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.

-------------------

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 incident to commercial activities and was not exempt under I.R.C. § 501(c)(3).

> Rev. Rul. 68-373, 1968-2 C.B. 206, described an organization whose principal activity was clinically testing drugs for commercial pharmaceutical companies. These tests were required in order to comply with Food and Drug Administration requirements that drugs be tested for safety
and efficacy before they can be marketed. The pharmaceutical companies selected the drugs to be tested and used the results of the tests in their marketing applications to the Food and Drug Administration. In addition, the results of the tests were freely available for publication in
various scientific and medical journals. Clinical testing is an activity ordinarily carried on as an incident to a pharmaceutical company’s commercial operations. The fact that the testing must be done by highly qualified professionals does not change its basic nature. Therefore, such testing did not constitute scientific research within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(5)(i). The organization failed to qualify for exemption from Federal income tax under I.R.C.
§ 501(c)(3).

It goes on an on... all seemingly very consistent in establishing what is considered 'scientific' and that how creating a SaaS platform falls squarely outside the definition:

> In lIT Research Institute v. United States, 9 Cl. Ct. 13, (1985), ... The Court held that "in the context of this litigation, ’science’ will be defined as the process by which knowledge is systematized or classified through the use of observation, experimentation, or reasoning." The Court further held that as scientific research does not include activities of a type ordinary carried on as incident to commercial or industrial operations, the organization was found not to be involved "in the commercialization of the products or processes developed as a result of its research," as it "would only develop a project to the point where the research principles were established." (emphasis added).

--------------

And so the knife goes in:

> Based upon the above law, you do not meet the first and second elements for recognition as a scientific research organization under I.R.C. § 501(c)(3) because you do not engage in scientific research and your development activities are of a type incident to commercial or industrial operations. Unlike the organizations described above, you are not utilizing objective scientific methods to formulate or verify facts or natural laws, or to search for a demonstrable truth. You do not propose a hypothesis pertaining to the verification of facts or natural laws. You do not
utilize scientific methods to test this hypothesis and objectively record the results of your experimentation. Finally, you do not objectively evaluate your research results and publish the findings for the public to utilize. Instead, you describe your scientific research activities as
developing open source software. These activities can best be described as routine product development, which are a type incident to commercial operations. Under Treas. Reg. §1.501 (c)(3)-1 (d)(5)(ii), scientific research does not include activities carried on as an incident to commercial or industrial operations, such as the design or improvement of goods or services.

...

> Finally, you do not meet the third element for a scientific research organization, which requires that scientific research to be directed toward benefiting the public. Treas. Reg. § 1.501 (c)(3) - I (d)(5)(iii). Your research does not benefit the public. First, you do not publish the results of your research. See Treas. Reg. § 1.501 (c)(3)-1 (d)(5)(iii)(a). Rather, you make X and I software’s source code and documentation, not the results of your research, available to the public. The release of X and Y software’s source code is akin to the release of a commercial product, not the publication of scientific research.