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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 68-373

1968-2 C.B. 206

Sec. 501

IRS Headnote

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. 

Full Text

Rev. Rul. 68-373 

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.