The new 501(c)(3) and the future of free software in the US

http://blogs.gnome.org/jnelson/2014/06/30/the-new-501c3-and-the-future-of-free-software-in-the-united-states/

254 66 12 years ago

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codezero4• 12 years ago

It sounds like the gist is that they were rejected because the code they create might be used by entities that are not nonprofits/charitable.

One one hand, this seems crazy if the software created is given -- for a bad metaphor: imagine a charity being unable to feed people because those people may use the energy they get from that food to do non-charitable works.

Separately, and to play devil's advocate, I can kind of see the logic here: it creates a loophole through which re-usable work that is funded under tax exempt status can then be used by anyone, so you could imagine some org donating some money to get some particular work done, then getting it and using it without having to have paid tax on the equivalent work that would have been done if they paid for it. Going back to the food metaphor, it might be like a charity offering free food to anyone, rather than just to those who have a particular need. I think that such a charity might run into a similar rejection, but I don't know.

Like I said, I think it sounds crazy, but hopefully this draws more interested parties into the discussion.

spenvo• 12 years ago

The NFL is considered a non-profit organization by the IRS, yet all of the teams which associate with its branding reap enormous profits.

How should all organizations which happen to open-source code automatically be "for profit" just because some other companies might use such code for commercial purposes? The two examples are very similar but the NFL is non-profit. If the precedent is set, the damage to the FLOSS movement would be real and lasting.

codezero4• 12 years ago

To be clear, there are significant differences with the legal classifications of various non-profits. 501(c)(3) is much different from 501(c)(6) (the NFL is (6)) I am not a lawyer so I don't know what the differences are, but it's possible/likely that if someone was going for a different kind of non-profit the rules would change dramatically, so they can't quite be compared apples to apples.

see: https://en.wikipedia.org/wiki/501(c)

dragonwriter7• 12 years ago

The NFL is considered a non-profit organization by the IRS, yet all of the teams which associate with its branding reap enormous profits.

The NFL is a 501(c)(6) trade association, so that's expected. Its not a 501(c)(3) charity.

The rules are completely different.

snowwrestler• 12 years ago

The NFL is not a great example as they have a specific exemption that Congress wrote into the law just for them.

dragonwriter7• 12 years ago

How should all organizations which happen to open-source code automatically be "for profit"

They aren't. See, inter alia, the Apache Software Foundation. "BOLO" doesn't mean "blanket prohibition".

smsm422• 12 years ago

>> so you could imagine some org donating some money to get some particular work done, then getting it and using it without having to have paid tax on the equivalent work that would have been done if they paid for it

If they donate the result to be used by everyone, not only this org - what's wrong with that? If a company builds a public park and this company's employees, along with others, can visit it - is it bad? If a company builds a hospital which accepts, among others, this company's employees - is it evil?

codezero4• 12 years ago

I am not justifying anything but I think that the target audience of the tax-free work is important to the IRS when classifying the organization. Like others have said, they may get exemption with some tweaks, but simply "not being bad" doesn't make it good, if you think of it from the point of view of a loophole that other companies can take advantage of, it's important to the IRS to avoid loopholes like that, it has nothing to do with good or evil, just with money and avoiding taxes :)

claudius• 12 years ago

The park could be completely encompassed by company buildings and the hospital could be located on a remote oil rig. Both could, legally, still be accessible to the general public for use as they please, but due to their concrete nature, the general public is either unaware of it or has few means to use it.

Similarly, the software built by the company-funded tax-exempt ‘charity’ could be constructed in such a way that essentially only the funding company can make use of it.

That’s not to say that accepting others in a hospital on an oil rig is ‘evil‘, it might just not be tax-exempt (assuming that an employees-only hospital wouldn’t be tax-exempt).

philipn2• 12 years ago

I'm the ED of a 501(c)3 non-profit (http://localwiki.org), and when we applied for our (c)3 status we got some flack along these lines, as well. Here's my advice to the Yorba Foundation folks:

If you haven't received your final rejection, you can appeal.

Don't try and do this yourself. The post says they spoke with folks at the Software Freedom Center, which is great, but I highly recommend finding a specialized attorney who's seen lots of applications and knows the right angle. Hire an attorney who specializes in obtaining 501(c)3 status. We made this mistake early on, thinking we could work through the NOLO book and apply ourselves. It cost us. For around $1k you can find a good non-profit attorney to help.

