IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired) [LWN.net]

Wired looks at delays for open-source-oriented groups in getting their applications for non-profit status accepted—or denied—by the US Internal Revenue Service (IRS). Open source is on a list of organization types that require extra scrutiny from the IRS—"Tea Party" groups making that list have been in the news over the last month or so. "That has provided the documentary evidence for a phenomenon that many open source project leaders know all too well: For the past four years, it's been close to impossible to get an open source project approved for 501(c)(3) classification — a nonprofit status that allows supporters to make tax-exempt donations to the organization. Take the Open Source Geospatial Foundation, which builds open-source mapping software called OSGeo. It first applied for 501(c)(3) status more than five years ago, according to Tyler Mitchell, the former executive director of the foundation. 'It's not resolved today,' he says. 'You'll just keep thinking that it will be resolved in a couple of weeks. It never will be. '"

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IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 27, 2013 17:53 UTC (Thu) by josh (subscriber, #17465) [Link] (22 responses)

Apparently the specific case the IRS wants to watch for is seemingly Open Source foundations that serve only as a front for software primarily developed by a single commercial company. In other words, the Open Source "foundation" equivalent of astroturfing. That does seem like a reasonable thing to watch for. Unfortunately, it sounds like that has had the side effect of delaying legitimate Open Source foundations as well.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 27, 2013 18:16 UTC (Thu) by hadrons123 (guest, #72126) [Link] (6 responses)

Am I the only one thinking Microsoft is behind this to stop OpenSource?

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 27, 2013 19:28 UTC (Thu) by aoeu (guest, #84301) [Link] (3 responses)

Most likely it's the IRS trying to collect more tax.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 30, 2013 3:21 UTC (Sun) by rahvin (guest, #16953) [Link] (2 responses)

The problem with understanding it is that a certain media organization and political group in the US are standing in their echo chamber screaming about IRS bias and drowning out the real facts, the facts have been leaked out as side notes to the main echo chamber generated stories and you have to be paying attention like a bloody hawk to catch them and put them all together.

Basically a few years ago a tax code change requiring disclosure of political donors caused a whole bunch of political organizations to claim they were social charities (engaged in social welfare charity which typically encompassing a few categories like helping people find work, educating them, helping with housing, food etc, basically trying to better society and peoples lives). They did this because donations to social charities are not required to be disclosed to the public. As a result the yearly number of organizations applying for social charity status went up dramatically (I don't recall the exact numbers but I think it was almost a 3000% increase in applications).

Faced with a massive increase in applications, and no increase in budget or staff the IRS applied some filters to the applications to try to set some of the applications for further review. They used common political (social charities are specifically bared from direct political activity) terms like Tea Party, Progressive and even selected other categories like Open Source which apparently the IRS doesn't understand. Though most of us would agree that Open Source qualifies as Social Charity in that it provides access to good software that helps people, in particular the poor there is significant misunderstanding from the IRS probably because there are fortune 500 companies like RedHat engaged in open source. As stated previously the IRS was concerned that these charities were engaged in for profit activity and using charity status to conceal that income.

But this is all the result of a massive number of political organizations trying to claim social charity status to avoid revealing their contributors. As an example of what I believe is the abuse the IRS was looking for it's been reported that Crossroads GPS, a organization run by Karl Rove that played a significant role in the last election (including running hundreds of political commercials in key states) was officially a social charity and in fact filed official documents claiming social charity status stating they were NOT engaged in political activity. As I said this is evidence of what the IRS was trying to stop but was being buried in paperwork by similar organizations.

The solution to this problem is to better define social charity in the tax code and put people who claimed to be doing social charity but were in fact engaged in political action where they belong, in jail. It's been very difficult for the truth to come out because there are powerful people in the echo chamber that have clearly (IMO) engaged in fraud by claiming social charity status. I have a strong belief none of them will ever be punished and the IRS workers will be thrown under the bus to distract the public from the real issue at play. Hopefully I'll be wrong on that.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jul 1, 2013 8:16 UTC (Mon) by egcroan (guest, #91645) [Link]

RAHVIN thank you for taking the time to explain what 501 (c) (3) is all about. I have been getting into this discussion a few times a week with conservative classmates at school, but most people just wsnt this to be a simple case of politics. It is politics of course, but not because of this administration but the last one. Karl Rove knew that Non-profits were apotential taxdodge since his Commander-in-Chief was the first one to voice this concern. The status of being a non-profit carries with it a lot of restrictions, and many churches violated the restriction on politics since many preachers as of late or at least during the last Presidential clearly preached from the pulpit who to vote for. This was of course barely mentionedon the media outlets as no one wants to offend the Crhistisns since they are now a very political organization.Karl Rove is behind much of this and it was made clear by his getting off after commiting trason thst he considers himself above the law.

