Exclusive:
Google's arrogance infects Mozilla
Foundation
Mozilla Foundation evades taxes on its Google windfall
by Daniel Brandt
January 29, 2006
Firefox also defaults to a Google search when it is unable to recognize the entry in the address bar as a URL. And in 2005 Firefox enabled a prefetch "feature" that was tied to the top result shown by a Google search.
Rumors began in mid-2005 that Mozilla Foundation's income from Google was huge. These rumors were reinforced in August, when the Foundation announced that it was spinning off a for-profit subsidiary. Some comments made to the press basically confirmed that this was done for tax reasons.
|
"Firefox's revenue share with Google (the search toolbar in the browser) generates about $50 million a year, he [Mitch Kapor] said." — from a speech by Mitch Kapor on February 14,
2006, at the Open Source "I said, 'You must pay lots of taxes.' She turned to me and said, 'We don't pay taxes; only the little people pay taxes.' " — Elizabeth Baum, testifying about her former
boss Leona Helmsley |
After waiting for the Foundation's filing extensions to expire, I received a copy of their Form 990 on January 6, 2006. I had told Mr. Mitch Kapor and Ms. Mitchell Baker back in August why I wanted to see their 990. I wanted to know how much income they had from Google, and I wanted to see if they declared it on a 990-T and paid taxes on it.
It turns out that they did file a 990-T, but only to pay the tax on Amazon affiliates product revenues of $99,270. Their "search revenues" amounted to $4,422,674 and they paid no tax on this amount. This is presumably all from Google. Their reason for not paying tax on this amount is that they claim this income is related to their exempt function or purpose.
After reading the IRS material on "unrelated business income," it seems
to me that this claim is not only arrogant, but also fraudulent. The IRS
instructions make it clear that if a nonprofit newsletter starts carrying
ads, for example, then this advertising income is unrelated business income
and is taxable. The IRS also makes it clear that just because an unrelated
business activity generates income that is then used to further the
exempt function or purpose, this does not by itself qualify that activity
as exempt from taxation.
|
"Ms. Baker, who is an attorney, says she had trouble finding relevant case law or precedents for a nonprofit whose revenues come from a traditionally taxable source. Attempting to avoid future complications, Mozilla Corporation was founded as a wholly owned unit of Mozilla Foundation in August 2005. 'In common parlance it's a for-profit, but what we really made was a taxable subsidiary,' says Ms. Baker." — Red Herring, April 3, 2006 ( Excuse us for asking a silly question, but if the for-profit was founded in August 2005, and the tax returns at issue here were filed three months later, doesn't this mean that Ms. Baker was fully aware, when these returns were filed, that the 2004 revenue from Google should have been declared as taxable income? ) |
Mozilla Foundation's statement that their arrangement with Google "facilitates the dissemination of the Foundation's browser, thereby increasing the accessibility of the Internet," is laughable. Between the IRS and the California state tax, what's at issue here is something close to $2 million that the Foundation kept for themselves. They could have written out a check for the amount they owe. The Google income was 76 percent of their total revenue in 2004, and of that total, almost all of it was still in the bank at the end of the year.
How does spreading Google ads help disseminate their browser? And even if it did, doesn't all that advertising decrease the accessibility of the Internet rather than increase it? Mozilla Foundation owes the IRS and California a lot of money, and they also owe everyone an apology for selling out to Google-style arrogance and greed.
Mozilla Foundation's Forms 990 and 990-T
(PDF, 412 kB — for Jan.1-Dec.31, 2004, filed in Nov. 2005)
IRS instructions for the 990-T
(PDF, 148 kB — 990-T computes tax on unrelated
business income)
IRS publication 598
(PDF, 168 kB — provides examples of what constitutes
unrelated business income)
This explains that nearly $2 million for 2004 and over $11 million for 2005 are defined as a potential tax liability, not including possible penalties. The auditor implies that before it was transferred to the Corporation, the revenue from Google was considered by Mozilla management to be a royalty, and not as unrelated business income. But this is questionable, so it is listed on Mozilla's Form 990 for 2005 as a potential liability. The advance ruling period for the Foundation's 501(c)(3) ends on December 31, 2007, at which point the evidence from previous years is examined and the IRS will issue a determination letter. The public-support test will fail if the revenue from Google is looked at closely by the IRS. (Too much support from a single source disqualifies that portion of the revenue as "support from the general public," even if it is a legitimate donation, or is revenue clearly related to the exempt function and purpose.) At that point, the Foundation could be considered a private foundation by the IRS instead of a public charity, and be subject to a two percent tax on its net investment income. Why doesn't Mozilla just move to the Cayman Islands? Perhaps that's what Mitchell Baker, who pulled in $567,262 in salary and benefits in 2006, would prefer anyway.
Mozilla Foundation's Form 990 for 2005 (PDF, 1.4 megs — for Jan.1-Dec.31, 2005)
Mozilla Foundation's Form 990 for 2006 (PDF, 2.8 megs — for Jan.1-Dec.31, 2006)
Update, 2008: Independent consolidated audit for the Foundation and Corporation — see note 5 at the end.
"The Foundation received the royalty revenue in 2004 and part of 2005. These years are open to examination and the IRS is currently auditing these years for the Foundation... In addition, the IRS is currently auditing the Corporation for 2005 and is challenging certain deductions."
Mozilla Foundation's Form 990 for 2007 (PDF, 2.3 megs — for Jan.1-Dec.31, 2007)
2008-11-19: In an interview with CNET, Mitchell Baker states that the so-called "royalty revenue" is actually ad revenue. This makes it almost certain that the IRS will classify it as "unrelated business income."
Is the revenue based on Firefox downloads? Search queries?
Baker: It's analogous to what you see on Web sites with Google AdSense (in which other sites show Google ads, and Google shares the resulting revenue when people click on those ads). It's a mechanism for ad distribution.
So Mozilla is funded by ad revenue?
Baker: That's right. It's not the AdSense program, but it's from ad revenue.
Scroogle
Google Watch