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

yorba_logo_big.pngNote: I’m a software developer, not a lawyer.  I suspect I’m not the only coder whose eyes roll to the back of their head when legal or tax matters are discussed.

However, if you’re involved in the free software movement—especially in the United States—you may want to read through this, as long as it may seem.  It appears that the United States’ Internal Revenue Service has strongly shifted its views of free and open-source software, and to the detriment of the movement, in my opinion.

What follows should not be construed as legal or tax advice or professional interpretation of those laws.  If you have questions, please consult a professional.

Earlier this month the Yorba Foundation received a formal notice from the Internal Revenue Service (IRS) denying Yorba 501(c)(3) tax-exempt status.  It’s possible this is nothing to be concerned with (at least, not unless you’re a part of Yorba).  Reading their response, I believe this denial is actually a cause for concern for free software groups within the United States, and perhaps abroad.

A quick primer

501(c) is the section of the United States’ tax code dealing with tax-exempt organizations.  The third type (i.e. 501(c)(3)) are for organizations that are “organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals”.  IRS publication 557 gives the full run-down.  Wikipedia has a good explanation of 501(c) and 501(c)(3) as well.

Free/libre/open software organizations such as the GNOME Foundation, Mozilla Foundation, Apache Software Foundation, Linux Kernel Organization, WordPress Foundation, Django Software Foundation and more operate under a 501(c)(3) status.

One misconception is that 501(c)(3)’s don’t pay any taxes.  501(c) only provides exemption from Federal income tax.  Most states honor Federal exemption and will exempt those organization from state income taxes as well.  The organization must still fulfill other tax obligations (such as payroll, unemployment, and sales taxes).

The advantages of 501(c)(3) go beyond income tax exemption.  The status also allows donations to the organization to be treated as a tax exemption by the donor.  For those of you giving $25 or $50 that’s not much of an advantage (although those donations are most certainly appreciated!).  However, Yorba has seen donors offering potentially thousands of dollars back away because of our lack of 501(c)(3) status.  Many large charitable foundations and grants will only consider donating to groups with a 501(c)(3) status.

Last year there was a bit of a dust-up—a scandal to some, a distraction to others, depending on their politics—when many right-wing nonprofit organizations in the United States began complaining they were being unfairly targeted by the IRS.  Media inquiries determined IRS examiners were given “BOLOs” (Be On The Lookout) for certain keywords in 501(c) applications, including “Open Source Software”.  Last year I spoke with Wired about the issue.

The question of the IRS targeting certain groups has not died off, although the connection to free software has fallen off the radar screen.

Yorba’s 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.

The final determination letter, the denial of exemption, is dated May 22, 2014, almost four and a half years after we first applied.  That strikes me as excessive, particularly since, as the above list of open-source foundations suggests, ample positive precedent existed.

The new 501(c)(3)

What I find alarming are some of the statements made by the IRS in their denial letter.  This is what could have a direct impact on the free software movement, at least here in the United States.  What follows are the most hair-raising statements in their denial letter and my interpretation and response (IRS’ statements are in italics):

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.

(To help with the legalese, remember that Yorba is applying as a tax-exempt entity, and so nonexempt purposes are those that are not charitable, scientific, etc.)

The IRS reasons that since Yorba’s open source software may be used for any purpose, Yorba is not a charity.  Consider all the for-profit and non-charitable ways the Apache server is used; I’d still argue Apache is a charitable organization.  (What else could it be?)

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?

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.

(Here and elsewhere, “Tools” is IRS shorthand for Yorba’s software.)

The IRS is correct that Yorba does not know who is using our software or for what purposes, nor does Yorba limit the distribution of our software to a particular charitable segment of society.  But when I spend three milliseconds imagining how that would work, I shudder.

What’s more, these objections clash with three of the Four Software Freedoms and copyleft in general:

  • The freedom to run the program as you wish, for any purpose (freedom 0).
  • The freedom to redistribute copies so you can help your neighbor (freedom 2).
  • The freedom to distribute copies of your modified versions to others (freedom 3).

In other words, we (and, presumably, everyone else) cannot license our software with a GNU license and meet the IRS’ requirements of a charitable organization.

Freedom 1 (“The freedom to study how the program works”) isn’t attacked as non-charitable by the IRS, but it is defined as non-educational:

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.

Which is like saying the only point of an algorithm is its final answer, and so Einstein publishing E=mc2 offered nothing more to the world than a way to accurately measure the amount of energy in, say, a cube of sugar or a block of cheese.  Any deeper learning is incidental.

I can directly trace the start of my year career in software development to the first BASIC programs I encountered as a 9 year-old.  I pressed the Break key, typed LIST, and learned.  I didn’t receive any formal education in programming until my junior year in high school.  I know for a fact I’m not the only one.

How many coders learned from studying and modifying existing code?  Think about UNIX, BASIC, HyperCard, and just about every scripting language devised.  The availability of source code and its relation to learning how to program is so fundamentally correlated, it’s zen.

The development and distribution of software is not a public work even if published under open source or creative commons compatible licenses because software is not a facility ordinarily provided to the community at public expense. … In the face of such consistency of the key characteristics over four centuries we are constrained from extending the term public works to encompass intangibles such as software.

The “four centuries” of terminology being referenced here is that software is not a lake, dam, bridge, highway, etc.  In other words, because 17th century English Common Law doesn’t mention IMAP email clients or JPEG decoding, software is not a public work.

Sarcasm aside, these statements are annoying because they create a kind of Möbius strip Catch-22 with the earlier statements I quoted.  Since Yorba makes our software widely available to the public at large, we’re not truly charitable; but since software doesn’t meet the IRS’ definition of “public works”, making our software widely available is not charitably serving the public at large.

And then there’s this humdinger, which sounds like it came from a Douglas Adams novel:

…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).

There’s something delicious about the phrase “We have not found any  authority for the proposition that the world is a community.”  Mahatma Gandhi, Jesus Christ, and Martin Luther King Jr. are three I can name off the top of my head.

You are the copyright holder of some Tools code.  Private persons are the copyright holders of the portion of Tools code you do not own. … Even though you are the copyright holder to a portion of Tools code, the portion of Tools code owned by private persons cannot be a public work within the meaning of § 501(c)(3).

I believe what the IRS is inadvertently requiring here is copyright assignment.  Since Yorba does not require copyright assignment from our contributors, the IRS appears to think our software cannot be a public work.

Copyright assignment is controversial in the free software community.  (A nice overview can be found here; the controversy up-close and in-person can be found here and here.)

I hope I’m wrong about this.  I doubt they’re going to start enforcing this in the future for organizations that already enjoy exemption.  If they do, it will be a royal mess for those projects having to contact every author of every non-trivial contribution and get them to sign over their rights.  This is all a big if, of course.

Where Yorba stands

This does not spell disaster for Yorba.  The Foundation’s existence does not hinge on 501(c)(3) status.  It certainly would’ve been advantageous if the IRS had granted it.  It certainly would’ve been a better world if the IRS hadn’t waited four and a half years to inform us of their decision.

We have no plans to appeal their decision.  It looks to be an arduous legal battle we cannot afford.

I hope other open source projects will take note of this decision, especially projects considering applying for 501(c) status.

For those who think I’m being alarmist, I encourage them to consider the above statements by the IRS and ask themselves how the good projects already granted 501(c)(3) would’ve stacked up under the IRS’ new parameters.

I also recognize that I’m cherry-picking statements from the IRS for my commentary.  I selected the ones I thought would be of most interest to the community.

The full PDF of the IRS’ decision can be found here.

138 thoughts on “The new 501(c)(3) and the future of free software in the United States”

    1. Yes, but they do promote the free software movement, and the IRS makes some interesting allegations about free software, for one, that it’s not a public work. I think the FSF would have something to say about that.