Again thank you for explaining this non-profit loophole to everyone. Now if somone could expkain it to Fox News that would be even better.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jul 2, 2013 8:20 UTC (Tue) by jzbiciak (guest, #5246) [Link]

The only problem with this explanation is that typically open source projects (like Xiph) organize under 501(c)(3), and the social charity designation that's getting flooded as you describe is 501(c)(4). There isn't a good reason why 501(c)(3) should get such additional scrutiny, since 501(c)(3)s are very strictly prohibited from political activity.

More details: https://en.wikipedia.org/wiki/501(c)_organization

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 19:52 UTC (Fri) by robert_s (subscriber, #42402) [Link] (1 responses)

I do hope you're kidding.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 30, 2013 7:47 UTC (Sun) by drag (guest, #31333) [Link]

Maybe somebody marginally important in the IRS owns Microsoft stock.

Who knows?

Delay may be okay; forbidding is not

Posted Jun 27, 2013 20:28 UTC (Thu) by david.a.wheeler (subscriber, #72896) [Link] (8 responses)

If it was merely a delay, that might be appropriate. The IRS is required to check for legitimacy, and they should look for red flags that suggest problems. And if there are red flags, it makes sense that it'd take longer to check. But it sounds like the effect was to completely forbid, not merely delay, and that is unjustified. The law has certain requirements... if the requirements are met, then the status should be granted. Period.

Delay may be okay; forbidding is not

Posted Jun 27, 2013 21:22 UTC (Thu) by josh (subscriber, #17465) [Link] (6 responses)

Agreed.

On the other hand, sufficiently advanced bureaucracy is indistinguishable from malice. I can pretty easily imagine such bureaucracy leading to multi-year delays that aren't actually associated with a denial.

Advanced bureaucracy

Posted Jun 28, 2013 7:04 UTC (Fri) by oldtomas (guest, #72579) [Link] (5 responses)

"sufficiently advanced bureaucracy is indistinguishable from malice"

I've never seen such an elegant generalization of Clarke's Third Law. You made my day!

Definitely QOTD worthy.

Advanced bureaucracy

Posted Jun 28, 2013 9:27 UTC (Fri) by k3ninho (subscriber, #50375) [Link] (4 responses)

I prefer the ramp up via Hanlon's Razor "Never attribute to malice that which is adequately explained by stupidity" which spawns "Any sufficiently advanced incompetence is indistinguishable from malice", known in some places as Grey's Law. The interchangeability of bureaucracy and incompetence is a given.

Advanced bureaucracy

Posted Jun 28, 2013 12:11 UTC (Fri) by micka (subscriber, #38720) [Link] (1 responses)

> The interchangeability of bureaucracy and incompetence is a given.

Just add "I think..." before any sentence that express a mere point of view, please.
It's so much better to not have definitive sentences if you don't have the intention to give arguments.

Advanced bureaucracy

Posted Jun 28, 2013 16:15 UTC (Fri) by k3ninho (subscriber, #50375) [Link]

>> The interchangeability of bureaucracy and incompetence is a given.
> I think you should just add "I think..." before any sentence that express a mere point of view, please.
> I think it's so much better to not have definitive sentences if you don't have the intention to give arguments.

TITIFTFY (There, I think I've fixed this for you). Further, from where I stand the sense of my words is prefaced by 'I prefer...' at the top and ultimately sidelined as non-argumentative by the jokey context for this branch of the discussion. I think that you might have overlooked this - no worries.

K3n.

Advanced bureaucracy

Posted Jun 28, 2013 15:13 UTC (Fri) by tjc (guest, #137) [Link]

> The interchangeability of bureaucracy and incompetence is a given.

It certainly seems so!

Advanced bureaucracy

Posted Jun 30, 2013 7:50 UTC (Sun) by drag (guest, #31333) [Link]

There is a such thing as 'incompetent malice'.