We got flack for the open-source thing, too. Our original exemption application was basically "Hey, we're a charity! We give things away for free and release open source code, which can be used by everyone!" Depending on the IRS agent assigned to you, you might get flack for this as well. Generally speaking, they may not like that a for-profit business can use your organization's by-product to make lots of money for themselves. We spent some time explaining how OSS worked to the agent, and was able to convince him that because (most) of our OSS is copyleft, that it would be a continually-free-and-open good, not a private benefit.

Nevertheless, just releasing OSS is NOT an exempt purpose. If you read the IRS regulations, they are very specific as to what a core exempt purpose is. You'll need to pick one that fits best. Generally speaking, it's 1) Church stuff 2) Scientific advancement and research 3) Furthering of the arts 4) Education 5) "Charity," meaning helping people who are disadvantaged in some way 6) Some others that I'm not remembering.

Most OSS 501(c)3 don't get exemption by just releasing open source software-- they get exemption by being an educational institution. So you may want to go that route -- the organization's core exemption is the creation of educational materials that help education members of a particular community in XYZ ways. This is what we ended up doing -- we're classified as an educationally-exempt organization. If you look up the 501(c)3 apps of some other OSS non-profits you'll see similarly -- e.g. Plone Foundation is set up as an educational organization.

Edit: If you'd like to take a look at some of our back-and-forth with the IRS agent at the time, check out the page here: http://localwiki.net/org/Historic_501%28c%293_application_pr... You'll see his response was similar to yours, but we decided to pursue educational exemption and were granted on that basis in the end. Also, you can call up the IRS Agent assigned to you and talk to them about the application, which can be extremely helpful.

dnautics• 12 years ago

oh thanks for the link to the back and forth. I am applying for my own 501(c)(3) - details in the profile - and we are still twiddling thumbs waiting for an agent to be assigned. The IRS is backed up for nearly a year now!

danbmil99• 12 years ago

So basically, Yorba f'd up by not getting advice from someone with deep knowledge of the proper bureaucratic bs to proffer for a successful application for tax-exempt status.

GabrielF002• 12 years ago

That's a little unfair. A 501(c)3 is a huge asset - not only is a 501(c)3 exempt from federal income taxes (and often state sales taxes) but people can make tax-deductible contributions to a 501(c)3. If two companies are producing a product and one is a 501(c)3, then that company has an enormous competitive advantage in the marketplace. Yorba is producing software that commercial software developers also produce. The IRS has a very good reason to make sure that Yorba is actually an exempt organization before it grants tax-exempt status - otherwise the government is effectively subsidizing one company in the marketplace.

GabrielF002• 12 years ago

This is a good explanation, but let me tack on one thing. The original blog post says:

> There’s a charitable organization here in San Francisco that plants trees throughout the city for the benefit of all. If one of their tree’s shade falls on a cafe table and cools the cafe’s patrons as they enjoy their espressos, does that mean the tree-planting organization is no longer a charity?

In fact, the tree-planting group can easily show that they serve an exempt purpose, namely "lessening the burdens of government". Planting trees is something that city governments routinely do for the purposes of beautification or whatever. If a non-profit wants to do it, that's a perfectly legitimate reason to get tax exempt status. The group would also have to show that they are serving a public interest - for instance they're not just planting trees outside of one company's coffee shops but they're providing a service for the whole neighborhood.

danielweber3• 12 years ago

That question shows the typical nerd-misunderstanding of law as a rule-based system with distinct outputs. They think the rule must be "no for-profit company can ever benefit from the work of the charity" and are pointing out how the rule is stupid so the rule must not exist.

IANAtaxL, in fact IANAL of any kind, but my reading is that the IRS doesn't want companies to set-up fig-leaf charities that absorb and hide their normal business functions.

labster• 12 years ago

By "we thought we could do this ourselves", philipn meant that basically I wasn't up to the task. Myself being not a lawyer and all.

Nolo's book isn't really meant for OSS/software/online projects, so it only really provides a rough outline of the process. Because of that, we got to the point where we did have to consult an attorney to get us back on track.

If you're working with an OSS community, it's important to note that giving stuff away != a charity. You need to emphasize that you are working specifically for the underprivileged. Even if you have an underprivileged community that you are serving, if you serve all comers it could easily seem as if it was self-serving to donors.

The educational exemption is generally much more appropriate for information and technology, like philipn said. When we took the time to explain that our goal was to teach people about their own communities, they were much more receptive. Other orgs like The Perl Foundation were similarly organized as educational (providing training at conferences, educational grants). Likewise with Wikimedia Foundation, which is fairly obviously educational despite major software investments.