      1. Would that be the FSF or the group that Eben Moglen used to run I think parallel to the FSF (or the FSF is a client of theirs) that deals pro bono with law issues and Free Software: The Software Freedom Law Center.
        They were the ones who sued Cisco on behalf of the FSF, dealt with Busybox and other cases involving free software and GPL.

        Im sure both would be involved but the SFLC is basically the lawyers.

        Time to send in Eben.

  1. This sounds like the success of the open source method has left us in a situation where an open-source project just looks like normal development.

    I find it hard to fault the IRSs logic in their response (their delay in responding, much easier so). If a project only produces open-source products then it is indistinguishable (by outputs) from any commercial entity that is doing the same (except for in price, and maybe even not that). The important aspect seems to be finding an unprivileged group and ensuring that the software is getting to them and is something they would otherwise be unable to obtain (which seems fair).

    Perhaps the best method for obtaining charity status for general purpose application development is such: Find a group that is using a free desktop and develop software that they have a need for. That way there is a clear connection between the need and the development. The benefit to everyone else is a side-effect. A good example might be the Blender foundation where they produce movies that would probably be unaffordable to make but the use of their tools makes them so.

    I wonder what this means for the existing projects that have tax exempt status? Will they be reviewed under the same conditions a t some point?

    1. “If a project only produces open-source products then it is indistinguishable (by outputs) from any commercial entity that is doing the same (except for in price, and maybe even not that). ”

      By that logic, a charitable hospital should lose its charitable status because the work it does is indistinguishable from a commercial hospital.

      1. exactly – I’ve never seen this condition applied to other c3s. My understanding is that that’s not part of the code (but could be wrong – it’s been a while since I did all my reading in this area). But if so, I take away one of two things – 1) Someone or some group got a little overzealous in denial and put arguments that can’t be backed up or 2) This is alarming for far more than free software. These justifications, as you noted with hospitals – go far beyond free software and into most sectors.

      2. Except that a charitable hospital has quite a number of requirements that a for-profit hospital does not have. So your argument is precisely incorrect.

        1. A charitable hospital has requirements beyond those a for-profit one does, but similarly a charitable software entity would have requirements (in terms of reporting, governance, etc.) beyond those that a for-profit one would have.

      3. By that logic, a charitable hospital should lose its charitable status because the work it does is indistinguishable from a commercial hospital.

        Not true – one major difference is that the donors to a charitable hospital are in almost every case different than its patients. If that wasn’t the case then you’d be completely correct and they would indeed lose their tax-exempt status.

        Are Yorba’s donors made up primarily of the users of the software? If so, I’m with the IRS here. If most of the money comes from people or entities who do not directly or personally benefit from the software then you’ve probably got a stronger case.

        1. Are Yorba’s donors made up primarily of the users of the software? If so, I’m with the IRS here.

          I’d argue that Yorba’s donors are primarily their contributors, and secondarily their users.

          1. By “donors” the IRS is speaking about people who are being issued tax receipts for their donations. Usually this is financial donors, but I suppose if people gave the copyright to their code to Yorba, they might be donors as well.

        2. While some of the donors to a hospital are not users of their services, I can tell from personal experience that they really go after you if you (or your family) were. I’m pretty sure that it is part of Hospital Fundraising 101 to target people who have used their services.

    2. “If a project only produces open-source products then it is indistinguishable (by outputs) from any commercial entity that is doing the same (except for in price)”
      Surely price is a crucial difference.

      “The important aspect seems to be finding an unprivileged group and ensuring that the software is getting to them”
      This is a completely made up reason that is not in the statute. Merely advancing science is valid reason.

      1. Is a computer program by definition ‘advancing science’? If I write a program that prints pornographic ascii art to a dot matrix printer, does that ‘advance science’?

        I don’t just find that questionable, I find it utterly unconvincing. It’s exactly like saying that a company that builds bridges is advancing science, and should therefore be a 501(c)(3).

        1. If Yorba built bridges, then according to the IRS, yes, we’re building a public work, which would lend support to our application.

          I would say to everyone commenting, remember that this isn’t about what “feels” charitable, it’s about how the tax code is being interpreted. My article is suggesting that the IRS has shifted its interpretation with regards to open source.

          I would recommend everyone at least familiarize yourself with the 501(c) statutes before making pronouncements.

          1. Not true. If they built bridges for free, that are open to public use, then it may be a public work.

            But taking public money doesn’t make a bridge building company a 503(c)3.

            Clearly not all software contributes to science though. And making code available to read does not always contribute to education.

          2. I would recommend you familiarize yourself with everyone’s familiarity with all laws and regulations before you comment on anything anywhere.

        2. “Is a computer program by definition ‘advancing science’?”

          No, but a FOSS program is by definition “advancement of education or science”, because programmers can learn from the source code, or from enhancing it.

          Nothing in the statute requires the “advancement of education or science” criterion to benefit (or not benefit) any specific class of people. It is completely independent of the “relief of the poor, the distressed, or the underprivileged” criterion. I’m not surprised that the IRS didn’t accept the “relief of the poor…” criterion.

          1. If that was true then – for example – every major engineering firm would qualify as a non-profit. Blueprints are typically all public record and are not generally protectable. Simply releasing code for others to study does not qualify. Spending 9 times as many hours using the code to actively teach people how to program than it takes to write the code in the first place would probably work though, according to the IRS guidelines.

          2. Richard, if such an engineering firm operated with the purpose of publishing such plans with open-source-like redistribution permission, was funded by donations, and was otherwise structured as required by a non-profit, then yes, I think it should qualify as a 501(c)(3) under the “advancement of education or science” clause. Of course, that’s only my opinion, not that of the IRS.

          3. Richard,

            Blueprints being public record does not mean that they are not generally protectable. See 17 U.S.C. 102(a)(8) on protection of “architectural work”. The government requiring deposit of documents and making them available for public inspection doesn’t grant the public unlimited rights to reproduce the documents. They are not effectively “open source” unless the copyright owner chooses to release them as such.

            Eric

  2. Linux Foundation is not a 501c3 — it is a 501c6 which is very different — about businesses working together rather than individual charity.

    If you think the FSF, as an established 501c3, can help, please let me know!

    1. I didn’t link to the Linux Foundation but the Linux Kernel Organization, which they state is a 501(c)(3) on their web site.

  3. I don’t understand the benefit of getting this status. If you are providing free software you will not have any profits, so how does tax matter? Is it only whether donations to your project are tax deductible?

    If so, I can see the IRS’s point here. If a bunch of people got together to, say, make an open source game, why should donations to that be tax deductible?

    I’m sure there are all kinds of gray lines, and you could easily find a less deserving group that did qualify, but that is not itself an argument.

    1. It has everything to do with donations because that’s how these orgs stay afloat. Unless backed by some other larger corporate entity, these organizations survive by contributions from the public, and the public is more willing to contribute if they can write it off at the end of the tax year.

      As for your game developer example, I don’t see why not. An open source game development shop as a 501(c)(3) would be pretty cool. The open source game market is tiny and not all that great IMO. So more open source games, and more people looking at game code would definitely be beneficial to the open source community at large.

  4. Free software benefits all and the well being of this planet is of no concern to the IRS.

    Did Yorba provide specific examples as to how it’s software benefits specific groups in the US? For instance, Shotwell being used in schools? Geary being used to help US based non profits communicate?

    1. We did discuss in our application Shotwell being used in schools and for artistic means. We also discussed that by making the code freely available it could be used to learn about the various processes and techniques for manipulating digital images, for example.

      We didn’t mention Geary because we didn’t start that project until well after the application had been submitted.

      1. If the open source software in question is used by a number of 501(c)(3)s to help them fulfill their missions , I think the entity producing it should clearly be eligible to be a 501(c)(3) itself.

        I’m not sure if the IRS would take this as acceptable proof of eligibility though.

