
The new 501(c)(3) and the future of free software in the US - slashdotaccount
http://blogs.gnome.org/jnelson/2014/06/30/the-new-501c3-and-the-future-of-free-software-in-the-united-states/
======
JackC
So, I'm a lawyer, but not at all a tax lawyer.

I was talking to a tax lawyer the other day, though. I told her that I heard a
lot of public-interest journalism projects were getting rejected for tax-
exempt status, and it seemed like a problem in the tax laws -- we haven't
adjusted to a world where a lot of journalism is done by non-profits. A lot
like this story, but with journalism instead of software development.

She said she had looked at some of those applications, and she would have
rejected them too. She thought the problem was journalism startups haven't
figured out that they need to talk to a _tax_ lawyer before filing important
documents with the IRS. (And, yes, she's donating time to help with that,
incidentally.)

Like I said, I'm not a tax lawyer. But I would wait to get a perspective from
someone who knows this field before I concluded that the IRS is really opposed
to free software in general. And I would do this kind of thing through a
lawyer who specializes in it. Remember that you're helping out more than just
you -- if you do it right you're paving the way for people like you. If you do
it wrong, you're inviting bad decisions with broad statements like the ones
quoting in this article.

------
codezero
It sounds like the gist is that they were rejected because the code they
create might be used by entities that are not nonprofits/charitable.

One one hand, this seems crazy if the software created is given -- for a bad
metaphor: imagine a charity being unable to feed people because those people
may use the energy they get from that food to do non-charitable works.

Separately, and to play devil's advocate, I can kind of see the logic here: it
creates a loophole through which re-usable work that is funded under tax
exempt status can then be used by anyone, so you could imagine some org
donating some money to get some particular work done, then getting it and
using it without having to have paid tax on the equivalent work that would
have been done if they paid for it. Going back to the food metaphor, it might
be like a charity offering free food to anyone, rather than just to those who
have a particular need. I think that such a charity might run into a similar
rejection, but I don't know.

Like I said, I think it sounds crazy, but hopefully this draws more interested
parties into the discussion.

~~~
spenvo
The NFL is considered a non-profit organization by the IRS, yet all of the
teams which associate with its branding reap enormous profits.

How should all organizations which happen to open-source code automatically be
"for profit" just because some other companies _might_ use such code for
commercial purposes? The two examples are very similar but the NFL is non-
profit. If the precedent is set, the damage to the FLOSS movement would be
real and lasting.

~~~
codezero
To be clear, there are significant differences with the legal classifications
of various non-profits. 501(c)(3) is much different from 501(c)(6) (the NFL is
(6)) I am not a lawyer so I don't know what the differences are, but it's
possible/likely that if someone was going for a different kind of non-profit
the rules would change dramatically, so they can't quite be compared apples to
apples.

see:
[https://en.wikipedia.org/wiki/501(c)](https://en.wikipedia.org/wiki/501\(c\))

~~~
thefreeman
So I was curious about this and looked up some more information on it (the NFL
tax exemption).

 _Section 501(c)(6) of the Internal Revenue Code provides for the exemption of
business leagues, chambers of commerce, real estate boards, boards of trade
and professional football leagues, which are not organized for profit and no
part of the net earnings of which inures to the benefit of any private
shareholder or individual._

[http://sportsfans.org/2012/03/why-is-the-national-
football-l...](http://sportsfans.org/2012/03/why-is-the-national-football-
league-given-tax-exempt-status/)

One more needle to add to the haystack of bull shit from my government I put
up with.

------
gpcz
The IRS BOLO lists [1] are scanned bitmap PDFs, which make them extremely hard
to search. Does anyone know if they also BOLOed Free Software, or was it just
Open Source?

The reason I ask is that the term "open source" was designed to be more
palatable to businesses. In Revolution OS, Eric S. Raymond said in regard to
saying open source over free software: "If you walk in to an executive's
office and say 'Free Software', OK, If you're lucky, the response you'll get
is something like, 'hmm, hmm, Free Software, must be cheap, shoddy,
worthless.' If you're not lucky, it has associations with the Free Software
Foundation's wholesale attack on intellectual property rights, which
regardless of what you think about the ethics of that, it's lousy marketing,
it's not something that businesses want to hear" [2].

I don't know how savvy the IRS was about the nuances between open source and
free software (probably not very), but if they were, they might be making a
somewhat-reasonable distinction that "open source" was designed specifically
to please the business sector rather than free software's focus on ethics and
freedom.

[1]: [http://democrats.waysandmeans.house.gov/press-release/new-
ir...](http://democrats.waysandmeans.house.gov/press-release/new-irs-
information-shows-“progressives”-included-bolo-screening-list) [2]:
[http://www.cswap.com/2001/Revolution_OS/cap/en/25fps/a/00_54](http://www.cswap.com/2001/Revolution_OS/cap/en/25fps/a/00_54)

~~~
jordigh
> Free Software, or was it just Open Source?

