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

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

Posted Jun 27, 2013 22:58 UTC (Thu) by JoeBuck (subscriber, #2330)
In reply to: IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired) by josh
Parent article: IRS Puts Open Source Projects Under Microscope, Spawns Nonprofit Black Hole (Wired)

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.

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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.