  5. Sounds like a lot of places have donate to non-profits only polices. Talk to Aaron Wolf (really friendly guy) from the snowdrift.coop co -op (https://snowdrift.coop/). Not only can they help you out with funding for your FLO project, you can also ask him how they too were denied 501(c)(3) status unjustly but were able to get non-profit status from Michigan.

    1. @BK, thanks for acknowledging that I’m friendly, but please let me clarify:

      ***Snowdrift.coop has NEVER been denied ANYTHING***. We NEVER APPLIED FOR 501(c)(3). Rather, we *explored* the option, and got legal advice that 501(c)(4) would likely be a better fit. We have not yet applied for ANY 501 status. It is standard procedure for all organizations to incorporate first at the state level before applying for 501. So our process is not notable or unusual. We are just part-way through the process and still planning the details for a 501 application.

      The reasons we have been unsure about (c)(3) include issues mentioned in this overall discussion as well as our cooperative structure. Because we want all stakeholders involved as co-op members, there were concerns about that within a (c)(3). We also want our scope not to be too limited, and we didn’t think the benefits of (c)(3) would be worth the hassle and cost for us. But we still have yet to see what will happen when we get a lawyer to work with us and do the real 501 application.

  6. Can you publish your application and the full IRS response? It’s hard to judge whether it is an appropriate response otherwise.

  7. Would a software project using a truly free license, like the BSD license or the MIT license, would be better off in this situation than one using a non-free or restrictive license like the GPL?

      1. Troll? Said the poster named “Anonymous”?

        The GPL is indeed a more restrictive license. It restricts what you may do with the source, while the BSD or MIT (and others) do not – you can do whatever you like with BSD or MIT code, and indeed some have taken BSD code, ported it to Linux, and locked it up in the GPL so that it can no longer be used by BSD!

        1. Those restrictions are not restrictions, but requirements for the software to be a bit more free (from the user’s point of view, not the developer who wants to use it for his next project).

          In the same way a country bans (restriction) slavery, while doing it it’s actually making its population a bit more free.

          1. Let me get this straight, Andres. So they’re limitations placed upon what somebody may do, but somehow they’re not restrictions? Cut the crap, please. We’re dealing with restrictions here, plain and simple. Don’t pretend otherwise.

            And don’t pretend that limiting one party’s freedom somehow improves freedom for everybody. It doesn’t. Outlawing slavery does not increase the overall level of freedom. It may give former or potential slaves more freedom than they would otherwise have, but it only does this by taking away freedom from those who wish to own slaves. There’s no net increase in the level of freedom, but merely a redistribution.

            The GPL is a restrictive license, and that’s just an honest to gosh fact.

          2. Responding to Jennifer (portions and and some spinoffs from the LSMB project are BSD licensed and so I work with both).

            The fundamental disagreement here is over what “freedom” means and the role of institutions in ensuring it. The FSF follows a pretty typical “liberal” (in the way historians would use the term) interpretation of the concept, where “freedom” can be analyzed, broken down, and divided into enumerated rights, rights that can be centrally enforced. Here communities and organizations other than the enforcer of liberty are suspect and things to liberate the developer from. Hence the GPL as an exercise in ordered liberty.

            The problem as I see it (and why I prefer the other side) is that over time, an enumerated rights approach with enforcement ends up breeding complexity and a need to further restrict freedom in order, ostensibly, to guarantee it. Compare the GPL v2 and the GPL v3 for example. In this way, liberty made its own goal, becomes its opposite.

            The alternative is to have liberty serve something else, i.e. to ask why we need liberty. I would argue instead that we humans are creative beings, and so the fundamental liberty is the liberty to produce things of one’s own with the tools. This is a work ownership theory of freedom and holds that freedom is uninumerable but inseparable from economic production: the greatest freedom is what you can produce. The BSD, because it has a model of giving forward what I produce so that you can own what you produce encourages greater freedom, and freedom of a more durable form (because it is less subject to legalistic reinterpretation later). Moreover since such freedom *has economic value,* we don’t have to worry about closed competition because eventually the open versions will prevail as the closed versions must compete against both low cost (i.e. free as in beer) and also free as in freedom software.

          3. Responding to Chris Travers wrt his arguments about BSD vs GPL: there’s a counter-example that refutes your theory. If “we don’t have to worry about closed competition because eventually the open versions will prevail as the closed versions must compete against both low cost (i.e. free as in beer) and also free as in freedom software”, how is it possible that nowadays MacOSX (initially based on BSD, and thanks to this, now proprietary) has way more market share than any BSD OS (or Linux)?

          4. Answering Andres:

            The question is whether you worry over proprietary competition in the long run more generally. With OSX there are two important things to consider.

            First, OSX serves a distinctly different audience than BSD. Consequently the Linux and BSD communities can see from the experience of OSX what is needed to break further into that market. Now that Linux and BSD kernels largely own the market in important areas (certain server segments, certain smartphone segments, etc), it seems likely this marketshare will expand regardless of competition.

            Secondly what BSD is selling (a high quality platform for professionals and servers) is not currently what OSX is selling (namely easy, polished user experience). This is a different product, but it is one that points the way for further open source work.

            There are other cases which one might bring up. For example, EnterpriseDB’s proprietary Oracle compatibility extensions for PostgreSQL. The fact is, however, these are mostly interesting to people moving from Oracle and the community is much happier without these things. Again, as much as EnterpriseDB would like to (and try to, to their shame), they don’t effectively compete with the PostgreSQL commercial support community very well.

            Again, I don’t see *long-run* competition of closed source to be economically viable, and therefore I don’t worry about it. I think eventually closed source will be relegated to those areas where free software business models have trouble distributing costs (I can think of a few examples, such as payroll software, where maintenance costs make open source business models difficult, but they are niches).

        2. I like the BSD license, but I don’t see why it would matter in this case for two reasons.

          First the IRS claims to be concerned about copyright ownership, not reserved rights. It isn’t clear beyond copyright assignment what could be done to appease this concern. Certainly changing a license wouldn’t. Maybe “I hereby assign my copyright to everyone who reads the code as a joint work” might do it since the US does not recognize moral rights for software and yes, that would be more like the public domain.

          Secondly, the IRS expresses a concern about a *lack of restrictions in commercial use.* It isn’t clear to me how you can address that concern by eliminating restrictions for commercial delivery.

          Again, I prefer the BSD license to the GPL because I prefer a work ownership theory of freedom rather than an enumerated rights theory. But there is no reason to think that this would make a difference here.

    1. GPL, LGPL, AGPL: none of these are non-free or even restrictive.

      Copyleft is a tool which may actually end up helping you. It’s in no way making the software non-free.

      1. Isn’t it nice to state your own opinion on a subject as if it were incontrovertible fact? When in fact it is a subject where no definitive answer is even possible because there is no agreement on the definition of at least one of the terms (“free”)?

        Telling other people what to think is so free and open.

      2. Except for the fact that you cannot do whatever you want with it, only what the GPL allows you to do with it. Some say that’s a good thing, and for their project that’s fine – their choice. For other projects the desire to grant their users the freedom to do what they want with the code trumps the benefit of forcing their users to keep the source open. Again, their choice. But to claim the GPL is not restrictive is nonsense – it’s deliberately restrictive in order to force the code to always be open. That’s the point of it.

    2. The IRS notes read like an even less restrictive use license would be even MORE of a problem, since they are already complaining that “everyone” can use the software rather than just a specific “community” of needy or under serviced people.

  8. It’s kind of ironic that the conclusion to this could very well mean that adopting a CreativeCommons-NonCommercial license for writing software could actually apply better to IRS’ requirements than truly open-source licenses.

    Meh.

    1. Creative Commons licenses are specifically called-out: “The development and distribution of software is not a public work even if published under open source or creative commons compatible licenses because software is not a facility ordinarily provided to the community at public expense.” This plus the other reasoning in the document leads me to believe that permissive, non-permissive, and CC-style licensing are all dismissed by the IRS. Since we use GNU licenses exclusively, I concentrated on that.