Unfortunately as you get older you find that incompetence and malice are not mutually exclusive concepts. In fact, they go together more often then not.

Delay may be okay; forbidding is not

Posted Jul 1, 2013 8:24 UTC (Mon) by egcroan (guest, #91645) [Link]

I do think it is a delay because of two reasons. The first being the situation RAHVIN so exoertly described above with the increase of a 3000% workliad with no additional manpower. The second being the IRS is so embattled by investigations theylittle time to actually focus intheir jobs instead of being paraded in front of a congress whose primary agenda is to embarrase this Administration no matter what effect it has on the USA.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 27, 2013 22:58 UTC (Thu) by JoeBuck (subscriber, #2330) [Link] (5 responses)

I don't think it's "astroturfing" that they are worried about, but tax avoidance. Let's say that you're the developer of some FLOSS software my business relies on, and I want to hire you to support it for me. Instead, you could set up a nonprofit, I could give to the nonprofit and get a tax writeoff, and the nonprofit could pay you, with an under the table agreement that only donors to the "charity" get their bugs fixed. But a straight-up support contract wouldn't get the same tax treatment.

need to figure out what's making the IRS uncomfortable

Posted Jun 28, 2013 0:45 UTC (Fri) by tialaramex (subscriber, #21167) [Link]

If we can identify a concrete concern that the IRS has about the funding of these organisations versus what they do we can perhaps find a formula that addresses that concern.

For example, the UK has a non-governmental body that sanctions advertisers whose creations are misleading, or distasteful called the ASA. Since it's not funded by the taxpayer it gets money from (some subset of) the advertisers it is regulating. A naive funding mechanic would make it easy for a big company to effectively "pay off" the watchdog. But instead the watchdog and the funding are kept at arm's length, any particular company that runs adverts might or might not be funding the ASA, the ASA doesn't know, its oversight applies regardless.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 5:50 UTC (Fri) by Russ.Dill@gmail.com (guest, #52805) [Link] (2 responses)

Maybe it should work that way. If you are releasing the software under an open license, then the work is being done for a public good. For instance, there are many organizations that maintain public hiking trails and have non-profit status. If a lodge that was near a public land trail donated to one of these organizations to have this trail revitalized, would that be an analogous situation?

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jul 1, 2013 11:40 UTC (Mon) by endecotp (guest, #36428) [Link] (1 responses)

> there are many organizations that maintain public hiking
> trails and have non-profit status. If a lodge that was
> near a public land trail donated to one of these organizations
> to have this trail revitalized, would that be an analogous
> situation?

Here in the UK, there are rules about the benefit that a
company is allowed to get in return for a donation. If the
benefit is more than (typically) 5% of the value of the
payment, then it is not considered a donation by the tax
authorities; rather, it's a payment for good & services.

But actually, your example is off-target as companies can
count both donations and payments for services as business
expenses. The important issue arises when it's not a company
(the hiking lodge in your example) but an individual who is
making the donation. If I, as an individual hiker, make
a payment to a trail maintenance organisation, then should
that be tax exempt? We might all agree that maintaining
hiking trails is a "public good" and deserves charitable
status, but there are difficult edge cases especially where
the thing being maintained is of benefit primarily to more
wealthy individuals. A good example here is private schools,
most of which still controversially enjoy charitable status.
In comparison to, for example, a charity that supplies
mosquito nets to Africa, it's far from clear to me that a
body that improves the software that I use in my for-profit
business should be charitable.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jul 3, 2013 2:17 UTC (Wed) by shmget (guest, #58347) [Link]

"In comparison to, for example, a charity that supplies
mosquito nets to Africa, it's far from clear to me that a
body that improves the software that I use in my for-profit
business should be charitable."

Even if you for-profit business is a Hotel in Africa that benefit from donated mosquito net ?

I would think that a 'charity providing mosquito net' _exclusively_ to africa is just as dubious as a charity financing a private school... in both case it restrict the _public_ to a sub-grup selected on a criteria that is orthogonal to the approved goal of the charity.
(the former would be to improve health condition of the public, the second - presumably - to educate the public... both being approved charity purposed to qualify for tax-exemption).

