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.

Reader Comments (rss)

(Flattened / Threaded)

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 12:11pm

    It has to benefit the poor ... like Massachusetts SWAT who apparently had no problem getting 501(c)(3) status

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Michael, Jul 1st, 2014 @ 12:16pm

    Non-Profit Status

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

    Perhaps my understanding of the "non" modifier is lacking.

     

    reply to this | link to this | view in chronology ]

    •  
      identicon
      PRMan, Jul 1st, 2014 @ 12:41pm

      Re: Non-Profit Status

      Ironically, that's not actually a requirement. My previous church (where I was on the board) had a Profit & Loss statement on which we showed a very slight profit every year (because we didn't like to spend money we didn't have, but did try to spend as much as we did have on outreach programs).

       

      reply to this | link to this | view in chronology ]

      •  
        identicon
        Anonymous Coward, Jul 1st, 2014 @ 1:12pm

        Re: Re: Non-Profit Status

        Yes, IMO, churches are pretty bad as "non-profit" organizations.

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

        Make no mistake, non-profit organizations are rife with crooks who find convenient ways to use the NPO's money for their personal gain - and often times this is through salary, bonuses, or purchasing of items which those people use for personal use.

         

        reply to this | link to this | view in chronology ]

    •  
      identicon
      Anonymous Coward, Jul 1st, 2014 @ 6:00pm

      Re: Non-Profit Status

      ... there should only be one requirement to qualify for "non-profit" status.

      Bribing the IRS agent is only one requirent.

      Donating to the President's political party winds up being two different requirements.

       

      reply to this | link to this | view in chronology ]

  •  
    icon
    Ninja (profile), Jul 1st, 2014 @ 12:21pm

    Looks like a duck!

    No really, criminals might use GM cars to transport drugs therefore... The not-so-smart person rationale...

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    ChurchHatesTucker (profile), Jul 1st, 2014 @ 12:21pm

    Equal Time

    The IRS has already pissed of the Right. Perhaps they're simply trying to even out the score?

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Anonymous Coward, Jul 1st, 2014 @ 12:27pm

    Excuse

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

    It takes time to write good fiction.

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    DannyB (profile), Jul 1st, 2014 @ 12:28pm

    Anyone might use the (open source) software

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

    But that doesn't mean the non-profit organization got any revenue from it.

     

    reply to this | link to this | view in chronology ]

    •  
      identicon
      Anonymous Coward, Jul 1st, 2014 @ 2:03pm

      Re: Anyone might use the (open source) software

      Yeah that is the most illogical argument I have ever heard.

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

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

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

      Etcetera...

      I know I make the church look uncharitable which for the most part is very untrue. However, the standards for what a 501(c)3 is seems to be slipping here.

       

      reply to this | link to this | view in chronology ]

  •  
    identicon
    Baron von Robber, Jul 1st, 2014 @ 12:42pm

    Did the IRS and USPO merge?!

    :(

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    PRMan, Jul 1st, 2014 @ 12:43pm

    What?!?

    This is completely ridiculous. Has the IRS lost their minds? People volunteering to make software for everyone for free don't qualify as a non-profit?

     

    reply to this | link to this | view in chronology ]

    •  
      identicon
      Quiet Lurcker, Jul 1st, 2014 @ 1:44pm

      Re: What?!?

      Has the IRS lost their minds?


      Sir, I think you are assuming facts not in evidence, namely that IRS had minds (or a mind) to lose to begin with.

       

      reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 12:48pm

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

    There is also the fact that just because you're officially categorized as 'non-profit' doesn't mean you are necessarily doing 'good things' for the world.

     

    reply to this | link to this | view in chronology ]

    •  
      icon
      OldMugwump (profile), Jul 1st, 2014 @ 1:24pm

      Re:

      Indeed.

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

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

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

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

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

      Customer: "That's not good enough".

      Us: We are selling goods and services, not the gender of our owners. Paperwork costs money and time. Do you want to buy or not?

       

      reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 12:48pm

    Try going the religion route instead.

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    mr. sim (profile), Jul 1st, 2014 @ 12:50pm

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

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

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Trevor, Jul 1st, 2014 @ 12:59pm

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

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 1:08pm

    Since when...

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

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

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

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

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    harknell (profile), Jul 1st, 2014 @ 1:10pm

    Too much trouble, Just make money...

    The silly thing about being a "non profit" is it costs a ton of money to get your paperwork set properly. In other words, you can more easily just make money than designate not to. I gave up on it as well for a project because it just wasn't worth the hassle.