      1. How about if we amend our definition of Open Source to allow restricting the government in general and the IRS in particular from every using our programs? Let’s see the government function without Apache and OpenSSL and the like.

        I’d love to see their reaction when they were flooded with Cease and Desist letters.

        Yeah, I know – won’t happen. But I can dream, can’t I? :-)

      2. “… software is not a facility ordinarily provided to the community at public expense.”

        Interesting. And wrong. My local library system has 1000s of computers for patrons to use free of charge. I’d guess that the vast majority of public libraries in the US are the same in that respect.

        Sadly, they don’t actually use GNU/Linux on those computers (that I’ve seen), but they could perhaps save the taxpayers a considerable chunk of change if they did.

        1. If the software in question is used by any public institution, then yes, it is providing something that would otherwise be at public expense. Otherwise the govt would presumably pay a contractor for similar software.

  9. OK, the bit about “your stuff can be used for non-excempt purposes” is important and can be challenged with a precedent I am very familiar with.

    The biggest 501 (c) 3 in the US is the main National Rifle Association. There are also separate political wings such as the PAC and the lobbying wing organized separately and when people complain about the “NRA” in DC that is what they are really talking about.

    But the “core” NRA is non-political and does mainly firearm safety training…which can be and often IS used for commercial purposes such as private security guards ranging from Pinkerton’s to Blackwater, GLOBALLY.

    For that matter the NRA’s training materials can be used for outright evil.

    I would cite all this in a challenge letter. If they were to try and take the NRA’s tax status away there would be an amazing shitstorm.

    Drop me email if you need more help, I’m a former gun-rights lobbyist and know this world very well.

    1. That’s… not how it works.

      Education IS a reason for an exemption, in and of itself. Education can be used for a lot of things, but it is exempt because it is considered to be a public benefit.

      Software in and of itself is not considered to be a public benefit, so it matters what the software is used for.

      This all gets back to the actual REASON for the 501(c)(3) tax exemption in the first place. It wasn’t ‘to give out neat free stuff to people’. It has some pretty specific reasons for existence, and I for one think it is perfectly reasonable that ‘we make free software and give it away’ is not necessarily within the definition.

  10. Well it makes sense … why would writing free software by itself be enough to qualify as charity? That would open the door for software vendors that produce open source software to out source their development to such “charity” organizations to save taxes.

    So without knowing the contents of your application its hard to judge.

    1. That would open the door for software vendors that produce open source software to out source their development to such “charity” organizations to save taxes.

      Even if we suppose this is true, why would it be a problem?

      1. The purpose of charity organizations is not to give companies an unfair advantage. If you’d tried to do the same here (in Austria) i.e ask for task exceptions because you are a “charity” which … writes software … people would laugh at you. I am surprised that it is something people even try in the US.

        1. In the US, there are various reasons that an organization might be tax exempt (and different definitions of “exempt”; http://www.irs.gov/Charities-&-Non-Profits/Types-of-Tax-Exempt-Organizations- ). Churches just are exempt regardless of whether they make the world a better place. There are small groups that don’t have to pay taxes on their income because they aren’t expected to make a long term profit ( http://www.coyoteblog.com/coyote_blog/2013/05/a-note-on-501c4-corporations.html ).

          There is a list of things an organization can do that are considered, by law, to make the world a better place ( http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exempt-Purposes-Internal-Revenue-Code-Section-501%28c%29%283%29 ). Creation of open source software is considered to be a literary activity. Yorba apparently also argued that it was an education activity.

          There are additional requirements ( http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exemption-Requirements-Section-501%28c%29%283%29-Organizations ). I don’t think Yorba violates any of the requirements, but you have to convince the IRS that’s the case.

      2. If you don’t think anyone should pay taxes ever, then I guess it wouldn’t. If you do, then why should open source developers get a tax exemption? Just because you like them?

        1. To be clear, it’s not the open source developers that receive tax exemption from 501(c)(3), the Foundation would. Even with 501(c)(3) I have to pay income tax just like everyone else.

          Since Yorba’s income is negligible, exemption is not even that much of an advantage for us. 501(c)(3) would allow us to solicit more donations, however.

  11. For what it’s worth, when we started the Dojo Foundation, I read through 501(c)(3) and 501(c)(6), and it felt like an open source foundation, under the current rules, is really more of a (c)(6). This does have the unfortunate side-effect that individual contributions are not tax deductible in the traditional charitable sense.

    In the past, the definition of how to really determine which you were was somewhat based on the profile of the donations you receive. For example, if you expected most of your donations to come from large corporations, you’re really a 501(c)(6) in the eyes of the IRS.

    In general, I would say that we chose to be conservative in our interpretation, as we weren’t 100% clear that we would be approved as a 501(c)(6), and it didn’t feel like the benefits of c3 outweighed the compliance headaches for our projects.

    1. Dylan, I think your analysis between the differences of a (c)(6) and (c)(3) here are far too simplistic, but this is probably not the forum to discuss that in detail.

      Anyway, the main benefit of a (c)(3) for Free Software rather than (c)(6) is that the primary mission of a (c)(3) is to serve the public good, and the primary mission of a (c)(6) is to serve a common business interest.

      1. As a follow-up to this point, it seems likely that different open source organizations might do well under either organization.

        For example, if there was a foundation focusing on open source accounting and ERP solutions, that’s pretty clearly a common business interest, I would think.

  12. A nuance, but a lot of the 501(c)3s that you associate with open source take the tack of being educational in focus. We’ve known for a long time that the IRS equates value produced in software (even open source software) with profits, but *education* about a project or endeavor is seen as public-benefit. It’s too bad we have to use that hack, but its not uncommon, FWIW, and also pretty close to the truth of how open source works.

    1. Oh, I understand that. The IRS’ view in our denial letter is that in order to be educational, a 501(c)(3) must provide “instructional training, lectures, workshops, exhibits, and presentations.” It’s not enough to be educational in focus, they want to see a substantial amount of educational activity. I don’t believe this was true before, and so as a “hack” future applicants might need to be more thorough in making explicit their commitment to education.

      1. I don’t think they said that. If you made free software that was designed primarily for use in schools, for example, I am nearly certain that you would not have had trouble.

        1. They did say that (in that, I quoted them verbatim). I encourage you to read the denial letter in full, particularly Section 3.

          Even if we designed our software primarily for schools, they still had a problem with the idea that, due to open licensing, anyone could use the software for anything, including for-profit activity. In your example, we would need to license our software with restrictive,
          “educational-use only” licenses to pass muster. That’s no longer free software, which is the overall point I’m trying to make.

    2. @Danese Exactly. It says in the document that 90% of the organization’s activities are producing software. Is that really true? Or are those the activities of the the Yorba Project? Is the foundation really paying for 90% of the development?

      Forums that help people learn how to use your software are educational. Conferences and workshops are educational. Sending people to workshops is educational. That’s why most FOSS foundations are mainly organized around putting on conferences, supporting user groups, providing support forums and so on. The foundation may also exist also to facilitate the development of software (a scientific purpose) though I think making the case for scientific purpose is always challenging.

      1. I don’t think the one can be inferred from the other. The 90% of activity that constitutes “developing software” would likely include curating pull requests and patches from volunteers who aren’t being paid by Yorba. Those contributions could be the bulk of the code, or an insignificant fraction, or anywhere in between.

        In other words, Yorba could be spending 90% of its time on software development while only doing a small amount of the development. I don’t know what the ratio actually is.

        1. It’s not really about time; it is about money. Are they spending 90% of their money curating pull requests? If so, how is curating pull requests a charitable purpose? That’s what they would have to justify.