If what you want to do is just be tax-exempt -- but not have tax deductible donations -- that's a much easier thing to do. A 501(c)6 may serve any community, so long as it gets most of its funding from donations or membership dues. That's how the Linux Foundation handles it. It's less desirable, but it will prevent you having to pay tons of back taxes.

kijin• 12 years ago

Just out of curiosity, has any FOSS project obtained 501(c)3 status through the "scientific advancement and research" and/or "furthering of the arts" clauses? IANAL but these look like obvious matches, even more so than the education clause. Projects like SciPy make a massive contribution to scientific research, whereas collaborative tools for writers and musicians, for example, might be seen as furthering the arts.

philipn2• 12 years ago

Yup, lots have. The Apache Software Foundation has a scientific exemption, and IPython is fiscally-sponsored by NumFocus (http://numfocus.org) which has a scientific exemption as well.

novaleaf• 12 years ago

I think a key point you make is regarding a for-profit company turning around and utilizing the non-profit assets.

If all OSS was 501c3 material, it would be easy to abuse for private R&D purposes.

reitzensteinm3• 12 years ago

Could you describe how this abuse would take place, exactly? R&D is already tax deductible.

I could see that if you funded a non profit via income like Kickstarter, that would allow you to use that money over multiple financial years without paying taxes on it in the mean time.

But that doesn't really seem egregious if the technology is to be open sourced.

bnolsen• 12 years ago

idiots. the business making the money pays the taxes. what kind of clowns and political hacks run the irs? oh yeah we dont know since they conveniently destroy any evidence when it is requested, and get away with it!

dwhly• 12 years ago

As the founder of a 501c3 non-profit that makes FOSS (http://hypothes.is), let me strongly second the points that Philip has made here.

1) Get expert counsel. It can make the difference in the ultimate determination, and also in the number of years (!) it takes to get approved. We were lucky in that we granted our determination without question-- and it still took nearly two years to get.

2) Don't focus on the software, focus on your mission. It's not just a ruse-- it really makes sense. Become knowledgeable about the nuances of the exemption, and why it is granted when it is.

3) Proactively call your agent, once one is assigned. Not only can it dramatically shorten the time to determination, but it can also often head off questions that, once asked, require formal replies and often lead to further clarifications, which all take time.

jcalvinowens• 12 years ago

Quotes From the IRS letter to Yorba:

You have a substantial nonexempt purpose because you develop software published under open source compatible licenses that authorize use by any person for any purpose, including nonexempt purposes such as commercial, recreational, or personal purposes, including campaign intervention and lobbying.

By this logic, all non-profit educational entities should be disqualified because things people learn through their programs might later be used by those people to make a profit.

public works must serve a community. Open source licensing ensures the Tools are accessible to the world. We have not found any authority for the proposition that the world is a community within the meaning of § 501(c)(3).

I understand that there are probably real legal reasons for the IRS saying this... but that's bordering on inanity worthy of the Onion.

titanix• 12 years ago

Private corporation seizing other's domains, non-profit organization unable to exempted from taxes, US gov wanting to access US-based company data on foreign data center, PRISM, etc. it seems the US is building a strong negative law environment against its own tech firms. If only Europe were to take take this opportunity to become more attractive... but I haven't any faith our leader will do it.

aikah• 12 years ago

(I didnt downvote you,what's up with people downvoting for the sake of it?)

There are weaker software patent laws in Europe,they exist but are very limited.

On the other hand Taxes are generaly higher,employement cost is higher and VC funding is close to non existant.But you might get financed by public money(with strings attached and a lot of paperwork ) So it's a trade-off.

From a pure "capitalistic" perspective the situation is better for startups in USA in the west coast.And since Europe is not really a country,it's harder to reach all European markets(different languages,cultures,fiscal policies,laws...).In USA everybody talks English.

rancar2• 12 years ago

From reading the blog post and the IRS letter of rejection, I didn’t really find a strong case for why Yorba requires being a separate entity. Have you considered becoming fiscal sponsorship project? There are multiple 501(c)(3) organization that might consider serving as a fiscal sponsor for the project like the Software Freedom Conservancy. Another perk to this relationship is that the fiscal sponsor will handle the taxes and compliance.