These two are synonyms:

[http://jordi.inversethought.com/blog/5-things-we-have-
forgot...](http://jordi.inversethought.com/blog/5-things-we-have-forgotten-
about-open-source/)

~~~
dllthomas
That's possibly relevant to what _should_ appear on the BOLO list. It doesn't
seem relevant to what _does_ appear on the BOLO list, or whether one could
avoid flagging by using the other term.

------
jcalvinowens
Quotes From the IRS letter to Yorba:

> 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.

By this logic, all non-profit educational entities should be disqualified
because things people learn through their programs might later be used by
those people to make a profit.

> 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).

I understand that there are probably real legal reasons for the IRS saying
this... but that's bordering on inanity worthy of the Onion.

------
philipn
I'm the ED of a 501(c)3 non-profit
([http://localwiki.org](http://localwiki.org)), and when we applied for our
(c)3 status we got some flack along these lines, as well. Here's my advice to
the Yorba Foundation folks:

If you haven't received your final rejection, you can appeal.

Don't try and do this yourself. The post says they spoke with folks at the
Software Freedom Center, which is great, but I highly recommend finding a
specialized attorney who's seen lots of applications and knows the right
angle. Hire an attorney who specializes in obtaining 501(c)3 status. We made
this mistake early on, thinking we could work through the NOLO book and apply
ourselves. It cost us. For around $1k you can find a good non-profit attorney
to help.

We got flack for the open-source thing, too. Our original exemption
application was basically "Hey, we're a charity! We give things away for free
and release open source code, which can be used by everyone!" Depending on the
IRS agent assigned to you, you might get flack for this as well. Generally
speaking, they may not like that a for-profit business can use your
organization's by-product to make lots of money for themselves. We spent some
time explaining how OSS worked to the agent, and was able to convince him that
because (most) of our OSS is copyleft, that it would be a continually-free-
and-open good, not a private benefit.

Nevertheless, just releasing OSS is _NOT_ an exempt purpose. If you read the
IRS regulations, they are very specific as to what a core exempt purpose is.
You'll need to pick one that fits best. Generally speaking, it's 1) Church
stuff 2) Scientific advancement and research 3) Furthering of the arts 4)
Education 5) "Charity," meaning helping people who are disadvantaged in some
way 6) Some others that I'm not remembering.

Most OSS 501(c)3 don't get exemption by just releasing open source software--
they get exemption by being an educational institution. So you may want to go
that route -- the organization's core exemption is the creation of educational
materials that help education members of a particular community in XYZ ways.
This is what we ended up doing -- we're classified as an educationally-exempt
organization. If you look up the 501(c)3 apps of some other OSS non-profits
you'll see similarly -- e.g. Plone Foundation is set up as an educational
organization.

Edit: If you'd like to take a look at some of our back-and-forth with the IRS
agent at the time, check out the page here:
[http://localwiki.net/org/Historic_501%28c%293_application_pr...](http://localwiki.net/org/Historic_501%28c%293_application_process)
You'll see his response was similar to yours, but we decided to pursue
educational exemption and were granted on that basis in the end. Also, you can
call up the IRS Agent assigned to you and talk to them about the application,
which can be extremely helpful.

~~~
GabrielF00
This is a good explanation, but let me tack on one thing. The original blog
post says:

>> 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?

In fact, the tree-planting group can easily show that they serve an exempt
purpose, namely "lessening the burdens of government". Planting trees is
something that city governments routinely do for the purposes of
beautification or whatever. If a non-profit wants to do it, that's a perfectly
legitimate reason to get tax exempt status. The group would also have to show
that they are serving a public interest - for instance they're not just
planting trees outside of one company's coffee shops but they're providing a
service for the whole neighborhood.

~~~
danielweber
That question shows the typical nerd-misunderstanding of law as a rule-based
system with distinct outputs. They think the rule must be "no for-profit
company can ever benefit from the work of the charity" and are pointing out
how the rule is stupid so the rule must not exist.

IANAtaxL, in fact IANAL of any kind, but my reading is that the IRS doesn't
want companies to set-up fig-leaf charities that absorb and hide their normal
business functions.