        2. It’s not really about time; it is about money. Are they spending 90% of their money curating pull requests? If so, how is curating pull requests a charitable purpose? That’s what they would have to justify. Also, interestingly enough, the IRS does not really care about how much volunteer participation you have. But even if it did, those volunteers would have to not get any benefit from their participation other than feeling good.

  13. The inconsistency is problematic, and *some* of the statements from the IRS are truly worrisome. While, I can’t actually support the idea that FLOSS = charity, FLOSS *definitely* creats public works / public goods though. 501(c)(4) and 501(c)(6) seem to be better fits in terms of meaning though, although I understand how tax-deducatability for donors is preferred.

  14. Don’t bother with the IRS, I would get a lawyer and sue in court. Appeal all the way to SCOTUS if you have to.

    1. You might want to note the layer of administrative law on top of any IRS issues. The exhaustion of administrative remedies is quite important in most cases (without remarking on this case).

  15. Oh. I get it.

    So they deny you 501(c)(3), so you can’t get the contributions necessary to afford the legal battle to obtain 501(c)(3).

    I’m not a lawyer, so take this with a grain of salt.

    I would point out that you intended the term “world” (for “world community”) to be severable into “each and every self-defined community that exists within the world, including the communities defined by every nation and state, every province or political subdivision, every privately-created organization and every individual within the world.”

    And then point out that since people use the products of educational institutions (knowledge and degrees) for monetary gain, educational institutions can’t meet the arbitrary criteria that they’re applying (even if “education” is one of the expressly-legislated permitted reasons).

    Finally, throw a convention every year to run educational programming tracks. That’s gotten a lot of organizations that can’t otherwise show they can meet the educational purpose requirement the 501(c) status. (I think Apache does this, which is why it can be an educational charity.)

    Of course, IRS is also trying to divide this in a way that still makes book publishers responsible for taxes. The argument goes like this: “Your business is to print and distribute books. What people learn from the information within the books is irrelevant.” I wonder if textbook companies are 501(c) organizations? Do they contract with non-exempt printers to print the books?

  16. The first thing you need to do is get your hands on a good lawyer, and have them explain what the IRS means in its rejection. If you’re truly like projects that have gotten status, then your application might be modifiable so that the IRS will accept it.

    Your first recourse is to reword the application to answer the rejection reasons. The FFS is not the best organization to help, if you don’t want to spend money on a lawyer. Your best bet would be EFF, I think, followed by the ACLU, although the later will probably decline on grounds of lack of expertise.

    Fighting with the IRS is always a last recourse. They might not win, but it’ll take you forever and cost you a lot of time.

  17. To be honest (and unpopular) im happy with the decision.

    Free to use for any purprose needs to be reconsidered.
    – Should it be ok to use free software to deny people software freedom ? Why ?
    – Should corporations have the same rights that humans have ?

    As a community of humans (not corporations) we need to open our eyes and recognise that Software Freedom is used by corporations to make society less free. We have to accept responsibility for that. Its not enough to say we only care about software, we are a part of the bigger picture wether we like it or not.

  18. I appreciate Jim posting this, and I hope people look closely at the issue. Understanding 501(c)(3) issues is very important for Free Software folks, because many of the orgs we rely on (such as the two I’m involved with (Software Freedom Conservancy and Free Software Foundation)), are under this 501(c)(3) tax exempt status.

    I really do hope Yorba changes their minds and decides to appeal the decision, and I hope those lawyers out there who keep claiming to “be there for Free Software” step up to the plate and do the work necessary pro-bono for Yorba.

    That said, even if Yorba doesn’t appeal (which seems the likely outcome), we should all keep in mind this is one opinion from one IRS examiner. It doesn’t change the status of orgs that are already operating properly under 501(c)(3) status.

    I suppose I should add a brief pitch for Conservancy’s model: Conservancy accepts applications from projects that want to be part of a 501(c)(3) charity but don’t have the resources or time to form their own org. You can visit: Conservancy’s website for details.

    Conservancy has been encouraging projects for a long time to find a fiscal sponsor (if not Conservancy, then SPI or Apache) rather than try to form your own org because you never know ahead of time what sort of roadblocks you might hit (like this one, or others) when you try to do a new org. I’d suggest the lesson from this outcome is “join a fiscal sponsor rather than forming your own org”.

  19. I’m sympathetic to Yorba’s frustration. But perhaps you didn’t spend enough time explaining to the IRS how Yorba software helps the world. Where do you explain that Yorba software is used to eliminate poverty, cure disease, and strengthen tooth enamel?

    Our FOSS non-profits don’t always use the right words to explain why we’re good for educational, scientific or charitable purposes. Helping each other create tools for our own and for commercial use is nice, but not 501(c)(3) “stuff”.

    With the government, the secret to success is sometimes what you say and how you say it.

  20. we did some similar research after the tea-party/irs scandal went down. turns out there’s a trend away from c3’s post 2006 when it comes to technology “non profits” towards trade orgs (c6’s), which is a better fit. businesses can deduct the expense, the trade association has more room in the political arena (c3’s do not), etc.

    i think most of the c3’s that did get approved (pre-2006) were mostly just lucky and not really a good precedent. do some c6 research, might be a good fit… it’s not that much diff, and in some cases better (imo).

  21. Wouldn’t it be possible to use an umbrella 501c3 organization for this? One of the bigger existing free software orgs could be interested in setting this up. If not, find some folks who are interested in setting up such an org.
    I guess that it’s easier to successfully spin off a 501c3 from an umbrella than to start a 501c3 from scratch.

  22. You might be interested in the take that SoylentNews has on this:

    http://soylentnews.org/article.pl?sid=14/06/13/2235203

    In short, they expect to be hamstrung too much by non-profit red tape, so will have a go at setting up as a benefit corporation (something that has only been around since 2010).

    [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

  23. Thank you for posting all of this. I’m a tax and business attorney who does some tax-exempt work and my FOSS coder spouse brought the issue to my attention. I share concern on the treatment of “community.” This also reminds me of an IRS denial from a few months ago of an international internet free speech org’s application – on different grounds, with some similarly puzzling reasoning. Trying to unearth that now…

  24. It’s interesting that the vast number of commenters here seem to think that this is an issue to be referred to an attorney, and not to an accountant or Enrolled Agent (I am an Enrolled Agent, recognized to practice before the Internal Revenue Service, as well as being an IT consultant).

    Without seeing your 1023, I couldn’t possibly comment on the Service’s reasoning for the denial. I will tell you, however, that when the determination letter states “…any authority for the proposition that the world is a community,” the inference is any legal authority under Title 26, not authority in the broader sense. Thus, their argument is likely sound, but again, without seeing the mission statement and other formation documents required to be filed with the 1023, I couldn’t possibly comment intelligently on how they reached their determination.

    Certainly other entities which develop software (either primarily or tangentially) have qualified under 501(c)(3) for exemption from income tax (Mozilla Foundation comes to mind, as well as Apache Software Foundation, both of which develop applications which may be used in commercial ventures). A good read of their 1023’s and related documents would be useful.

    I can also tell you that waiting such a long time is not unusual, either, and not necessarily an indication of a ruling one way or the other (I’m waiting on one now which seems to be taking forever).

    Anyway, just some random thoughts from someone who isn’t a layman in this regard (IRS Circular 230 Disclosure applies see our website for details). Good luck with this, if you do decide to appeal the determination.

    1. Well the Federal preemption against unauthorized practice of law provided by Circular 230 is limited to those activities constituting practice before the IRS. Circular 230 defines practice before the IRS to include:

      All matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a client’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include preparing and filing necessary documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings, and meetings.

      An attorney is usually required when resolution of a tax question requires an interpretation of legal principles that extend beyond Federal tax law, a particularly normal problem given the multilayered issues in business formation, estate and gift taxation, and the limitation of risk (which is the main purpose for quite a few people).

      I would suspect that people look to an attorney in this case b/c it isn’t just federal taxes.

