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:

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.

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