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In 2007, the Mozilla Foundation received 88 per cent of its revenue from a certain Mountain View sugar daddy. And thanks to its longstanding Google dependence, the organization is facing an IRS audit and questions over its tax exempt status.

Today, the non-profit behind the open-source Firefox browser released its long-delayed 2007 financial report. Revenues hit $75 million, and $66 million of that came from Larry, Sergey, and crew.

In 2006, the Foundation pulled in $67 million, and Google dollars accounted for 85 per cent ($59.5 million).

Mozilla and Google have entered some sort of agreement that involves Firefox shuttling people onto the world's most popular search. You'll notice that Mozilla slaps a Google search box onto the Firefox toolbar and default home page. Just before Google unveiled its very own Chrome browser, the two outfits renewed their Firefox pact for another three years. It expires at the end of November 2011.

Presumably, the pact is tied to ad revenue generated through Firefox. It dates back to at least 2005 - and most likely to 2004. Mozilla's 2004 tax form shows $4,422,674 in search cash, or 76 per cent of its revenues.

The Foundation received tax exempt status in 2003. And it did not pay taxes on that $4,422,674 in 2004, saying that an arrangement with "a search provider...facilitates the dissemination of the Foundation's browser, thereby increasing the accessibility of the internet."

We're not quite sure how a search box facilitates the dissemination of a browser. But there you have it.

Then, in 2005, the Foundation spun off a for-profit operation. And multiple search engine contracts were transferred to this brand new Mozilla Corporation.

That same year, according to today's blog post from Mitchell Baker, chairperson of the Foundation, it set aside a "tax reserve fund" in case the Internal Revenue Service (IRS, the US national tax agency) decided to review the tax status of its 2004 and 2005 search engine funds.

And the IRS has indeed launched a review. "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," Baker says.

In its financial report, Mozilla argues that its 2004 and 2005 search revenues were royalties and should not be taxed. But it's well aware that the IRS may see things differently. Its tax reserve fund totaled $14,832,000 as of the end of 2007.

The report also says there has been an "inquiry regarding its tax exemption" because Google is supplying such a large share of its revenue: "While the Foundation did not automatically qualify as a public charity with public support at 33 per cent of total support, it believes that it qualifies as a public charity under the facts and circumstances test with public support over 10 per cent."

If it doesn't pass the test, the Foundation says, it will become a private charity, coughing up about $100,000 in taxes.

We say all this merely to show there's a fine line between a tax-exempt charity and a multi-million-dollar Google traffic machine. ®

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