Scarecrow - 4:54 pm on Nov 21, 2008 (gmt 0)

The click-throughs from Google ads shown as a result of Firefox's default search box, show up at Google with a Firefox ID in the QUERY_STRING. This, plus the fact that the income from Google to Mozilla Foundation since 2004 is variable, strongly suggests that Mozilla is getting a percentage of the Google ad revenue. In addition to the default search box set to Google, Mozilla prefetches the top result from Google searches. And if the URL entered in the address bar cannot be parsed as a URL, Firefox asks Google for its best guess and displays that page. Google also hypes Firefox on its own site.

The details of the contract between Mozilla Foundation and Google have not been made public, but no doubt the IRS will get a copy -- with a subpoena, if necessary.

While Mitchell Baker underplays this issue, the fact is that the Foundation treated the Google revenue from 2004 and most of 2005 as Foundation services that are related to the Foundation's exempt function and purpose. By 2006 they decided that the term "royalties" sounded safer than "search revenue" in describing the same income source. In both cases it seems likely that it should have been declared as "unrelated business income" (UBI).

If the IRS requires a UBI reclassification for 2004 and most of 2005, then the result of this will be that the $14.8 million held by Mozilla for this contingency will be collected by the IRS. Plus there will be penalties, and California can also collect tax on these amounts.

A reclassification to UBI means that the Mozilla Foundation's claim that its public support meets certain standards will suddenly fail, since the UBI revenue is now entered into the equation and dramatically changes the percentage of claimed public support. At this point the Foundation may be considered a private foundation instead of a public charity, and be subject to a two percent tax on its net investment income. That would amount to about $100,000 a year.

From the end of 2005 until today, the Google revenue has been handled by the Mozilla Corporation, not the Mozilla Foundation. The Corporation, which is wholly owned by the Foundation, pays taxes and was created specifically because of this tax problem. Therefore, the main issue is the way the Foundation handled the Google revenue in 2004 and most of 2005. However, the IRS is looking at both the Corporation and the Foundation, and according to the independent auditor's combined report, is also challenging certain deductions on the Corporation's tax return. The salaries are now paid by the Corporation too. According to the Foundation's IRS Form 990, Mitchell Baker received nearly $570,000 in salary and benefits in 2006, and the same amount again in 2007.

Documentation for all of this is available at the bottom of s-c-r-o-o-g-l-e DOT org/mozilla.html