IRS says free software projects can't be nonprofits

boing
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As you noted, 501©(4) & (6) groups are both “groups”.

A 501©(4) is either a civic league operated for charity or a local employee group that donates earnings to “charitable, educational, or recreational purposes.”

A 501©(6) deals with a “board”. It lists specific types, “business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), 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.”

In the case here, it’s not profit for a targeted goal, but the company’s product itself that is being made available to all. That’s the IRS’s gripe. They want Yorba to be able to say that “only the poor and disenfranchised will benefit” from their software, but the business model (and decency) requires that Yorba make it available to all. The IRS is mad because they see a lost profit that they’d like a chunk of, and they want to force Yorba to collect it.

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You haven’t read the law. 501©(3)s can lobby. They just have to keep the finances down to under limits. Also, people within 501©(3)s are allowed to act as individuals. In reality, their limits are far less extreme than you would think.

http://www.irs.gov/Charities-&-Non-Profits/Lobbying

What they can’t do is directly support any candidate.

EDIT: What I mean by “act as individuals” is this: A preacher can make comments to his flock about the “negative ways” that the other political party wants to behave. He can do this by claiming he’s “teaching” a religious concept to the people in his charge. In this way, 501©(3)s can spread political misinformation and never be touched. Here’s the very first link I pulled up when I searched, “can a preacher talk to politically to his flock” for you. (It’s astounding.)

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I didn’t say “lobbying”. I said “electioneering”.

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

source

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Yeah, I know. I was trying to do two things at once, and for that I apologize. I’d already started editing, and had noted that they can’t directly electioneer. Hope the edits clear things up for you!

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The IRS isn’t ‘mad’. It’s not a person. It’s a large but currently understaffed (hence 4 year wait) bureaucracy trying to apply old laws to new kinds of organizations. This is not always going to be perfectly satisfying to everyone particularly as it is the tax collection bureaucracy.

The best thing, of course, would be for congress to amend the law to make it clear how an organization like Yorba should be treated. I suspect that if that was done it would probably not end up with contributions being tax deductible.

Re campaigning. I believe 501(c)(3)'s have been pushing the “education” activity. Educating the public about whatever, rather than campaigning. It actually is something of a grey area, though they obviously are cynically exploiting it.

The IRS is in no way trying to “trying to control non-profits from controlling what third parties do with their goods” it is trying to determine if Yorba’s activities qualify it for tax treatment as a 501(c)(3). Yorba can do whatever it wan’t it just can’t claim whatever tax advantages it wants.

BTW, from the irs publication on 501(c)(4):

Reg. 1. 501(c)(4)-1(a)(2)(i) provides that:

[A]n organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some
way the common good and general welfare of the community.

Obviously the language of both the statute and the regulations
comprehends a very broad category of organizations. As stated in the
1981 CPE text, Chapter G, “Social Welfare: What Does It Mean? How
Much Private Benefit Is Permissible?”

Although the Service has been making an effort to refine
and clarify this area, IRC 501(c)(4) remains in some
degree a catch-all for presumptively beneficial non-profit
organizations that resist classification under the other
exempting provisions of the Code. Unfortunately, this
condition exists because “social welfare” is inherently an
abstruse concept that continues to defy precise definition

I’d say free software projects fit that pretty well. They produce software for the general benefit of the community of users. The IRS admits that it is something of a ‘catchall’. The example organizations include many public infrastructure projects. Parking, parks, water supplies. I personally find that to be a pretty good analogy to open source software which is provided to anyone for free.

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I didn’t get much out of the TechDirt article. I got a lot more out of the Slashdot comments, Jim Nelson’s blog, and the full determination letter itself.

The most valuable piece of background from the blog and comments: The IRS has been on the lookout for “Open Source Software” organizations as the latest known tax dodge. It’s a dodge because many organizations are operating according to the mode of “give away the razor, sell the blades”. That is, let anyone download and use the software (basically a free sample), but support, consulting, and perhaps closed-source extensions of the same code base require a fee. In a practical this amounts to “humans get it free, companies need to pay.” You can no more claim to be a charity under this model than Baskin Robbins could claim to be a charity for giving out free samples. The existence of a commercial interest destroys exemption.

So on to Yorba itself: they state that 90% of their effort is writing code, and the remaining 10% awareness programs and fundraising. They claimed to be set up as exempt due to their missions of education, science, and charity. Those are the only criteria they’ll be judged on, since the IRS can cite code that requires Yorba to provide enough information to make a determination. If they fill out the forms poorly, the blame rests on them.

The educational claims are shot down pretty easily because they teach no classes, offer no formal instruction, produce no materials, and have no other efforts. Their only claim is that the wikis and code itself are educational materials. The IRS finds that pretty flimsy, and it’s only incidental because code must be available if the user is to modify the code, which is a claim of the product they’re making. At this time, they don’t deliberately produce anything that can be called educational materials.

The scientific claim is also shot down because code and precedent clarify what it means to be a scientific organization: you do science, for the public. Yorba does not.

So everything rests on whether or not they can be called a charity. In their application, they do not mention the “erection or maintenance of public buildings, monuments, and works” clause, which might be slightly better bent to their cause. They go all in on “relief of the poor and distressed or of the underprivileged”. We know from the dodge that the IRS is specifically looking for that people can download the software and then still pay for support. Yorba has no way of establishing that any underprivileged person ever downloaded the program once. They are a corporation making a product, and whether they are charitable depends entirely on the question of whether you believe that they only give away the software (and support) for free, and then reaching at least some underprivileged persons. Yorba has not demonstrated that. Thus in the eyes of the IRS, they’re just a do-gooder corporation with a bad business model.

