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IRS REV. RUL. 68-373
Summary:
A nonprofit organization primarily engaged in testing drugs for
commercial pharmaceutical companies does not qualify for exemption under
section 501(c)(3) of the Code.
26 CFR 1.501(c)(3)-1: Organizations
organized and operated for religious, charitable, scientific, testing
for public safety, literary, or educational purposes, or for the
prevention of cruelty to children or animals.
Advice has been requested whether a
nonprofit organization engaged in clinically testing drugs under the
circumstances described below qualifies for exemption from Federal
income tax under section 501(c)(3) of the Internal Revenue Code of 1954.
The organization's principal activity is
clinically testing drugs for commercial pharmaceutical companies. These
tests are 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 founder and principal investigator of the
organization has been approved by the Food and Drug Administration as a
qualified investigator.
The pharmaceutical companies select the
drugs to be tested and use the results of the tests in their marketing
applications to the Food and Drug Administration. In addition, the
results of the tests are freely available for publication in various
scientific and medical journals. All the organization's income is
derived from the pharmaceutical companies in payment for testing
services.
Section 501(c)(3) of the Code provides
for the exemption from Federal income tax of organizations that are
organized and operated exclusively for charitable, scientific,
educational, or testing for public safety purposes.
Section 1.501(c)(3)-1(d)(1)(ii) of the
Income Tax Regulations provides that an organization is not organized or
operated exclusively for exempt purposes unless it serves a public
rather than a private purpose. To meet this requirement, it is necessary
for an organization to establish that it is not organized or operated
for the benefit of private interests.
Section 1.501(c)(3)-1(d)(4) of the
regulations defines the term "testing for public safety" as
used in section 501(c)(3) to include the testing of consumer products,
such as electrical products, to determine whether they are safe for use
by the general public.
Section 1.501(c)(3)-1(d)(5)(i) of the
regulations in defining the term "scientific" provides that
since an organization may meet the requirements of section 501(c)(3)
only if it serves a public rather than a private interest, a
"scientific" organization must be organized and operated in
the public interest.
Section 1.501(c)(3)-1(d)(5)(ii) of the
regulations further 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.
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 does not constitute scientific research within the meaning
of section 1.501(c)(3)-1(d)(5)(i) of the regulations.
Until a drug is approved for marketing by
the Food and Drug Administration, it is not a "consumer
product," available for general use by the public. The clinical
testing of a drug for safety and efficacy in order to enable the
manufacturer to meet FDA requirements for marketing is not "testing
for public safety" but is merely a service performed for the
manufacturer. Such testing principally serves the private interest of
the manufacturer rather than the public interest.
Accordingly, the organization fails to
qualify for exemption from Federal income tax under section 501(c)(3) of
the Code. |
