IRS Rejects Non-Profit Status For Open Source Organization, Because Private Companies Might Use The Software

from the say-what-now? dept

Tue, Jul 1st 2014 12:06pm — Mike Masnick

Last year, as the IRS scandal blossomed over the IRS supposedly targeting "conservative" groups for extra attention concerning their non-profit status, we noted that the IRS had also been told to examine "open source software" projects more closely as well. We found that to be a bit disturbing -- and it appears that for all that focus on the scandal, the IRS hasn't quite given up on unfairly targeting open source projects. The Yorba Foundation, which makes a number of Linux apps for GNOME, has been trying to get declared a 501(c)(3) non-profit for over four years now... and just had that request rejected by the IRS for reasons that don't make any sense at all. Basically, the IRS appears to argue that because there might be some "non-charitable" uses of the software, the Foundation doesn't deserve non-profit status, which would make it exempt from certain taxes (and make donations tax deductible). Here was the key reason given:

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.

But... that's true of lots of other open source software that is (deservedly) classified as non-profit organizations -- including the Apache Foundation, the Mozilla Foundation and more. Furthermore, the IRS seems to argue that unless Yorba is actually teaching "the poor and underprivileged" how to use its software, it can't qualify:

Mere publishing under open source licenses for all to use does not show that the poor and underprivileged actually use the Tools. … You do not limit your distribution and do not know who uses the Tools much less if they use them for artistic purposes. … you do not know who uses the Tools much less what kind of content they create with the Tools.

Who knew that to be a non-profit you had to have an ironclad grasp over every possible use of everything you did? And, as Yorba's Jim Nelson points out, this requirement actually would appear to be impossible to match while also agreeing to the basic four software freedoms that are part of the copyleft world. Even more disturbing, the IRS seems to think that the benefits of open source are "incidental."

The purpose of source code is so that people can modify the code and compile it into object code that controls a computer to perform tasks. Anything learned by people studying the source code is incidental.

Oddly, the IRS seems to feel that because Yorba doesn't spy on how people use its software, it can't legitimately claim non-profit status as well:

You describe your charitable purpose as providing free software, complete with documentation, user-guides and responsive s upport and that your main activity is the promotion and development of free and open source software that benefits the general public. Your "production of free and open source software aims to provide a no-cost alternative to software that can sell for as much as $1,000 a license." You "aim to construct services and tools provided free to all, that will allow the poor access to what would otherwise likely be inaccessible tools" thereby providing relief to the poor or underprivileged. However, the Tools have been downloaded many times, but you do not know who the users are or whether they use them for exempt or private purposes. You also do not know how many users, if any, are poor or underprivileged.

There's a lot more that's troubling in this decision -- not limited to the fact that it took over four years for the IRS to issue it -- and in that time, nothing in the IRS's followups indicated any serious issue with the application:

The Yorba Foundation applied for 501(c)(3) in December 2009. We applied as a charitable, scientific, and educational organization. Remember that we only needed to meet the criteria for one of those to receive 501(c)(3) status.

We received two requests for clarification, one on June 23, 2010, and another on September 14, 2010, which we responded to in full. We received a notice on October 5, 2011 that our application was still being processed.

The requests for clarification contained mostly non-surprising questions. For example, “Describe whether your organization provides any goods or services for a fee.” (We don’t.) Some were odd: “Will any of your directors or employees reside at your facility [i.e. our office]?” (Ah…no.)

Other than those three notices and a couple of phone calls with our representatives at the Software Freedom Law Center, that was it.

I will admit, at times, to having mixed feelings about the setup of non-profits in this country right now. We've been working on a project in which I am constantly asked if I want to set it up as a non-profit, and I've avoided doing so, in part, because going through such a process just seems like such a hassle (and also, in part, because I think the idea that you need to be officially recognized as a "non-profit" to do "good things" for the world seems a little backwards). Either way, this rejection definitely seems troubling and somewhat ridiculous for a number of open source projects that do amazing work to better the world, and shouldn't have to face such challenges.