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My thinking is that if I’m going to give $100 to a software project I’d like to support, I’m likely to do it whether I get a hat and a $20 tax credit or not. That is, I think the relatively small tax credit is irrelevant to the decision to donate or not.

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This IRS is trying to control what non-profits do with their goods. From their own letter:

“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.”

In other words, even though Yorba doesn’t seek to sell or ever encourage people to use their software for the express purpose of politicking, the IRS has decided that since the software may ever be used that way (without Yorba’s knowledge or intent), it is not covered by the 501©(3). If that’s the case, then there really shouldn’t be any exclusion for a religious organization (like a church) allowing individual priests to expound on politics from the pulpit. That should also be disallowed.

You’re absolutely right that Congress should make a new law for the new technology, but it should still be tax deductible. Go back and look at the reasons that charitable organizations got their status. It was because they took a financial hit for doing good works. Yorba, and others providing open source software, do the same. Yorba isn’t claiming “education” - they’re claiming “charitable” (their software is open source, and is free) and only need to meet one of the supplied definitions to meet 501©(3) guidelines.

"https://en.wikipedia.org/wiki/Charitable_organization

I do understand that 501©(4) gets used as a “catchall” - but that’s something even they don’t want. Also, as already noted by Yorba, they DO meet the 501©(3) standards. There’s no reason to make them force fit a catchall.

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For penny-ante donations that makes sense. It’s my impression that many nonprofits are sustained by a few large sugar daddies though [citation needed], and in that case I bet the deduction matters.

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This is why I agree that a better IRS nfp definition for software manufacturers should exist.

Law is a living beast, and in this case, it’s behind the times. New IRS code should be written to accommodate open source developers who are serious in their intent and aren’t trying to pull a fast one. They shouldn’t simply be excluded, they should have better guidelines.

Not everyone is selling the razor cheap, and the IRS should have definitions in place for developers. Right now their reasons for excluding Yorba should also require churches to monitor preachers at the pulpit.

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No. That isn’t the IRS trying to control what Yorba does. That is the IRS telling Yorba that what it does doesn’t qualify for 501(3)© tax status. There are no jackbooted thugs breaking down the doors to take away their keyboards. They are doing exactly what they did before and will certainly continue to do what they were doing before. They will simply have to file their taxes a bit differently, and won’t be able to tell contributors that their contributions are tax deductible. They may very well still qualify for a different variety of tax exempt non-profit status.

And I do not accept that Yorba’s interpretation of the 501©(3) standards is more correct than that made by the IRS, or by my reading today. I think they are wrong (and the IRS was previously wrong). They aren’t a charity, a school, or a museum. They don’t serve the needy. They fit much better into the description for 501©(4). They provide a public good available to all for the benefit of a community.

So that’s all just arguments about current policy.

What should policy be?

Well If I were king I think I would actually just ditch all these laws. Every corporation would pay taxes. No contributions would be deductible. This whole discussion would vanish. If a corporation existed for some non-profit purpose they would simply not make a profit and the taxes on near-zero profit organizations would be near-zero. Not entirely sure if that stands up to the real world, but until someone bursts my bubble that’s my plan.

Short of that, no I don’t think contributions to free software projects should be tax deductible. I think they are less deserving of that status than actual charities and schools. As I discussed several posts ago I think there are already issues with the deduction for contributions to art institutions. And, yes, there are also problems with churches. And there are most definitely problems with political organizations.

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32

Write them a letter. Send them a stone tablet or papyrus. Better yet go to their office.

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I’m trying to figure out how the Wikimedia Foundation would fare under these rules. Not well, I suspect.

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Why doesn’t Yorba just buy some body armor, break into a few houses, and randomly shoot people. Instant non-profit SWAT-Corp. status.

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The decision comes after the IRS was told to start examining 501(c)3 applications more closely, in the wake of a scandal over alleged discrimination against conservative groups seeking nonprofit status.

Alleged? Alleged by Lois Lerner.

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We opened the full determination letter here for annotation. Would love to have all the people following this important story to share their experience, particularly if you have experience on the IRS and non-profit law, not to mention non-profit open source software development.

The letter is long with a lot to unpack. We’d love to help break it down with open annotation and our Madison software.

Thanks,
The OpenGov Foundation Team

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Giving away software isn’t charity? Why not?

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The IRS believes that it isn’t charity because the beneficiaries aren’t underserved.

You have not shown that all members of public share any charitable characteristics. The General public is by definition not poor (i.e.income <60% of the area median income), distressed,elderly,underprivileged,or sharing any other charitable characteristic and do not meet the definition of a charitable class. Similarly, users of the operating system and the Tools do not share any charitable characteristics: the only common characteristic they have is that they are users of the T software environment. We also note that the Tools licensing allows programmers to incorporate some or all of the Tools code into their own software programs. You have not shown that programmers are a charitable class.

Basically, the IRS is claiming that those deserving of charity will be served incidentally through the Yorba foundation, while the primary beneficiaries are likely to be commercial hardware vendors, programers who can well afford software licenses, and other parties well served by the existing marketplace,

However, the Free Software Foundation is a 501c3, with somewhat similar goals. So is the Open Source Initiative. Yorba might contact them for advice.

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