research Charity Will Keep Its Tax Exemption

The Internal Revenue Service has ruled that a charity that conducts scientific research is doing nothing improper by performing studies for a for-profit company and will keep its tax exemption.

The charity, which was formed to research new methods in medical imaging, agreed to collect data for the company using a method covered by patents the company has licensed. The charity evaluates whether the imaging method is able to identify a variety of medical conditions.

Under the agreement, inventions (patentable or not) or materials that could be copyrighted resulting from the research by the charity can be made available to the company through a royalty-free license.

The charity designed the studies, but company representatives are allowed to observe them.

In its ruling, the IRS said the charity’s activities qualify as “scientific research in the public interest” under federal law and regulations.

The charity is not testing a commercial product to qualify it for sale, an act that would be improper, the IRS said.

“Any results generated by [the] charity’s research could provide the basis for commercial products but would not constitute marketable products on their own,” the ruling said. “[The] charity does not conduct any market research or evaluate the commercial practicality of the method.”

The IRS noted that federal regulations say scientific research may be carried on in the public interest even though a commercial sponsor retains the rights to intellectual property produced by the research.

Federal regulations also say that scientific research is carried on if the results are made available to the public through trade publications. The charity in the ruling “published two papers in publicly available journals discussing the results of the research for [the corporate] sponsor,” the IRS said. “There is no indication that publication was unreasonably delayed after completion of the research.”

As is its policy, the IRS did not identify the charity involved in the ruling (Technical Advice Memorandum 200905033).