~~~
btown
And in fact, imagine a large software corporation that wishes to be able to
tax-deduct the portion of its profits that go into R&D, so it sets up an open-
source non-profit to do all of that, with leadership that may have a financial
stake in the corporation or be otherwise leveraged, and donates its corporate
profits to the non-profit for its operations. This is almost exactly the
definition of a fig-leaf charity. Imagine if Google spun off an Android
Foundation and sent all of its core OS developers there, or even more so if
Apple spun off a Swift Foundation to make an open-source compiler - even
though they would be creating open-source software that _could_ be used by
other companies, it would not be in the spirit of the law that defines
501(c)(3), and much of the benefit would be derived by the parent corporation.
So as much as my knee-jerk reaction is to say "government doesn't understand
software," as a taxpayer I think it's perfectly reasonable for the IRS to be
wary and have the BOLO in place.

~~~
riskable
Am I the only one who doesn't have a problem with either of these Google/Apple
examples?

If Apple or Google spun off a 503(c)(3) for Swift or Android how would that be
a bad thing? It would ensure that the work of those developers stays open
source and free to all. Even if it only applies to a particular platform it
would still be open source and very useful for the world--if only to be able
to see the code.

What the IRS needs is a few finer points of distinction... Let the FOSS
development be tax-free as long as it's GPL or similarly licensed (the code
_must_ stay open no matter what) but deny such status for code that is BSD-
like which may (easily) be used in a tax-circumvention mechanism; where _some_
core code could be open source but to actually make it work you need the
proprietary derivatives.

~~~
dragonwriter
> If Apple or Google spun off a 503(c)(3) for Swift or Android how would that
> be a bad thing?

Presumably you mean a 501(c)(3) -- a not merely tax-exempt organization but
one to which _donations_ are tax-deductible as charitable donations; the
problem here with one sponsored by a for-profit company, whether its
developing open source software or not, is that they run the risk of being
directed at the for-profit company's priorities, and being a way for money to
be, in effect, funneled into the companies business in a tax-deductible manner
from those with a stake in the company's returns.

> What the IRS needs is a few finer points of distinction... Let the FOSS
> development be tax-free as long as it's GPL or similarly licensed (the code
> must stay open no matter what) but deny such status for code that is BSD-
> like which may (easily) be used in a tax-circumvention mechanism

The copyleft vs. noncopyleft distinction really has no bearing on the central
problem here. The real problem is that, to the extent that there is legitimate
reason to more closely look at 501(c)(3) applications from entities focussed
on OSS (perhaps because for-profit entities have been trying to set them up as
ways to improve the tax status of development efforts when they have an OSS-
centric business model), this _particular_ case doesn't seem to be one that
should have been problematic -- not because of license terms, but because the
potential problems that such scrutiny is designed to avoid aren't present. But
that may just be a poor first-level decision or a result of poor application
crafting, and not any real indication of any problem with the general
_policy_.

~~~
btown
As a concrete example for the copyleft distinction, consider if Swift
Foundation was founded to create copyleft (let's say GPL or even AGPL)
compilers, but the system libraries every compiled program would need to link
to were only found on Apple products. It's very clear that this would be a
move that would be for the benefit of Apple's bottom line, and that it was a
technology originally developed by Apple employees. So it's not like some
random guy in his garage said "I will make something charitable but make the
independent decision to base it on Apple hardware," as is true of (say) an
iPhone app for detecting medical problems, which would indeed be 501(c)(3)
eligible in my book (IANAL).

------
zb
It is my understanding that 501(c)(3) status has always been difficult to get
for open source software foundations. Organisations such as the Linux
Foundation operate instead under 501(c)(6) (business trade association).

However, the OpenStack Foundation recently applied for 501(c)(6) status and
received an initial denial[1], much to the surprise of all concerned since
this was historically pretty easy to get. So there may be something to the
author's thesis.

[1] [http://blogs.gnome.org/markmc/2014/05/17/may-11-openstack-
fo...](http://blogs.gnome.org/markmc/2014/05/17/may-11-openstack-foundation-
board-meeting/)

------
rancar2
From reading the blog post and the IRS letter of rejection, I didn’t really
find a strong case for why Yorba requires being a separate entity. Have you
considered becoming fiscal sponsorship project? There are multiple 501(c)(3)
organization that might consider serving as a fiscal sponsor for the project
like the Software Freedom Conservancy. Another perk to this relationship is
that the fiscal sponsor will handle the taxes and compliance.

To give some more background, my nonprofit went through a similar 4 yearlong
back and forth process, but in the end, we did successful receive status last
year. Prior to approval, I set up our organization as a fiscally sponsored
organization by established another 501(c)(3). The status that we achieved is
probably one of the highest on the IRS watchlist (donor advised fund) so I’ve
had to fortune of getting to know the IRS and the tax code for tax-exempt
entities very well :-)

For Yorba situation, the language used by Yorba in response to the IRS may be
fine when talking to developers, but when talking to the IRS, using IRS’
language helps tremendously along with reinforcing a specific charitable
purpose and avoiding any red flags (which Yorba’s response triggered in
multiple regards); this is where a lawyer specializing in nonprofit law can
really help as @philipn suggested. If you can’t afford a lawyer, you may be
able to obtain pro bono work, and even then, it’s still good to read the
relevant legal treatise to ensure you are well informed.

------
juliendorra
Interestingly, from what I read here it seems a lot simpler to set up a tax
exempt non-profit in France (Europe?). Basically you just register the statute
of the non-profit (it's inner working), and you can then act as a registered
non-profit exempt from many taxes (non-profit meaning you can't share the
revenue between the members as if they were shareholders). The tax
administration can control at any point, of course, and ask for taxes if you
start doing for-profit or clearly commercial activities that are not covered
by the rules.

Then if you want to exempt donations, as in this case, you have to be of
general interest (for the common good).

You don't need to apply, You can just self-check against a list of criterias,
and emit a fiscal receipt for you donators (but you might have to prove it
later). Or you can ask the tax administration to confirm and declare that you
are of general interest.

And then there is another step for more exemptions, for your donators "of
public utility" ("d'intérêt public"). This is way harder to get and is granted
and published by the government. This is for bigger fondations working on
great, wide issues.

------
jorgeleo
Interesting case. What I understand is that the product not only lack of proof
that disadvantaged group benefits from it, but mainly it can be used by
institutions that are for profit.

GPL v3

IANAL, but can you modify the license so if the user of your code is a for
profit institution, then they are licensed under GPL v3. so the institution
will have to make their code available for the community to benefit. Something
that for profit institutions are highly allergic to (severe CIO rashes, and
COO anaphylactic shocks)

And then can you turn back to the IRS and say that because the licensing
schema, if a for profit makes use of the code, it forced to be used for the
benefit of the community and not just for their profit?

Or maybe there is the need of a GPL v4 where you cannot make profit using the
code released?

