Mozilla prepares for bad times, and an audit

Lean, not-mean, and sustainable is the way to take on the current economic climate and the Feds too, say Mozilla reps who posted the project's audited financial statements and tax forms for 2007 and gave a glimpse ahead...to today.

The relatively peaceful era of 2007 went well for Mozilla in both Foundation and Corporation forms. Revenues were up about 12%, mainly from their Google search-functionality arrangement, though search revenue didn't keep pace with Firefox's user base growth. Revenues were $75 million against expenses of $33 million, mainly for staff (Mozilla employs around 150 full- and part-time employees) and, to a lesser extent, infrastructure. Assets were $99 million, with unrestricted net assets at $82 million.

The Mozilla Foundation doled out around $700,000 in funds for development-related activities, and another $321,326.40 for various other open-source-related projects. You'll notice that that number's rather specific, which makes this as good a moment as any to mention that the IRS has taken an interest in the Mozilla Foundation -- yes, that's an audit underway.

The question appears to be whether the Foundation is a public charity (as Mozilla believes it to be) or a private foundation, which makes a difference as to whether the money from Google qualifies as royalties or unrelated business income (UBI). If it's UBI, there will be tax owed, the Foundation will be reclassified as a private foundation (and not tax-exempt), and its nonprofit status would be taken away.

Mozilla's keepers thought this might come up, as they note in the disclosure post, and in 2005 they laid in a "tax reserve fund" just in case. "We are early in the process and do not yet have a good feel for how long this will take or the overall scope of what will be involved," the post cautioned, and considering the complexity of the tax code, this could take many months to resolve.

It's certainly an unusual arrangement, to gather such a huge percentage of funding (Google accounts for about 88% of that $75 million) from one essentially commercial financial deal. And, as TechCrunch blogger Erick Schonfeld points out, it'll be interesting to hear how Google itself accounts for that $66 million. The Foundation secured an advance ruling that declared it to be a public benefit corporation, and non-Google public support is still over the crucial 10% level.

The announcement inspired a certain amount of blogosphere hyperventilation. Self-proclaimed Google watchdog Daniel Brandt accused Mozilla of "evading taxes," dug up the old Leona Helmsley quote about how only the "little people" pay them, and concluded with a statement that "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."

Cooler heads, such as that of John Colombo at the Nonprofit Law Prof Blog, weren't so quick to rule: "My guess is that the IRS is going to classify this income as UBI, not royalties, but there's certainly enough doubt about the definition of royalties that I wouldn't bet much on it."

Moving forward, Mozilla says it's feeling good about continuing with "relative stability" despite the financial crisis, stating that it has been doing so much with so little for so long that strange economic times make no impression. The foundation is sitting on "a significant amount" of retained earnings and has no current expectation of dipping into it, saying that revenues for the near term are sufficient to fund ongoing projects.

And that's a win for open source, not to mention for existing outside the world of share prices and market valuations. "The open source software development model is adept at providing multiple tools to achieve our goals," the post says. "Financial resources are a catalyst, but neither the goal nor the only tool."