IRS Determination Letter Final (PDF)IRS Determination Letter Final (Text)

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Filed Under: 501c3, irs, non-profit, open source, software
Companies: apache foundation, mozilla foundation, yorba foundation

49 Comments

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Anonymous Coward, 1 Jul 2014 @ 12:11pm

It has to benefit the poor ... like Massachusetts SWAT who apparently had no problem getting 501(c)(3) status
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Michael, 1 Jul 2014 @ 12:16pm

Non-Profit Status
It seems to me that there should only be one requirement to qualify for "non-profit" status.

Perhaps my understanding of the "non" modifier is lacking.
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Michael, 1 Jul 2014 @ 12:18pm

Re:
Trust me, for-profit SWAT teams would not be a good thing for the poor.
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Ninja (profile), 1 Jul 2014 @ 12:21pm

Looks like a duck!

No really, criminals might use GM cars to transport drugs therefore... The not-so-smart person rationale...
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ChurchHatesTucker (profile), 1 Jul 2014 @ 12:21pm

Equal Time
The IRS has already pissed of the Right. Perhaps they're simply trying to even out the score?
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Anonymous Anonymous Coward, 1 Jul 2014 @ 12:27pm

Excuse

"There's a lot more that's troubling in this decision -- not limited to the fact that it took over four years for the IRS to issue it"

It takes time to write good fiction.
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DannyB (profile), 1 Jul 2014 @ 12:28pm

Anyone might use the (open source) software
Yes, others, even for-profits, even God forbid Microsoft, might use the open source software.

But that doesn't mean the non-profit organization got any revenue from it.
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PRMan, 1 Jul 2014 @ 12:41pm

Re: Non-Profit Status
Ironically, that's not actually a requirement. My previous church (where I was on the board) had a Profit & Loss statement on which we showed a very slight profit every year (because we didn't like to spend money we didn't have, but did try to spend as much as we did have on outreach programs).
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Baron von Robber, 1 Jul 2014 @ 12:42pm

Did the IRS and USPO merge?!
:(
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PRMan, 1 Jul 2014 @ 12:43pm

What?!?
This is completely ridiculous. Has the IRS lost their minds? People volunteering to make software for everyone for free don't qualify as a non-profit?
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Anonymous Coward, 1 Jul 2014 @ 12:48pm

"because I think the idea that you need to be officially recognized as a "non-profit" to do "good things" for the world seems a little backwards"

There is also the fact that just because you're officially categorized as 'non-profit' doesn't mean you are necessarily doing 'good things' for the world.
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Anonymous Coward, 1 Jul 2014 @ 12:48pm

Try going the religion route instead.
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mr. sim (profile), 1 Jul 2014 @ 12:50pm

does this mean the Bill & Melinda Gates Foundation can't be a charity because it uses proprietary software from Microsoft which is a for profit entity? do all charity's get exempted from not profit status if a for profit entity uses the charity's name or logo on promotional materials to drum up business by pointing out how much of a "philanthropist" the corporation is.

why is the old guard so deadset, knowing they have maybe ten years left before the entire old guard is ushered out for the generations after 1980 have to do everything they can to screw up the government bureaucracy just like they did with the economy/jobs/environment/law/copyright system/ insert anything you can think of/
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Trevor, 1 Jul 2014 @ 12:59pm

Wouldn't this mean every political 501(c)(3) organization (including those set up for political reasons) don't qualify? If they create information that can and might be used by for profit organizations, shouldn't they be barred from claiming this exemption as well?
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Anonymous Coward, 1 Jul 2014 @ 1:08pm

Since when...
Does "not for profit" translate directly to "charity"...

There are plenty of non-profit organizations that really have nothing to do with charity...they are what the name implies, non-profit.

For example, insurance pools - they are made up of "members" who wish to pool reserves to pay for claims and purchase reinsurance policies to cover their excess. These pools must return any reserve overages as dividends back to their members after a certain number of years, and are only allowed to cover administrative costs, which is why they are considered non-profit organizations. They aren't in it for the money, they're in it to reduce costs to the members who pool their resources and share the risk.