~~~
davexunit
>Or maybe there is the need of a GPL v4 where you cannot make profit using the
code released?

That would violate freedoms 2 and 3 of the Free Software definition.

[https://www.gnu.org/philosophy/free-
sw.html](https://www.gnu.org/philosophy/free-sw.html)

------
wes-exp
It's a wake up call: real charity is stuff like stopping malaria in destitute
villages. Releasing software without charging a fee? Not so much.

------
restalis
"We have no plans to appeal their decision."

It's a shame. That kind of stupidity, shown by IRS, deserves to be penalized.

------
phazmatis
Crackpot conspiracy theory: Microsoft is whispering in the IRS's ear. The
joke's on them: Once a piece of open source software has a foundation around
it, it's pretty much just a bunch of people re-coloring widgets.

------
guard-of-terra
The quotes from IRS shot that this is not a random rejection, rather a whole
policy with thought-out basis. Somebody took time to ridicule open source in
legalese.

Two options from the paranoid:

Somebody influences IRS to stifle open source? Who may that be?

IRS thinks they can make enough wool by shaving pigs? That's desperate.

They should better figure out how to dismember Apple than do what they do.
It's a disgrace.

~~~
dragonwriter
> The quotes from IRS shot that this is not a random rejection, rather a whole
> policy with thought-out basis. Somebody took time to ridicule open source in
> legalese.

Its not "ridiculing". Its applying the law and existing precedent to the
specific facts presented by Yorba. It may be _wrong_ , but reading the whole
letter it seems like its more that Yorba did a poor job at explaining _how_ it
met the 501(c)(3) requirements, including when responding to specific
inquiries by the IRS.[1]

(It'd be interesting to get the application and other documents and compare
them to those of, e.g., the Apache Software Foundation, Mozilla Foundation,
and other open-source entities that _have_ gotten 501(c)(3) status and see if
its really that the IRS decision here is out of line with other ones in
similar areas or if its just Yorba's documentation and explanations that are
the issue.)

[1] [http://yorba.org/docs/IRS-determination-letter-
final.pdf](http://yorba.org/docs/IRS-determination-letter-final.pdf)

------
gcb0
reading that i almost wish they deny status to everyone writing coffee under
bsd and mit and only allow gnu gpl :)

------
jrockway
Little known fact: the GNU project got its 501(c)(3) status by starting The
Church of Emacs. The software is just something they do for fun.

(I might have made that up.)

------
titanix
Private corporation seizing other's domains, non-profit organization unable to
exempted from taxes, US gov wanting to access US-based company data on foreign
data center, PRISM, etc. it seems the US is building a strong negative law
environment against its own tech firms. If only Europe were to take take this
opportunity to become more attractive... but I haven't any faith our leader
will do it.

~~~
aikah
(I didnt downvote you,what's up with people downvoting for the sake of it?)

There are weaker software patent laws in Europe,they exist but are very
limited.

On the other hand Taxes are generaly higher,employement cost is higher and VC
funding is close to non existant.But you might get financed by public
money(with strings attached and a lot of paperwork ) So it's a trade-off.

From a pure "capitalistic" perspective the situation is better for startups in
USA in the west coast.And since Europe is not really a country,it's harder to
reach all European markets(different languages,cultures,fiscal
policies,laws...).In USA everybody talks English.