To give some more background, my nonprofit went through a similar 4 yearlong back and forth process, but in the end, we did successful receive status last year. Prior to approval, I set up our organization as a fiscally sponsored organization by established another 501(c)(3). The status that we achieved is probably one of the highest on the IRS watchlist (donor advised fund) so I’ve had to fortune of getting to know the IRS and the tax code for tax-exempt entities very well :-)

For Yorba situation, the language used by Yorba in response to the IRS may be fine when talking to developers, but when talking to the IRS, using IRS’ language helps tremendously along with reinforcing a specific charitable purpose and avoiding any red flags (which Yorba’s response triggered in multiple regards); this is where a lawyer specializing in nonprofit law can really help as @philipn suggested. If you can’t afford a lawyer, you may be able to obtain pro bono work, and even then, it’s still good to read the relevant legal treatise to ensure you are well informed.

jrockway• 12 years ago

Little known fact: the GNU project got its 501(c)(3) status by starting The Church of Emacs. The software is just something they do for fun.

(I might have made that up.)

guard-of-terra• 12 years ago

The quotes from IRS shot that this is not a random rejection, rather a whole policy with thought-out basis. Somebody took time to ridicule open source in legalese.

Two options from the paranoid:

Somebody influences IRS to stifle open source? Who may that be?

IRS thinks they can make enough wool by shaving pigs? That's desperate.

They should better figure out how to dismember Apple than do what they do. It's a disgrace.

XorNot• 12 years ago

non-crazy theory: much like US immigration, this is someone who's being allowed to have a bee up his bonnet about 'those silicon valley types' and is taking it out institutionally. Appealing this would be a charitable act in and of itself, since it would create precedent that other OSS groups could use too.

dragonwriter7• 12 years ago

The quotes from IRS shot that this is not a random rejection, rather a whole policy with thought-out basis. Somebody took time to ridicule open source in legalese.

Its not "ridiculing". Its applying the law and existing precedent to the specific facts presented by Yorba. It may be wrong, but reading the whole letter it seems like its more that Yorba did a poor job at explaining how it met the 501(c)(3) requirements, including when responding to specific inquiries by the IRS.[1]

(It'd be interesting to get the application and other documents and compare them to those of, e.g., the Apache Software Foundation, Mozilla Foundation, and other open-source entities that have gotten 501(c)(3) status and see if its really that the IRS decision here is out of line with other ones in similar areas or if its just Yorba's documentation and explanations that are the issue.)

[1] http://yorba.org/docs/IRS-determination-letter-final.pdf

juliendorra• 12 years ago

Interestingly, from what I read here it seems a lot simpler to set up a tax exempt non-profit in France (Europe?). Basically you just register the statute of the non-profit (it's inner working), and you can then act as a registered non-profit exempt from many taxes (non-profit meaning you can't share the revenue between the members as if they were shareholders). The tax administration can control at any point, of course, and ask for taxes if you start doing for-profit or clearly commercial activities that are not covered by the rules.

Then if you want to exempt donations, as in this case, you have to be of general interest (for the common good).

You don't need to apply, You can just self-check against a list of criterias, and emit a fiscal receipt for you donators (but you might have to prove it later). Or you can ask the tax administration to confirm and declare that you are of general interest.

And then there is another step for more exemptions, for your donators "of public utility" ("d'intérêt public"). This is way harder to get and is granted and published by the government. This is for bigger fondations working on great, wide issues.

gcb0• 12 years ago

reading that i almost wish they deny status to everyone writing coffee under bsd and mit and only allow gnu gpl :)

gpcz2• 12 years ago

The IRS BOLO lists [1] are scanned bitmap PDFs, which make them extremely hard to search. Does anyone know if they also BOLOed Free Software, or was it just Open Source?

The reason I ask is that the term "open source" was designed to be more palatable to businesses. In Revolution OS, Eric S. Raymond said in regard to saying open source over free software: "If you walk in to an executive's office and say 'Free Software', OK, If you're lucky, the response you'll get is something like, 'hmm, hmm, Free Software, must be cheap, shoddy, worthless.' If you're not lucky, it has associations with the Free Software Foundation's wholesale attack on intellectual property rights, which regardless of what you think about the ethics of that, it's lousy marketing, it's not something that businesses want to hear" [2].

I don't know how savvy the IRS was about the nuances between open source and free software (probably not very), but if they were, they might be making a somewhat-reasonable distinction that "open source" was designed specifically to please the business sector rather than free software's focus on ethics and freedom.

