IRS Rejects Non-Profit Status For Open Source Organization, Because Private Companies Might Use The Software
from the say-what-now? dept
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:
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.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.
Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.
While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.
–The Techdirt Team
Filed Under: 501c3, irs, non-profit, open source, software
Companies: apache foundation, mozilla foundation, yorba foundation
Reader Comments
Subscribe: RSS
View by: Time | Thread
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Donation of Lead
[ link to this | view in chronology ]
Re: Donation of Lead
[ link to this | view in chronology ]
Non-Profit Status
Perhaps my understanding of the "non" modifier is lacking.
[ link to this | view in chronology ]
Re: Non-Profit Status
[ link to this | view in chronology ]
Re: Re: Non-Profit Status
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.
[ link to this | view in chronology ]
Re: Non-Profit Status
Bribing the IRS agent is only one requirent.
Donating to the President's political party winds up being two different requirements.
[ link to this | view in chronology ]
No really, criminals might use GM cars to transport drugs therefore... The not-so-smart person rationale...
[ link to this | view in chronology ]
Equal Time
[ link to this | view in chronology ]
Excuse
It takes time to write good fiction.
[ link to this | view in chronology ]
Anyone might use the (open source) software
But that doesn't mean the non-profit organization got any revenue from it.
[ link to this | view in chronology ]
Re: Anyone might use the (open source) software
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.
[ link to this | view in chronology ]
Did the IRS and USPO merge?!
[ link to this | view in chronology ]
What?!?
[ link to this | view in chronology ]
Re: What?!?
Sir, I think you are assuming facts not in evidence, namely that IRS had minds (or a mind) to lose to begin with.
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
Re:
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?
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re: Re:
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...)
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re: Re:
wow such
[ link to this | view in chronology ]
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/
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Since when...
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.
[ link to this | view in chronology ]
Too much trouble, Just make money...
[ link to this | view in chronology ]
Re: Too much trouble, Just make money...
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.
[ link to this | view in chronology ]
Saying what you mean pedantry
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!!!!")
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Paperwork
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.
[ link to this | view in chronology ]
Re: Paperwork
[ link to this | view in chronology ]
Re: Re: Paperwork
[ link to this | view in chronology ]
IRS supposedly target conservatives
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.
[ link to this | view in chronology ]
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?
[ link to this | view in chronology ]
If only these guys at Yorba knew who to bribe in congress eh?
[ link to this | view in chronology ]
non-profits are non-prophet...
...and it IS purposeful to SHUT UP such groups, and keep them having as little public influence as possible...
[ link to this | view in chronology ]
The only solution
What is not carefully explained is the consumer eventually pays for all taxes because they are part of the overhead a company must recover.
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Response to: Anonymous Coward on Jul 1st, 2014 @ 7:52pm
[ link to this | view in chronology ]
Let's take it out of software:
Now let's change that a bit and see how it sounds in another environment:
Hmmm...the IRS interpretation doesn't sound very compatible with non-profit purpose. Could be a problem.
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Wait, What?
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!
[ link to this | view in chronology ]
Freedom to Fascism
http://youtu.be/uNNeVu8wUak
[ link to this | view in chronology ]
Who does and ndoes not deserve nonprofit status?
[ link to this | view in chronology ]
Literary Organization
[ link to this | view in chronology ]