     

    reply to this | link to this | view in chronology ]

    •  
      identicon
      Anonymous Coward, Jul 1st, 2014 @ 1:15pm

      Re: Too much trouble, Just make money...

      But you generally have to record the same information when you do make money - in order to pay income taxes...

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

       

      reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 1:34pm

    Saying what you mean pedantry

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

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

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

    (* = Let us ignore interpreted languages and scripts)

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

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

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

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    Padpaw (profile), Jul 1st, 2014 @ 1:50pm

    The IRS have become an openly corrupt organization for sale to the highest bidder like almost every other government organization these days

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 1:51pm

    Paperwork

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

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

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

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

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

    The Yorba Foundation likely failed simply because the person who did their original organization put in a few wrong words. Helping the community probably would work for an open source foundation as well, but again, every word has to be correct.

     

    reply to this | link to this | view in chronology ]

    •  
      identicon
      Jack, Jul 1st, 2014 @ 2:13pm

      Re: Paperwork

      And you see nothing wrong with this?

       

      reply to this | link to this | view in chronology ]

      •  
        identicon
        Anonymous Coward, Jul 1st, 2014 @ 2:54pm

        Re: Re: Paperwork

        The IRS is wrong in so many ways it's not funny. I think Ken White at Popehat.com summed it up nicely when he said the Romulans have a better concept of due process than the IRS. But it is what it is. It's got nothing to do with computers or open source software.

         

        reply to this | link to this | view in chronology ]

  •  
    icon
    Rocco Maglio (profile), Jul 1st, 2014 @ 1:54pm

    IRS supposedly target conservatives

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

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

    Nixon supposedly lied. I guess we will never know.

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 3:27pm

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


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

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

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

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

    Where the fuck do they find these people?

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 4:54pm

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

    If only these guys at Yorba knew who to bribe in congress eh?

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    art guerrilla (profile), Jul 1st, 2014 @ 5:53pm

    non-profits are non-prophet...

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

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    madasahatter (profile), Jul 1st, 2014 @ 5:53pm

    The only solution

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

    What is not carefully explained is the consumer eventually pays for all taxes because they are part of the overhead a company must recover.

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 1st, 2014 @ 7:52pm

    As someone on reddit pointed out likely an artifact of natural scarcity where limiting distribution actually makes sense. tax code was set up assuming you couldn't produce infinite copies of goods after the one time sunk costs of creating the first of that good

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    Coyne Tibbets (profile), Jul 1st, 2014 @ 10:21pm

    Let's take it out of software:

    IRS:

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


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

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


    Hmmm...the IRS interpretation doesn't sound very compatible with non-profit purpose. Could be a problem.

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 2nd, 2014 @ 6:17am

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

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Anonymous Coward, Jul 2nd, 2014 @ 11:13am

    In what universe is making something and giving it away for free a for-profit activity?

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    Sheogorath (profile), Jul 2nd, 2014 @ 5:01pm

    Wait, What?

    You have a substantial nonexempt purpose because you develop software published under open source compatible licenses that authorize use by any person for any purpose, including nonexempt purposes such as commercial, recreational, or personal purposes, including campaign intervention and lobbying.
    So does the above mean that 501c's with thrift stores will have to close them because people may wear clothes they buy there while at work in a company that doesn't qualify for 501c status? Gee, and I thought I had a cognitive disability!

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    Justin, Jul 3rd, 2014 @ 6:23am

    Freedom to Fascism

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

    http://youtu.be/uNNeVu8wUak

     

    reply to this | link to this | view in chronology ]

  •  
    icon
    Marvin (profile), Jul 3rd, 2014 @ 7:42am

    Who does and ndoes not deserve nonprofit status?

    Society of Automotive Engineers and United States Pharmacopeia (USP) are two organizations which it the same standards so they should loose non-profit status too. What About the National Geographic Society and AARP whose board members are self appointed and take in massive salaries and bonuses in lieu of profits?

     

    reply to this | link to this | view in chronology ]

  •  
    identicon
    WorBlux, Jul 7th, 2014 @ 8:21pm

    Literary Organization

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

     

    reply to this | link to this | view in chronology ]


Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Save me a cookie
  • Note: A CRLF will be replaced by a break tag (<br>), all other allowable HTML will remain intact
  • Allowed HTML Tags: <b> <i> <a> <em> <br> <strong> <blockquote> <hr> <tt>
Follow Techdirt
Advertisement
Essential Reading
Techdirt Deals
Techdirt Insider Chat
Advertisement
Recent Stories
Advertisement
Support Techdirt - Get Great Stuff!

Close

Email This

This feature is only available to registered users. Register or sign in to use it.