      1. An attorney is not required when appealing a Form 1023 decision.

        I can tell you from experience that attorneys who are not tax attorneys likely have little or no knowledge of how to complete a Form 1023 or what may have been missed in this case. However, an Enrolled Agent should have this understanding and be able to determine whether the services of an attorney may be required in order to amend the bylaws and other documents of the Organization in order to better conform to the spirit of the Code.

        As to whether the tenets of Circular 230 apply, again, I would refer you to our website, as it is not so limited in scope to only apply to representation before the IRS, hence my mention of its applicability to my previous comment.

  25. The idea that you can’t be 501(c)(3) because somebody might do something non-exempt with your work is terrifying. A charity that provides nice clothes to help unemployed people get jobs might provide the suit somebody wears while lobbying. That’s a dangerous precedent.

  26. I don’t think this is anything new considering I know of a few orgs relating to open source that got scrutinized. Mozilla itself had received some sort of IRS inquiry.

    I would suggest Yorba reached out to Mozilla and learn from their experience etc.

  27. If I freely publish a recipe for a fruit cake in a church/village newsletter and – unbeknownst to me – a company uses that recipe as the basis for a profitable commercial empire, then this decision would have it that I would have to be taxed on that profit. Crazy!

    I understand the financial reason for not wanting to appeal, but please find a sponsor to do so else this becomes precedent…

    1. First, recipes cannot be copyrighted. Second, this decision has to do with whether if you were an organization and you published a recipe it would be a charitable act and make your charity fit the legal definition of a 501(c)3.

  28. Is it enough that it be used in science to be recognized as having scientific value? Are case studies what’s needed? I installed Luna about a month ago, and it’s where I’m developing the software used in my research. It’s also where I’ll be writing the papers that come out of it.

  29. Doesn’t this mean churches whose premises are used by for-profit organizations to meet are also now not non-profit? There are a LOT of non-profits who have or make something that is used by for-profits out there besides software.

  30. Looking at this from a different point of view: if an evil twin of Yorba was granted 501(c)(3) status, in what ways could it be misused? For instance:
    1) I could set up a not-for-profit corporation “A” producing software that it claims is open source, and apply for 501(c)(3) status.
    2) I could set up a for-profit corporation “B” which “donates” (tax exempt!) to corporation “A” to cover the running costs for corporation “A”.
    3) corporation “A” is under no legal obligation to release software to anyone in particular, so it releases its software only to corporation “B”, perhaps under a BSD license, so that “B” can sell the software at a profit…

  31. Sound to me like most free software projects, and this project in particular, would fit better as:
    501(c)(4) “Examples can include civic groups, downtown improvement associations, and social action organizations.”
    or perhaps
    501(c)(6). “Chambers of commerce, retail merchants associations and real estate boards”

    501(c)(3) is intended for: “Day care centers, food banks, low-income housing organizations, mental health organizations, United Ways, museums, theatre groups, colleges, and environmental groups are just some examples of the many types of charities. – See more at: http://www.njnonprofits.org/Whats-a-np.html#sthash.JZCmQLkm.dpuf

    Really 501(c)(4) sounds perfect. 501(c)(3) sounds like a pretty big stretch. You aren’t a charity, a school, or a museum. You are a ‘software infrastructure improvement organization’.

    I’m thinking that the IRS is just doing its job better after recent kerfuffles related to tax exempt statuses. It’s slow because it is pretty massively understaffed these days, but it is getting there in the end.

    Unless the purpose of a project’s software is very specifically charitable, educational, or artistic it should not be a 501(c)(3) and benefit from tax deductible contributions.

  32. I think I know a solution. We need to start a free software religion. RMS can be our “Jesus”. Then any free software project can adopt this religion and obtain 501c status and tax exemption.

    1. Came in to say this. I am not going to choose RMS as my Jesus, especially not for PR purposes.

      But I am an ordained minister, and would be willing to help out The First Yorban Church Of Free Code…

  33. So this is essentially as if they told a school, “You teach people how to write programs, and they might someday get a job writing programs, so you are obviously not non-profit.”

    Funny thing is, though, they don’t actually say that to schools.

  34. if it would not be that sad i would laugh till cry.

    “We have not found any authority for the proposition that the world is a community within the meaning of § 501(c)”

    this sounds like a geek-shirt text.

  35. It might help to clarify this if in place of “software,” which does not provide any prima facie benefit to the public at large, we say “widget.” A widget may be very useful, and even become ubiquitous through general use, sharing, and adaptation; but widgets are not among the things that the IRS has determined are essential public goods or public services (like food to the hungry, public roads, charitable medicine, education, scientific inquiry and the arts) that are serving a charitable purpose. If I am a widget maker, and the widgets I make are nifty, the mere fact that I allow interested passers-by to help themselves to my widgets does not qualify me to apply for tax-exempt status.

    If I’m providing support for scientific research into the nature of widgets or their role in society or their function in the economy — the kind of knowledge that could benefit the advance of human understanding — then I could make a stronger case to the IRS. Or if the widgets I made were art, or if the widgets I made enabled poor people to grow food or communicate off the grid — I would have both a charitable purpose and would be benefitting a designated charitable class.

  36. “The IRS reasons that since Yorba’s open source software may be used for any purpose, Yorba is not a charity.”

    While the software may be used for any pupose, in the same way that clean air could be breathed by anyone, it should be remarked that there are some very clear limits that define what can be done with the software code. For example, if it is released under the GPL, the source code, if improved upon and released to another party, must be also made freely available. So, due to the restrictions placed on the re-use of the code, it really is not true that that freedom to use the code is not without limits. Those limits are necessary to protect others rights. Reapply, noting the goal of protecting users rights.

    1. The significance of the “any purpose” is to point out that the software does not serve a charitable purpose. It’s not about whether or not end users make a profit. Software users’ rights are not among the things the tax code was designed to protect. If Yorba made only software for educational or artistic purposes, or if it was primarily a collective conducting research, or if its software was all intended to benefit children with leukemia, or homeless people, or disadvantaged minorities, or the environment, etc. — then you could argue that its efforts are worthy of tax subsidy, which is what 501(c)3 status really is. Merely providing a product for free does not earn you public charity status.

      1. If you read the IRS’ reasoning carefully, you’re incorrect.

        If Yorba produced educational software or software for poor people, the IRS is also claiming that we *must* license it in such a way that only those groups (schools, poor people) can use it. We must also enforce that license.

        In other words, no matter how well-intentioned we are, no matter what group we intend to help, Yorba cannot use copyleft or permissive open-source licenses for that software.

        That is the broad point of this blog post — open source software is not charitable in the IRS’ eyes, no matter its purpose.

        1. Since Yorba does not restrict its work to educational or artistic software, it’s a stretch of a counter factual to ask us to imagine what the IRS would say if it did. Given the fact that Yorba produces a substantial amount of nominally nonexempt product, in order to qualify for tax exempt status it would have to restrict the consumption/free distribution of the bulk of its products to a charitable class. And “the world” does not constitute a charitable class.

          1. That’s my point — the restrictions you name eliminate licensing software with copyleft (i.e. GPL), permissive licenses (i.e. MIT, BSD, or Apache), or Creative Common-style licenses.

        2. That may well be the IRS’ reasoning, but it’s contrary to the actual statute. The statute says that education OR benefit to the poor qualify, not that something needs to be both. By statute something educational isn’t disqualified just because the rich can benefit from it.

          IANAL, but it really doesn’t seem like that particular part of the statute is difficult to understand, or likely to have a legal meaning significantly different that how a normal person would read it.

          My argument that FOSS is inherently educational might not convince the IRS, but I think if someone had the resources to fight it in court, there’s some non-trivial chance that a judge might accept it.