As soon as you start equating non-profit with charity, you start getting into fuzzy situations. How many "charitable" organizations are truly charitable. I've heard that some organizations only end up using ~5% of their donations for charitable purposes, while the rest covers administration costs, resources, and compensation for the employees.
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harknell (profile), 1 Jul 2014 @ 1:10pm

Too much trouble, Just make money...
The silly thing about being a "non profit" is it costs a ton of money to get your paperwork set properly. In other words, you can more easily just make money than designate not to. I gave up on it as well for a project because it just wasn't worth the hassle.
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Anonymous Coward, 1 Jul 2014 @ 1:12pm

Re: Re: Non-Profit Status
Yes, IMO, churches are pretty bad as "non-profit" organizations.

However, the key is not that the church retains "profit", but that they are not distributing those profits to individuals who "own" the church. In other words, there's no one person who keeps the money year-over-year, and it simply goes into the coffers for a following year where it is properly utilized for non-profit purposes.

Make no mistake, non-profit organizations are rife with crooks who find convenient ways to use the NPO's money for their personal gain - and often times this is through salary, bonuses, or purchasing of items which those people use for personal use.
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jupiterkansas (profile), 1 Jul 2014 @ 1:15pm

Re:
We're overdue for a technology worshiping religion.
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Anonymous Coward, 1 Jul 2014 @ 1:15pm

Re: Too much trouble, Just make money...
But you generally have to record the same information when you do make money - in order to pay income taxes...

The real challenge IMO, is finding a way to use the money such that it doesn't directly benefit any one person, but truly the organization and it's mission. It's not uncommon for NPOs to build up large amounts of money and not find a way to spend it - at which point they can often times just donate it to another NPO of their choice.
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Anonymous Coward, 1 Jul 2014 @ 1:19pm

Re: Re:
They murder the poor, this is a benefit... well in the eyes of your Political Critter... though they would never openly admit that.
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OldMugwump (profile), 1 Jul 2014 @ 1:24pm

Re:
Indeed.

Reminds me of the requests we get where I work. We are majority owned by a woman, but compete on quality and value - we've no interest in being a charity case.

Customer: "Are you a woman-owned company?"

Us: Yes. [as if it matters...]

Customer: "Show us your certification paperwork to prove it."

Us: Um, the owner is , who I assure you is female. We don't have any paperwork. I can send you her photo, or you can talk to her.

Customer: "That's not good enough".

Us: We are selling goods and services, not the gender of our owners. Paperwork costs money and time. Do you want to buy or not?
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Anonymous Coward, 1 Jul 2014 @ 1:30pm

Re: Re:
Doge be with you.
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Anonymous Coward, 1 Jul 2014 @ 1:34pm

Saying what you mean pedantry
"The purpose of source code is so that people can modify the code and compile it into object code that controls a computer to perform tasks."

The purpose of the source code is so that it can be compiled (*) into object code etc. It's purpose is NOT to be modified. If they meant 'The provision of the source code is so that people can modify it ...' then they should have written it. Looks like the IRS just can't get the staff these days.

Similarly, the 'purpose' of a church is to indoctrinate it's followers (ok, I could phrase that better if I tried) not to teach a doctrine that can be modified. By the same IRS logic surely anyone who learns a religion from it's official 'organisation' and then goes out and writes a book about their experiences of the religion or sells cookies to raise funds (regardless of whether they take a cut for themselves) should also be lead the the church being denied it's non-profit status. Surely?

(* = Let us ignore interpreted languages and scripts)

"Anything learned by people studying the source code is incidental." (**)

Can't modify the code without studying it. If, as they assert, the purpose of the source code is that it can be modified, then studying it is not incidental. They are hoist by their own petard (or by their sloppy logic, same thing).

(** - this reminds me of my very first job as a very junior programmer, when my team leader rebuked me with "You shouldn't be reading the language manuals, you have programs you should be writing!!!!")
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ArkieGuy (profile), 1 Jul 2014 @ 1:40pm

Donation of Lead
Swat teams do donate a lot of lead to the poor.... ;)
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Quiet Lurcker, 1 Jul 2014 @ 1:44pm

Re: What?!?
Has the IRS lost their minds?

