In September 2015, John Levine asked why ICANN should be considered a tax-exempt organization following the completion of the U.S. government’s transition of technical management of the Internet’s Domain Name System (DNS). The U.S. Internal Revenue Service (IRS) determined that ICANN was an exempt organization in 2000 and, inarguably, circumstances have evolved materially since then.

In 1999, ICANN submitted IRS Form 1023 applying for exemption from taxation as a corporation “organized and operated exclusively for charitable purposes” as provided for by I.R.C. § 501(c)(3). In Appendix 4, ICANN laid out legal claims supporting this application and cited both Treas. Reg. § 1.501(c)(3)-1(d)(2), which states that activities aimed at lessening the burdens of government are charitable activities, and Rev. Rul. 85-2,(9), which establishes a two-part test:

1. Whether an organization’s activities are activities that a governmental unit considers to be its burdens, and
2. Whether such activities actually “lessen” such governmental burden.

ICANN claimed that it qualified as an exempt organization because it met both criteria set forth in Rev. Rul. 85-2,(9) and the IRS agreed. However, the evolution of circumstances since then have made the premises upon which this IRS determination was based inaccurate and/or inapplicable.

ICANN’s Activities Are Not Governmental Burdens

In Appendix 4 of ICANN’s Form 1023, ICANN sought to establish that it carried out functions that “would otherwise be—and until the completion of the transition to ICANN are—the responsibility and burden of the United States Government” and offered four supporting claims:

1. DNS management has always been undertaken by, or on behalf of, the federal government;
2. The DOC (U.S. Department of Commerce) and ICANN have an established interrelationship with regard to DNS management;
3. The DOC has made statements indicating that it considers DNS management to be a governmental burden; and,
4. ICANN’s contractual powers will revert back to the DOC if it terminates the Memorandum of Understanding (MOU) with ICANN.

While these claims may have been accurate in 2000, this hasn’t been the case since September 30, 2016 when the U.S. Government completed the above-mentioned transition of technical management of the Internet’s Domain Name System (DNS).

Thus, ICANN’s technical management of the DNS is no longer performed on behalf of the government, ICANN does not have an established interrelationship with DOC any different than what can be enjoyed by any organization, the DOC no longer considers DNS management to be a governmental burden, and ICANN’s contractual powers will not revert to the DOC since DOC no longer has any readily apparent mechanism to withdraw its recognition of ICANN or otherwise reclaim technical management of the DNS.

Since ICANN no longer performs activities that otherwise would be governmental burdens, ICANN’s activities cannot “lessen” any governmental burden. Lastly, ICANN no longer has any direct working relationship with the U.S. Government for technical management of the DNS and, in any event, the MOU—offered by ICANN as “strong evidence” of a “favorable working relationship” for “lessening the burdens of the government”—expired in 2009.

ICANN’s Questionable Financial Dealings Warrant Scrutiny

When ICANN submitted Form 1023 in 1999, the organization’s annual revenues of less than a million dollars were forecasted to grow only to an estimated $5.9 million annually for the next two subsequent tax years, and the organization carried more debt than assets. By way of contrast, ICANN’s Form 990 for tax year 2018 declares revenues of more than $160 million and net assets of nearly $470 million.

Some areas for scrutiny include:

• ICANN’s garnering of hundreds of millions of dollars in application fees and auction proceeds stemming from the creation of more than a thousand new Internet registries.
• A unique and arbitrary assessment of $0.75 that has been levied by ICANN since 2011 on each .net domain name registration and which exceeds the standard $0.25 per domain name registration contributed to ICANN by every other Internet registry. This has resulted in more than $70 million in additional revenue collected by ICANN, ostensibly for a “special development fund,” but the monies collected are not sequestered or accounted for separately from ICANN’s general revenues. (See .net Registry Agreement Fee Schedule)
• Warehousing of certain .com and .net domain names in violation of ICANN’s Bylaws Section 2.2 Restrictions with intent to improperly auction at least one of these names and provide the proceeds to an oddly redacted list of non-profit organizations. (See ICANN Bylaws and Second Amendment to the .com Registry Agreement)
• $20 million—to be paid in installments of $4 million annually for five years—collected by ICANN in conjunction with its approval of pricing power for the .com registry in 2020. (See Binding Letter of Intent)

Extraordinary Action Necessary to Protect the Public Interest

ICANN is a deliberately byzantine organization that struggles with remaining transparent and accountable to the global community of stakeholders that are impacted by its actions and decisions. In an April 15, 2020 letter to ICANN, California’s then-Attorney General Xavier Becerra wrote, “(t)here is mounting concern that ICANN is no longer responsive to the needs of its stakeholders.” Mr. Becerra’s concerns are more than justified because of ICANN’s unchecked ability to generate untaxed income by levying assessments and collecting unlimited fees and auction proceeds from the creation of new Internet registries. This invites corruption and risks destabilizing the Internet by eroding governance legitimacy.

Given these risks and the fact that ICANN’s justifications for exemption from taxation in 2000 are no longer accurate or applicable, an updated review is warranted and necessary. Accordingly, on May 12th, the IRS was requested to conduct a review of its 2000 determination that ICANN is an exempt organization and this request also was provided to the California Attorney General, which oversees non-profit organizations in that state.

ICANN may remain an exempt organization, but this must only be determined after a comprehensive updated review by the IRS and other regulatory authorities that is based upon current, accurate, and applicable justifications. Also, given that the Internet ecosystem has evolved materially since the turn of the century, other currently exempt organizations likely also require updated regulatory review and IRS determination.

This includes the Internet Society (ISOC) and its subsidiary Public Interest Registry (PIR) for, at a minimum, the proceeds from sales of single-character .org domain names. These sales resulted in significant revenues for PIR and ISOC with at least two names, i.org and v.org, being sold to Facebook and the Jimmy V Cancer Foundation, respectively, for at least $50,000 apiece at a time when .org pricing was still capped. Today, many other single-character .org labels are advertised for sale with a hefty price tag of $1 million.

The ICANN Board’s continuing failure to curtail misconduct occurring over many years—decades, in some instances—and the demonstrated widespread inability or unwillingness to ensure basic compliance with ICANN’s Bylaws are confirmation that additional extraordinary measures remain necessary for protecting the public interest.