[1] http://democrats.waysandmeans.house.gov/press-release/new-ir... [2]: http://www.cswap.com/2001/Revolution_OS/cap/en/25fps/a/00_54

mark_l_watson• 12 years ago

+1 good point. If I were the IRS, organizations producing GPL (or AGPL) licensed software would look more like an educational 501(c)(3) entity than those producing software under Apache or MIT type licenses.

I am not saying I like one license type more than the other (I use both GPL and Apache, depending on the project).

jordigh• 12 years ago

Free Software, or was it just Open Source?

These two are synonyms:

http://jordi.inversethought.com/blog/5-things-we-have-forgot...

dllthomas2• 12 years ago

That's possibly relevant to what should appear on the BOLO list. It doesn't seem relevant to what does appear on the BOLO list, or whether one could avoid flagging by using the other term.

gpcz2• 12 years ago

In your blog post, you argue that since the two terms result in (mostly) the same output/outcome, the two terms are synonymous. However, according to FSF's open-source/free-software overlap diagram [1], tivoized programs are open source but nonfree, meaning that there is a difference between the outcome of the two terms.

More importantly, that difference is actually a big reflection of the underlying philosophy between the two terms. Free software is about maintaining the Four Freedoms (making tivoization a damaging loophole in the GPL), while open source is about arguing that the bazaar model is superior technically in order to sell it to business (and therefore tivoization is actually a plus to them). I believe this difference in intent should be noteworthy to the IRS in terms of evaluating whether a company is creating a nonprofit for tax-free software development as a form of corporate welfare.

[1] https://www.gnu.org/philosophy/free-open-overlap.html

zb• 12 years ago

It is my understanding that 501(c)(3) status has always been difficult to get for open source software foundations. Organisations such as the Linux Foundation operate instead under 501(c)(6) (business trade association).

However, the OpenStack Foundation recently applied for 501(c)(6) status and received an initial denial[1], much to the surprise of all concerned since this was historically pretty easy to get. So there may be something to the author's thesis.

[1] http://blogs.gnome.org/markmc/2014/05/17/may-11-openstack-fo...

JackC• 12 years ago

So, I'm a lawyer, but not at all a tax lawyer.

I was talking to a tax lawyer the other day, though. I told her that I heard a lot of public-interest journalism projects were getting rejected for tax-exempt status, and it seemed like a problem in the tax laws -- we haven't adjusted to a world where a lot of journalism is done by non-profits. A lot like this story, but with journalism instead of software development.

She said she had looked at some of those applications, and she would have rejected them too. She thought the problem was journalism startups haven't figured out that they need to talk to a tax lawyer before filing important documents with the IRS. (And, yes, she's donating time to help with that, incidentally.)

Like I said, I'm not a tax lawyer. But I would wait to get a perspective from someone who knows this field before I concluded that the IRS is really opposed to free software in general. And I would do this kind of thing through a lawyer who specializes in it. Remember that you're helping out more than just you -- if you do it right you're paving the way for people like you. If you do it wrong, you're inviting bad decisions with broad statements like the ones quoting in this article.

restalis• 12 years ago

"We have no plans to appeal their decision."

It's a shame. That kind of stupidity, shown by IRS, deserves to be penalized.

wes-exp• 12 years ago

It's a wake up call: real charity is stuff like stopping malaria in destitute villages. Releasing software without charging a fee? Not so much.

jorgeleo• 12 years ago

Interesting case. What I understand is that the product not only lack of proof that disadvantaged group benefits from it, but mainly it can be used by institutions that are for profit.

GPL v3

IANAL, but can you modify the license so if the user of your code is a for profit institution, then they are licensed under GPL v3. so the institution will have to make their code available for the community to benefit. Something that for profit institutions are highly allergic to (severe CIO rashes, and COO anaphylactic shocks)

And then can you turn back to the IRS and say that because the licensing schema, if a for profit makes use of the code, it forced to be used for the benefit of the community and not just for their profit?

Or maybe there is the need of a GPL v4 where you cannot make profit using the code released?

davexunit• 12 years ago

Or maybe there is the need of a GPL v4 where you cannot make profit using the code released?

That would violate freedoms 2 and 3 of the Free Software definition.

https://www.gnu.org/philosophy/free-sw.html

phazmatis• 12 years ago

Crackpot conspiracy theory: Microsoft is whispering in the IRS's ear. The joke's on them: Once a piece of open source software has a foundation around it, it's pretty much just a bunch of people re-coloring widgets.

The new 501(c)(3) and the future of free software in the US

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