Sir, I think you are assuming facts not in evidence, namely that IRS had minds (or a mind) to lose to begin with.
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Padpaw (profile), 1 Jul 2014 @ 1:50pm

The IRS have become an openly corrupt organization for sale to the highest bidder like almost every other government organization these days
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Anonymous Coward, 1 Jul 2014 @ 1:51pm

Paperwork
The IRS hates to give 501c(3) status to anyone. To get it, you have to fill out the paperwork exactly right and follow specific rules. It looks to me like this group gave the IRS too much information and the IRS used it against them. I bet if they were to disband and then spend money on the right attorney to recreate the organization from scratch, they would be able to qualify for 501c(3) status without changing a thing they are doing.

Part of the problem is that you first have to form some kind of organization that is registered with the state. Usually some form of corporation. When you do that, you have to state a purpose for your organization. When you apply for 501c(3) status, you have to use that same purpose in your application. If you even have one wrong word in your organizational charter, the IRS will reject your application.

There are even examples of how to do it and how not to do it on the IRS web site. IIRC, if you form your corporation for charitable purposes, you will be rejected. But if you form your organization to do charity, you will be rubber stamped. Or maybe I have that backwards.

I looked into forming a 501c(3) off shoot of an existing non-profit (not 501c(3)) and determined while I had a pretty good chance of doing the paperwork properly myself, it made much more sense to scrape up the money and higher an attorney rather than take several months forming and disbanding the organization every time I put one wrong word in the original charter.

The SWAT teams qualify because they are trying to help the community and I'm sure they hired an experienced attorney to create the organizations and file all the paperwork. Same thing with the tree planters.

The Yorba Foundation likely failed simply because the person who did their original organization put in a few wrong words. Helping the community probably would work for an open source foundation as well, but again, every word has to be correct.
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Rocco Maglio (profile), 1 Jul 2014 @ 1:54pm

IRS supposedly target conservatives
I think you need to reexamine what happened. We have significant evidence that there was unequal treatment. The one person who seems to have directed this unequal treatment "lost" two years of emails. Six other people involved with this have also lost their emails.

This is not the first time the IRS has targeted people with an anti IRS bent. There have been numerous times tax documents have been leaked. There is a high correlation between audits and people that were critical of the administration.

Nixon supposedly lied. I guess we will never know.
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Anonymous Coward, 1 Jul 2014 @ 2:03pm

Re: Anyone might use the (open source) software
Yeah that is the most illogical argument I have ever heard.

A priest in a church performs a public speaking engagement. How it that not a problem with the potential profitable use?

A church doesn't register who enters. How can they be sure that they serve the poor or underprivileged?

A church doesn't serve a scientific purpose at all - disregarding a small social study interest - any learning from studying the activities in churches will be incidental.

Etcetera...

I know I make the church look uncharitable which for the most part is very untrue. However, the standards for what a 501(c)3 is seems to be slipping here.
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Jack, 1 Jul 2014 @ 2:13pm

Re: Paperwork
And you see nothing wrong with this?
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kitsune361, 1 Jul 2014 @ 2:36pm

Re: Re:
Some states encourage public institutions to do business w/ woman and minority owned businesses. See Texas's HUB program: http://www.window.state.tx.us/procurement/prog/hub/
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Anonymous Coward, 1 Jul 2014 @ 2:54pm

Re: Re: Paperwork
The IRS is wrong in so many ways it's not funny. I think Ken White at Popehat.com summed it up nicely when he said the Romulans have a better concept of due process than the IRS. But it is what it is. It's got nothing to do with computers or open source software.
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Anonymous Coward, 1 Jul 2014 @ 3:27pm

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.

So publishing something that can be used for commercial purposes means you're nonexempt? Okay. So let's see how this works:

American Mathematical Society (a 501(c)(3)): You have a substantial nonexempt purpose because you promote the teaching and study of mathematics which can be used by any person for any purpose, including keeping the books for for-profit corporations.

American Association of Physics Teachers (a 501(c)(3)): You have a substantial nonexempt purpose because you promote the teaching and study of physics which can be used by any person for any purpose, including building quantum computers.

Building Standards Institute (a 501(c)(3)): You have a substantial nonexempt purpose because you promote safe building standards which can be used by any person for any purpose, including making sure corporate headquarters don't collapse.