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jul 1, 2013 14:52 UTC (Mon) by jhhaller (guest, #56103) [Link]

As endecotp wrote, as far as the IRS is concerned, there is no difference between contributing to a charity than to paying for a work-for-hire. However, being deemed a 501(c)(3) organization has other tax affects: the organization pays no federal or state income tax on income in excess of expenses, and many state and local jurisdictions use that status to allow exemption from sales and property taxes. The Linux Foundation is classified as a 501(c)(6) organization, and that type of organization does not have all of the same benefits, only the benefit of not paying income tax.

There are limits to what a 501(c)(6) organization may do, primarily activities which improve the business conditions of the members, such as collect statistics, provide forums/conventions to allow members to discuss the common interests. However, being limited to a small subset could be considered to be in violation of the rules. For example, an group of Pepsi bottlers was considered to be too limited, while a general group of bottlers which included competing products may have been acceptable.

How one decides whether an Open Source foundation meets the requirements for any of the 501(c) organization type has got to be a difficult job, navigating the maze of laws, regulations, court rulings, and potentially incomplete information about who can be a member, what they are getting from being a member. If I were an IRS agent, it might be appealing to ask for more information and put the application on the bottom of the pile, as there are certainly other organizations which are easier to make decisions, particularly if I had a quota on the number of applications to process. It's less work to sit on an application than to reject it and have to deal with the appeals. Approving an application and then being overturned by a next level review is also not good for one's career.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 27, 2013 21:58 UTC (Thu) by bpearlmutter (subscriber, #14693) [Link] (5 responses)

There isn't really any need to do all this paperwork yourself. Many open source projects rely on SPI http://www.spi-inc.org/ (or similar organizations) to handle their donations and books. It is very straightforward. SPI keeps the finances for the various associated projects separate, and does as it's told with the money modulo legal constraints. There is no barrier to prevent revoking the association with SPI and transferring the account to a different non-profit. Projects that use SPI's services include Debian, Drupal, Libreoffice, OpenWRT, haskell.org, Arch Linux, Postgresql, and many more. Although I'm not familiar with the workings of other "shell" open source organizations, I imagine they'd operate in a similar fashion.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 1:51 UTC (Fri) by jamesh (guest, #1159) [Link] (4 responses)

While SPI might be awesome and make the life of many projects easier, people shouldn't be forced to go to them because the IRS isn't processing new non-profit corporation applications for open source projects.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 8:59 UTC (Fri) by bpearlmutter (subscriber, #14693) [Link] (3 responses)

As a US citizen living and working abroad, I can assure you that my hatred for the irrational and byzantine US tax code and its intrusive laborious procedures burns with the heat of ten thousand suns. And not little suns like our friendly Sol, but great big ginormous bright stars like Antares.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 17:14 UTC (Fri) by mathstuf (subscriber, #69389) [Link] (2 responses)

> And not little suns like our friendly Sol, but great big ginormous bright stars like Antares.

As a side note, these stars tend to be cooler than Sol. They probably put off more heat energy over their lifetimes since they live orders of magnitude longer than the hotter blue-white stars :) .

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 28, 2013 18:23 UTC (Fri) by donbarry (guest, #10485) [Link]

You're assuming a little main sequence red dwarf. Antares is a supergiant, a star with at least a dozen times the mass of the Sun, now shining with about 57,000 times the Sun's luminosity at the end of its life. Yes, it's cool, but it's also enormous. And over its life, it will end up putting out something more than a dozen times the Sun's lifetime luminosity, because fusion will progress all the way to iron, rather than stopping at carbon/oxygen as in the case of the Sun.

IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

Posted Jun 30, 2013 13:04 UTC (Sun) by rich0 (guest, #55509) [Link]

It is possible for the "heat of ten thousand suns" to be greater for one set of ten thousand "cooler" suns than another set of ten thousand hotter suns.

Heat and temperature are NOT the same thing. The plasma in a compact fluorescent bulb is WAY hotter than a bonfire, but you can hold the former when the latter would cook your hand before you could even touch it. The difference is mass - the amount of plasma in a bulb is probably measured in micrograms, and even if that bonfire is colder than a match there might be a hundred kilos of the wood burning.

(FYI - finding estimates of plasma temperature in a fluorescent bulb is challenging. I found an article "Electron Temperature and Lamp Voltage for Various Ar Concentration in Ne-Hg Discharge Plasma" which indicated that in at least one type of bulb the electron temperature was about 2eV, which corresponds to about 23,000K. I think that most would agree that the typical bonfire is a bit colder than that.)