IRS says free software projects can't be nonprofits




In the Age of Internets, the world is our oyster. There is Europe, there is Asia, maybe South America, sometimes even Africa could be an option.

Can somebody more skilled in international accounting figure out how to set up a nonprofit in a more friendly jurisdiction? How are employees of such entities handled? Do we have some whitehat "accounting hackers" on hand?


This is a political and economic attack. Call your congress critter.


I run a small nonprofit, and getting it approved was a bear, even before the manufactured IRS scandal. They were quite strict about who we benefit and how much, with a certain fraction of clients being below the poverty line and so on.

There is a perfectly good workaround, which is to list making and distributing software as a secondary activity. A nonprofit must have its main activity in certain categories, one of which is education. If their primary activity is teaching the public, for fee, how to use GNU, in their little classroom in back, then the IRS doesn't care how much software they give away, or to whom. Bonus points if they give some lessons to low-income kids.

I don't know how many paid employees Yorba has, but if their budget is under $50,000, there's almost no oversight after the 1023 is approved - just a 1-page form to say, "hi, we're still here!"


It seems to me that most charitable organizations have the potential to benefit the private sector in some way.


I actually agree with the IRS here, having read their full response. The company in question makes no charity or educational efforts directly. They may want to do that in the future, but in saying they do 90% code updates and 10% fundraising, they've admitted they don't currently. They just hope that because their code is open sourced, someone else will come along and do that for them. That someone else will be eligible for 501(c).


I'm not sure what the problem is. A regular corporation is in no way obligated to optimize for profit. If this sort of organization wants to accept donations, they can always "sell" overpriced t-shirts hats and stickers, the same way the EFF gives me swag when I donate to them. What does non-profit status get you apart from a de minimis tax deduction for its donors?


A bit of googling lead me to this:

Sound to me like free software projects might fit better as:
501(c)(4) "Examples can include civic groups, downtown improvement associations, and social action organizations."
or perhaps even
501(c)(6). "Chambers of commerce, retail merchants associations and real estate boards"

The one they are trying to use, and perhaps the one everyone has been using, seems less appropriate:
501(c)(3) "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:"

Now, the big difference between 3 and 4 and 6? Contributions to 501(c)(3) are deductible, the others are not.


Not sure how it's "manufactured" since there's no small amount of evidence that the agency was used as a cudgel against opposing schools of thought and then conveniently lost the data regarding their decisions. Not that it's anything new for the IRS - they've always been thugs used against political opponents.

The bigger joke revolves around the kind of bullshit organizations that have gotten tax-exemption status: The NFL, Scientology... It's truly ridiculous.


This reminds me of the challenges faced by (micro)computer user groups in the mid-to-late 1980s, as they grew to the point of seeking 501c3 tax status, under some of the same body of law.

Lawyers told us the authoritative precedent (PDF) at the time (remember, we couldn't Google it) was a 1974 vendor-specific minicomputer-platform user group, which conducted mostly activities in conjunction with the for-profit vendor, rather than independent advocacy, organization, and education. The subsequent 1983 ruling, 83-164 for a Prime users group, was upheld in District Court in 1987, and similarly on appeal in case with Guide International, an IBM group dating back to 1956 but incorporated in 1970. However, these were all about c6 business societies, not c3 charitable exemptions.

So this is why we set up the Berkeley Macintosh Users Group, started in 1984 as a campus club, legally in 1985ish as BMUG, Inc. (unofficial motto when filing: "No, it doesn't stand for anything") and while applying for 501c3 status and for years afterwards made some mostly-token efforts at cross-platform inclusion, including publishing a Windows newsletter, attending a Comdex, and doing a poorly-named "GUIfest" rather than our traditional MacFest. Of course, its primary relationship was with Apple and over 10,000 Mac users. The nonprofit status turned out not to matter much, as an insubstantial part of the organization's revenue came from donations, and in most cases these were not deducted by the donor.

As the IRS sez (PDF) in a 1996 thoughtful analysis that illuminates some of the type of thinking and precedents that eventually led to the latest ruling:

One problem common to many cases concerning computer-related organizations is language. Computer enthusiasts tend to use a jargon that often does not translate easily into the language of the federal tax laws.