Where the fuck do they find these people?
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Anonymous Coward, 1 Jul 2014 @ 4:54pm

We all know the only 'proper' organizations that have been given and deserve tax exemption for non-profit 'charity work' are microsoft, google, amazon, ebay, oracle, apple, samsung etc.......

If only these guys at Yorba knew who to bribe in congress eh?
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art guerrilla (profile), 1 Jul 2014 @ 5:53pm

non-profits are non-prophet...
as i understand it, non-profits are purposefully and especially forbidden from -effectively- commenting on, taking positions on, or otherwise proselytizing virtually ANY political or contemporary issue, OR you lose your non-profit status and become an 'advocacy' group...
...and it IS purposeful to SHUT UP such groups, and keep them having as little public influence as possible...
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madasahatter (profile), 1 Jul 2014 @ 5:53pm

The only solution
The only solution is to abolish all income taxes including corporate. There would be no need for the non-profit/profit status because the profits are not taxed.

What is not carefully explained is the consumer eventually pays for all taxes because they are part of the overhead a company must recover.
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Anonymous Coward, 1 Jul 2014 @ 6:00pm

Re: Non-Profit Status
... there should only be one requirement to qualify for "non-profit" status.

Bribing the IRS agent is only one requirent.

Donating to the President's political party winds up being two different requirements.
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Anonymous Coward, 1 Jul 2014 @ 7:52pm

As someone on reddit pointed out likely an artifact of natural scarcity where limiting distribution actually makes sense. tax code was set up assuming you couldn't produce infinite copies of goods after the one time sunk costs of creating the first of that good
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Anonymous Coward, 1 Jul 2014 @ 7:53pm

Response to: Anonymous Coward on Jul 1st, 2014 @ 7:52pm
infinite for practical purposes i mean to say
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Coyne Tibbets (profile), 1 Jul 2014 @ 10:21pm

Let's take it out of software:
IRS:

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.

Now let's change that a bit and see how it sounds in another environment:

You [church has] a substantial nonexempt purpose because you [collect clothing and donate it without restriction for] authorize[d] use by any person for any purpose, including nonexempt purposes such as [employment], recreational, or personal purposes, including campaign intervention and lobbying.

Hmmm...the IRS interpretation doesn't sound very compatible with non-profit purpose. Could be a problem.
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Anonymous Coward, 2 Jul 2014 @ 6:17am

Luckily we still have non-profits like FIFA.
They do a lot of public works, or at least let other nations perform their public works.
Some billions in the bank doesn't mean that they are profit oriented.
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monkyyy, 2 Jul 2014 @ 10:25am

Re: Re: Re:
Doge be much worshiped

wow such
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Anonymous Coward, 2 Jul 2014 @ 11:13am

In what universe is making something and giving it away for free a for-profit activity?
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OldMugwump (profile), 2 Jul 2014 @ 3:10pm

Re: Re: Re:
That's why I said "we've no interest in being a charity case".

We prefer to compete with the boys on quality and value, without special preference based on the shape of somebody's genitals.

(A very old fashioned attitude, I know...)
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Sheogorath (profile), 2 Jul 2014 @ 5:01pm

Wait, What?
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.
So does the above mean that 501c's with thrift stores will have to close them because people may wear clothes they buy there while at work in a company that doesn't qualify for 501c status? Gee, and I thought I had a cognitive disability!
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Justin, 3 Jul 2014 @ 6:23am

Freedom to Fascism
If you haven't seen this already, it may be a good time to do so now...

http://youtu.be/uNNeVu8wUak
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Marvin (profile), 3 Jul 2014 @ 7:42am

Who does and ndoes not deserve nonprofit status?
Society of Automotive Engineers and United States Pharmacopeia (USP) are two organizations which it the same standards so they should loose non-profit status too. What About the National Geographic Society and AARP whose board members are self appointed and take in massive salaries and bonuses in lieu of profits?
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Anonymous Coward, 4 Jul 2014 @ 7:16pm

Re: Donation of Lead
And with such vigor to boot!
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WorBlux, 7 Jul 2014 @ 8:21pm

Literary Organization
501(c)(3) also allows exemptions for organizations for literary purpose. Since code is language (according to the courts) OSS projects should qualify under this exempted purpose as well.
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