  37. My 2c:

    … you develop software published under open source compatible licenses that authorize use by any person for any purpose, including nonexempt purposes…

    True I suppose, but for intellectual works it seems pretty irrelevant. If you made pens and supplied half to the local school and half to the local law firm, then the local school would only get half the benefit of your work. If you write software, the school gets no less benefit if the law firm also uses it. I note Max Lybbert says producing software is considered a ‘literary activity’. If so, this seems very relevant, because the same situation applies there as here.

    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.

    I think I’d actually agree on this one. Certainly people can learn a lot from source code, but I suspect what they are looking for here is more like a set course of instruction with specific learning objectives. Others have said you may need to better understand what the IRS is looking for, and I think that could be true.

    …software is not a facility ordinarily provided to the community at public expense.

    I’m not sure if this is helpful, but I’d disagree with this. From Wikipedia

    Article I, Section 8, Clause 8 of the United States Constitution, known as the Copyright Clause, empowers the United States Congress:
    To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

    Article I, Section 8 is the Powers of Congress section which begins with the power to collect tax. i.e. copyright was not seen by the drafters of the Constitution as a natural right, but rather, like tax, as a power granted by the Constitution to Congress. In my view, it follows that software is a facility ordinarily provided to the community at public expense.

    …public works must serve a community. Open source licensing ensures the Tools are accessible to the world.

    I think I’d probably agree that the world isn’t a community, but as Kyle Hamilton says, open source licensing may serve many communities, and its service to one community isn’t lessened by its service to others.

    Even though you are the copyright holder to a portion of Tools code, the portion of Tools code owned by private persons cannot be a public work within the meaning of § 501(c)(3).

    This sounds like a problematic technicality.

    1. If you make pens and give them away for any purpose, that’s really nice of you, but it’s not considered a charitable purpose that qualifies you for tax exemption. If on the other hand you were training unemployed people to make pens and other office equipment as a way of moving them out of poverty, your pen manufacture would be serving a charitable purpose regardless of who uses the pens or for what.

      There is no logical connection between the protection of copyright and the furnishing of works to the public at public expense. When the IRS says that software is not something that is provided to the public at public expense, they’re saying it’s not something the government would be spending money on that a non-profit could be saving them from the trouble and expense of supporting. By contrast if you were organizing volunteers to build schools, or care for a public park, etc — these are all things that government would otherwise be doing, and which therefore qualifies as a public benefit.

      1. If you make pens and give them away for any purpose, that’s really nice of you, but it’s not considered a charitable purpose that qualifies you for tax exemption.

        Perhaps I could have made this clearer: If you made pens solely for children at a school that struggled to afford pens, I think this would be considered a charitable purpose. If instead you gave away the pens for any purpose, the children would benefit from less of the work. They wouldn’t benefit from the work that went in to making the pens they didn’t get, so the work of making the pens would serve less of a charitable purpose. With software, the situation is different. If you made software solely for children at a school that struggled to afford software, I assume this would be considered a charitable purpose. However, if you allow the software to be used for any purpose, unlike the situation with the pens, the children would not benefit any less. They would still get the full benefit of all your work, so no less of a charitable purpose is being served. The point I was trying to make here is that the test being applied seems irrelevant to intellectual works, and it may be a good idea to look into whether writing software is considered a ‘literary activity’ by the IRS, since the tests that apply there may be more appropriate.

        There is no logical connection between the protection of copyright and the furnishing of works to the public at public expense. When the IRS says that software is not something that is provided to the public at public expense, they’re saying it’s not something the government would be spending money on that a non-profit could be saving them from the trouble and expense of supporting.

        If copyright was a natural right of authors that the government protected, then this would follow. Copyright would take nothing from the public, because it would be the author’s right to begin with. But likewise, if the collection of tax was a natural right of governments, then government expenditure would not come at public expense either, because it would be the government’s right to begin with. The connection is that tax and copyright are both impositions that the government makes on the public, so both come at the public’s expense.

        1. A company that makes pens and wants to give them away to schools will likely have two areas of operation: a for-profit arm that manufactures and sells pens, and a charitable giving arm that gives them away to needy groups. It’s unlikely the IRS would grant 501c3 status to any pen manufacturer, even if 90% of their product was given away.

          Things do get fuzzy when you consider the fact that software copies are virtually free, but it still doesn’t get you around the fact that the mere production of software is not a charitable purpose.

          1. Okay, enough of the pens. I’m sick of pens. I guess I chose a bad example.

            Things do get fuzzy when you consider the fact that software copies are virtually free, but it still doesn’t get you around the fact that the mere production of software is not a charitable purpose.

            But I wasn’t disagreeing with this. Perhaps an organisation producing free software would have trouble fitting the criteria for being a “Charitable Organization”, but if so, one producing free literature probably would too, for the same reasons. What I was saying was, if the “Charitable Organization” criteria don’t fit, maybe the “Literary Organization” ones do. I don’t know if this is the case, but I think it could be worth looking in to.

    2. I note Max Lybbert says producing software is considered a ‘literary activity’. If so, this seems very relevant, because the same situation applies there as here.

      I’m no longer sure about that. Software is copyrightable as literature, so I assumed that creating software would be a literary activity. But I should know better than to expect the law to use terms consistently in different contexts.

      Not every nonprofit puts their nonprofit applications online. But the ones I’m familiar with don’t specifically list “literary activity” (then again, they often just say “one or more of the things on the list”):

      * Haiku: http://www.haiku-inc.org/documents.html (Certificate of Incorporation, Ninth section: “the corporation is organized exclusively for one or more of the purposes as specified in §501(c)(3) of the Internal Revenue Code”; note who signed the acceptance letter)

      * GNOME: http://www.gnome.org/wp-content/uploads/2012/02/bylaws.pdf (Article III: “The objectives of the Corporation shall be as stated in the Articles of Incorporation. Specically, the objectives shall include charitable and educational purposes within the meaning of Section 501(c)(3)”)

      * Apache Foundation: http://apache.org/foundation/records/ASF-1023.pdf (pg. 2; see also http://apache.org/foundation/bylaws.html#A8 )

      * The Perl Foundation: http://www.perlfoundation.org/attachment/legal/articles.html (Article II: “The purpose for which the corporation is organized is to create opportunities and provide support for the advancement of collaborative efforts in Computer Science and Information Technology.”)

      * Python Foundation: https://www.python.org/psf/mission/ (“qualifies under the US Internal Revenue Code as a tax-exempt 501(c)(3) scientific and educational public charity”)

  38. To break down your problem a bit. It isn’t solely a “legal problem”; it is an access to expertise issue. While it is nice that you posed the problem, perhaps a more definite search for experts is in order? A few suggestions … law schools have pro-bono programs, law professors like causes, large law firms have pro-bono activities, and those pesky people who write law books might know someone. Similarly there may be people willing to help on the more academic side (cheaper). All of this requires a proactive (yet positive attitude) networking scheme.

    I assume that the basis of the IRS decision is somewhat stale considering the timeline, thus you may have opportunity. I can’t help you (not my state), but I have always found that there are numerous people who can if you can both find them, convince them, and inspire them.

    However assuming you can’t do it cheaply (and thus make mistakes with little cost) the next question is whether the money you are possibly paying is going to be used competently. How I hire underling attorneys is if they treat cases and fact patterns like their fiance (attentive, noticing everything, and prepared for more commitment) , if they “nerd” out about the fix, if they have fall back positions, and if they recognize risk and have mitigated the consequence of risk so that it is a known cost. While this is my version of “yes I will hire you” it may not be yours. I dislike specialization to the extreme (since hammers only see nails to hit but miss the screws).

    You also have a money problem. Make this a win-win in some way. Be creative to whom you are talking to find out what they need or want which is of lower cost to you but higher value to them and trade. Money isn’t the only solution. For instance, since you and others have expertise you could trade services. However there may be non-obvious solutions. The more you dialogue with the person, the more you can find an interest based solution rather than a money based solution.

    Just some non-legal musings. An attorney in your state and with a drive to helping you is usually a good thing (see about free consults).