Over the course of the past few decades, I've seen over and over again the pattern of people forming organizations go through all kinds of gyrations to qualify that take energy away from the project itself, or deeply influence the collective sense of what is possible. It behooves every group that wants to be effective to take time in formation and on a regular basis to step back and look at the big picture, to talk to partners and advisors and members and seriously ask the question: "is this organization serving us or should we lay it down and work together in new ways?" If your group isn't meeting members' or the community's needs, people will vote with their feet and/or wallets and energy and attention and you'll end up moving on sooner or later.

I am a fan of Benefit Corps. LLCs, and other new forms that add more flexibility and ease in aligning structure and purpose; they provide new levels of agility and ease in cooperation, for whatever collective purpose.


"Now, the big difference between 3 and 4 and 6? Contributions to 501(c)(3) are deductible, the others are not."

Note also the difference in intent.

501(c)(3) organizations are what in common language would be called "charities" "schools" and "art institutions". They would be generally thought of as benefiting people other than their donors (except perhaps art institutions which mainly raise funds from rich people and output entertainment for rich people, but we have a bias toward supporting 'art' in our culture and law).

501(c)(4) & (6) organizations exist to benefit their members, and advance particular interests of their members.

IMO most free software organizations fit 4 & 6 better than 3 here too. Though some specific types of software would fit 3.

Note all of these categories are exempt from income taxes so they are all 'tax exempt', that term is simply to imprecise.


Oh, and the NFL is a 501(c)(6) organization. Which, at a glance anyway, seems reasonable.


BTW it is sounding like a better title would be something like "Free software projects have been applying for the wrong type of non-profit status."

The IRS is, it seems to me, just doing their job better than they had been.


Started a petition on, if any are interested. The IRS is under executive branch control.


If you can use phones.


Maybe we just need a new description for these kinds of projects on the books. Open source software should be tax exempt, but judging by the rules being cited, we're trying to claim it's tax exempt by metaphor.


Why yes, they were hyper-interested in both conservative and liberal 501(c)(3)s!

At that time, they were improperly behaving toward both groups, so their behavior lends no credence to a further tightening of their watch on any 501(c)(3).

In fact, when the scandal broke, they were told to lay off!

So now they've come back to haunt only certain types of 501(c)(3)s that they think the public won't understand or be able to defend. They're wrong. I looked into Yorba's setup and exactly what is going on here. @Boundegar is right.

Yorba is being targeted because all they do is create open source software that they provide absolutely free of charge. They allow donations, but there's not even a donation link on the same page as the software! It's a separate area of the site. They make software that anyone can have and use.

The reason the IRS has decided to come down on them is similar to why IKEA targeted IKEAhackers. Yorba makes good software, and now some of their software has been adopted as standard for Linux users. Other people are making profit on Yorba's goods. Yorba still isn't even making t-shirts.

Yorba's IRS application was first submitted in 2009, and took until 2014 to process and finally be denied. They squarely meet the written definition of a 501(c)(3), and Yorba's owner does a great job of explaining why the IRS should back off of trying to control non-profits from controlling what third parties do with their goods. (It could be noted here that once a well-manufactured good leaves a warehouse, all liability is removed from for-profit companies. Only not-for-profits are now somehow expected to track their goods as they leave the market.)

Techdirt also wrote a great article about this whole thing. It's worth a read.


I would think that something like the the Komen Foundation's cause marketing is a more likely candidate for such a ruling.


I see no reason to think that the charitable contribution tax deduction should be characterized as "de minimis". Can you explain?


as I understand it, 501c3 groups are not supposed to engage in electioneering, period. Even 501c4 groups are supposed to avoid spending more than 50 percent of their time on electioneering. There are other groups, subject to FEC regulation, that are free to do so. The reason why 501c4 groups are so popular is that they avoid certain FEC disclosure requirements. If you value transparency in campaign finance, this can be viewed as a sort of money laundering.

How was this general policy enforced? Clumsily.