  39. Have you published your application anywhere? Perhaps a comparison to other applications would help unravel this.

    [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

  40. Let’s step back and think about this in a new way.

    a) I create an open source project. I include a copyright notice similar to that of a book or work of music. That is I permit people to read it, copy small bits for “reasonable use” like similar to book reviews.

    b) I offer to license it as I would a book – maybe on a per user basis or for a large corporation or governmental organization on a blanket basis or per product or what ever. I might offer/accept different terms for different customers. e.g. low/free for charitable organizations, educational institutions, high for corporations, prohibitive for government organizations or … whatever.

    c) If no one actually uses the code – (by far the most likely case as in written novels and music) – no problem.

    d) If someone purchase a license – it’s either a business expense or it’s not. If it is – it’s deductible, if it’s not – it’s not deductible. In any case, as an author it”s not my problem.

    e) I declare moneys received as royalty income and deduct all my expenses. The difference is net income from the activity.

    f) If net income is negative (most likely) theres on tax to pay and no problem. If net income is positive some years – I pay the tax – but I can deduct all the expenses associated with producing and maintaining the code. So in most cases – no problem.

    g) If I in fact start to make a lot of money from my project – I would have to pay taxes on the net. This a huge bummer. But then the likelihood of this actually happening is so small that it doesn’t really need to be seriously considered.

    h) If some huge corporation want’s to make a big donation, they can call it a consulting fee, pre-paid royalty or whatever. This is still deductible to them – though they might have to amortize it. I would still have to declare it as income – but I would likely be able to amortize it as well. If this is too much for me to bear – we could call it an investment. The donor can still amortize it as it will never make any return and I can leave it on my books as equity – not tax payment required. Of course, the “enterprise” would eventually accumulate a huge amount of worthless equity – but hey – so do lots of large corporations as well as all government enterprises. I doubt this would be a problem.

    i) Hopefully, some sort of “standard” copyright enforcement setup would evolve along similar lines to the music business where companies such as BMI enforce music copyrights for a share of the fees.

    j) This leaves control of the software in the hands of the creators/authors rather than organizations with their own agendas such as the software conservancy.

    h) Finally, throw out software patents – it’s already beyond ridiculous. Copyrights give authors the right enforce their rights for 75 years after they are dead. (lol – unbelievable but true – and actually happens – think snow white (disney version)). The only reason we have software patents is to feed the trolls who would starve otherwise – it’s basically welfare for this who can’t do anything useful.

    i) Finally – no change in the law required – Copyright law has a long history and current usage and practice.

    Robert Ramey

  41. I have lightly read the IRS’ response.

    I’m a tax professional in my own Country (not the US) and a programmer.

    Even though I’m not fluent in US tax, it is clear a decent tax professional could protest and then obliterate most of the IRS arguments. You only have 30 days to protest, so better be hasten

    The entire document is basing on the fact that you need to go to great lengths to ensure your charitable work doesn’t get used by non-charitable entities, which is not true and unreasonable. Having a charitable purpose is not the same as having your charitable work being used for non-charitable purposes by someone else.

    The document also limits the definition of “charity” as targetting the poor to deny your request, even though as they cited, charity is defined on whether it serves public interest. (interestingly “lessening the burdens of the governement” is not argued even though there are tons of examples of US government using GNU tools, there are also examples of gnu tools being used by schools and university both inside and outside the US, be sure to provide them)
    Most of the argument also goes around you not providing proof. Make sure you do.

    It is also shocking the IRS denying the educational value of open source software. Both as a way of learning from source code (which is labeled as ‘incidental’, this is incorrect; studying source code can be the main source of learning) and as a suite of tools that can be used in schools in universities.

    The development of GCC involves a great deal of development of science, and there are tons of scientific research around compiler optimization and GCC’s involvement. Provide proof about it.

    Usually protesting is quite cheap; what’s expensive is to keep the battle if they further keep denying your request after protesting, in which case you have to go to court and may be go through appeals.
    Take a few decent lawyer and tax professionals and protest the response with good proof and careful wording; unless these lawyers advise you not to.

    Good luck

  42. You should clearly get the status (501(c)(3) tax-exempt status) and Internal Revenue Service clearly did you wrong. This bothers me how institutions like Internal Revenue Service don’t get the basics.

    They shouldn’t care if somebody uses your software for commercial agenda or not it doesn’t make any difference. You don’t do that and you should clearly get 501(c)(3) tax-exempt status granted. For organizations/companies that use your products for commercial purposes it is clear to me that organizations/companies doing that pay (different) taxes. Probably they know all that and are just trying to hinder FOSS as much as they can. In the future i do imagine there will be more people using FOSS and will acknowledge its rightful place and contribution to society but ATM well there is just to much ignorant people working for IRS and to little political power to start changing the laws to become more current and not to remain few centuries old. That is basically the main issue you where processed by an outdated system. On top of that the only ones that are capable to change this systems are big corporations and clearly a big chunk of them does not want to make your (organisation like the Yorba or FOSS in general) life easier. Some of them would probably like to see you stop doing what you are doing. But hang on there is a society out there you are serving and supports you and in time it will only grow.

  43. The slow but successful 501(c)(3) application of the Open Source Digital Voting Foundation (OSDV) seems highly relevant to this issue:

    Open Source Voting Machine Reborn After 6-Year War With IRS | Enterprise | WIRED
    http://www.wired.com/2013/08/osdv/all/

    501(c)(3) status was highly relevant since OSDV was losing out on funding via grants from foundations who want to help governments run elections in a more open and transparent way, using open source software. But like most foundations, they expected 501 (c) (3) status from their grantees.

    It says that the IRS “had one, over-arching beef: It didn’t want a for-profit company nabbing the Open Source Digital Voting Foundation code for commercial purposes.”

    It also discusses the experience of OpenMRS, to whom an IRS lawyer noted “We’ve had issue in the past with for-profit organizations creating not-for-profits as a way to defer tax payments on the upfront development of something that they end up monetizing downstream.”

    Also cited is the challenge that the Mozilla foundation’s application faced. It singles out Marcus Owens, a partner with the law firm Caplin & Drysdale, as someone very knowledgeable about all this. Until 2000, he was director of the Exempt Division at the IRS.

  44. Reading through all this, seems the practical concern you raise is about open source groups seeking tax-exempt status to help with getting donations.

    I run an education business with social cause, teaching coding and entrepreneurship, and am wondering if this points to an education hack for O/S organisations. I might be able to help out here.

    It’s been pointed out that a c6 might serve almost as well as a c3, but if a c3 is more useful for other O/S groups, then they require a significant part of their work to be limited to an underprivileged group.

    Plus, it’s more likely to accepted as a c3 if some of this activity is educating rather than creating software. Kyle, above, points out this is why Apache and other O/S orgs have achieved c3 status.

    Do I have the above right?

    If so, it seems working with local educators to target underprivileged groups might make for a useful partnership. Most O/S organisations have specialised know-how (like how you made Geary and Shotwell) that could be turned into great educational content. If that were distributed in similar ways to existing c3’s, would that be enough of a hack to get you approved?

  45. Yorba should be treated as Apache. To wit: Apache shouldn’t be treated as Red Cross.

    * Apache Foundation is nonprofit.
    * Apache Foundation is not charity.

    * Red Cross is nonprofit
    * Red Cross is charity

    In all likelihood IRS is trying to reel in 501c’s without of date 501c tax law.

  46. It is obvious you don’t satisfy the requirements of the 501(c)(3) regulations. All you guys have to do is add an education aspect to your application where you distribute educational information on your website that teaches people about open source software, and also give people tutorials. That would satisfy an educational aspect and should get you an approval. I expect that you already know that none of you can own the nonprofit, so be careful who you choose as directors. Founders often get kicked out of the NP’s they start.

Comments are closed.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>