Yorba, the IRS, and tax-exemption [LWN.net]

By Nathan Willis
July 9, 2014

On June 30, Yorba Foundation director Jim Nelson posted a blog entry reporting that the US Internal Revenue Service (IRS) had denied Yorba's application to be registered as a tax-exempt 501(c)(3) charity. Nelson and others contend that this denial is cause for concern to other players in the FOSS arena, but there are voices who disagree about the implications.

As Nelson's blog post explains, Yorba had filed its 501(c)(3) application in 2009. In the US, 501(c)(3) organizations are one of several types of tax-exempt nonprofit, but there are additional benefits to being a 501(c)(3) rather than, say, a 501(c)(6) trade association. Most notably, Nelson said, donations made to 501(c)(3)s are tax deductible for the donor, and that makes fundraising easier. Many high-profile organizations in the free and open-source software realm are 501(c)(3)s, including the GNOME Foundation, the Mozilla Foundation, the Apache Software Foundation, and the Linux kernel project.

Last year, news broke that the IRS had flagged "open source" tax-exemption applications for increased scrutiny, reportedly out of concern that for-profit companies might seek to run their operations out of a nonprofit organization to evade taxes. That "be on the lookout" (or "BOLO") issue, as it was known, had allegedly started in 2010, and Nelson reported that Yorba received two requests for further information from the IRS that year.

Yorba's application was as a "charitable, scientific, and educational organization". Nelson reported that the IRS's rejection notice was dated May 22, 2014, and gave several reasons for the decision—reasons he called "hair-raising" statements that "could have a direct impact on the free software movement, at least here in the United States."

Nelson quoted five snippets from the IRS's justification for its decision, including the fact that Yorba's software could be used "by any person for any purpose, including nonexempt purposes such as commercial, recreational, or personal purposes", that Yorba does not own all of the copyrights on its software, and that releasing the source code to software does not constitute an educational function since "anything learned by people studying the source code is incidental". The IRS also contended that developing and distributing software is not a "public work" because software is not something ordinarily provided at public expense, and that open-source software is available worldwide and therefore does not "serve a community" as 501(c)(3) rules require.

Nelson pointed out that several of these rationales seem to conflict with the IRS's recognition of other open-source software foundations as 501(c)(3)s, and that several of them seem to suggest that Yorba should impose restrictions on its projects, such as limiting their usage or requiring copyright assignment from all contributors. "In other words," he surmised in one place, "we (and, presumably, everyone else) cannot license our software with a GNU license and meet the IRS’ requirements of a charitable organization."

He added that the potential impact of these statements by the IRS would be chilling to FOSS as a whole:

I doubt they’re going to start enforcing this in the future for organizations that already enjoy exemption. If they do, it will be a royal mess for those projects having to contact every author of every non-trivial contribution and get them to sign over their rights. This is all a big if, of course.

and concluded by saying that Yorba does not intend to appeal the rejection, but will continue developing its application software nonetheless.

The story was picked up by the general tech press in short order, many of whom paired it with the news that the OpenStack Foundation had received a rejection from the IRS for its 501(c)(6) application in March (a decision that OpenStack has already appealed). According to that blog post, the IRS listed three issues with the OpenStack application:

That the foundation is producing software and thus is “carrying on a normal line of business.”
That the foundation is not improving conditions for the entire industry.
That the foundation is performing services for its members.

The rules for 501(c)(3)s and 501(c)(6)s differ, of course, but both rejections share some common themes, like the assertion that the projects are essentially engaging in normal software development practices as many for-profit companies do. To a lot of commenters, that amounted to a rejection of the core principles of FOSS. Simon Phipps, for example, in a story titled "Are open source foundations nonprofits? The IRS says no," said "it seems that the IRS no longer thinks collaborating on open source is a public good." Other news outlets took their interpretations to even greater extremes, applying them to FOSS as a whole (headlines such as "IRS says free software projects can't be nonprofits" and "The IRS wages war on open source nonprofits" are easy-to-find examples).

But others have pointed out that the decision in Yorba's case does not set precedent for any other FOSS project's application. Bradley Kuhn, in a comment on Nelson's post, said that the decision is the opinion of one IRS examiner, and should not be treated as broader in scope. Furthermore, it "doesn’t change the status of orgs that are already operating properly under 501(c)(3) status."

Karen Sandler noted in a blog post of her own that the IRS has said more than once in the past that a decision about one non-profit application has no effect on existing non-profits. Concern that existing organizations will lose their tax-exempt status would seem to be overblown.

Nevertheless, Yorba's multi-year wait for a decision from the IRS does seem to be the norm. Perhaps that is a good thing in and of itself; although no organization seems to be happy about the lengthy wait, vetting an organization is probably a process that ought to require some in-depth investigation, lest gaming the system be too easy. But the lengthy wait clearly has an impact on the projects and foundations in question, consuming time and resources.

It is also possible that the IRS (or some portion of its reviewers) is developing an attitude toward FOSS software that is fundamentally at odds with the common practice of developing and releasing free software while finding other means to fund operations. In a 2013 WIRED article, Luis Villa commented that he had heard from several projects that the IRS wanted them to put non-commercial usage restrictions into their licenses.

No doubt there are unscrupulous individuals out there who would love to be paid to write software but not have to pay taxes (and if there were none before, the idea has surely occurred to them in the wake of the Yorba story). It is a tricky problem for the IRS to sort out, determining whose work is truly in the public interest and who might be developing a standard-issue software product but putting an open-source license on it for tax purposes.

For those who are genuine in their commitment to the ideals of software freedom, though, it is just one more uphill battle among many. Hopefully others will not take the Yorba rejection as a discouragement, and hopefully Yorba will not be discouraged either. Many commenters, both on Nelson's blog post and elsewhere, spoke up to offer their encouragement in general, and their encouragement that Yorba should appeal this initial rejection.

to post comments

Yorba, the IRS, and tax-exemption

Posted Jul 10, 2014 1:42 UTC (Thu) by dberkholz (guest, #23346) [Link] (1 responses)

In discussion with many people involved with FLOSS foundations, a common theme has been that it seems that times have changed at the IRS. Nowadays, you need a much clearer benefit to society than freely available code, whether it's a focus on education or software itself that's clearly beneficial to underserved groups.

Yorba, the IRS, and tax-exemption

Posted Jul 12, 2014 0:50 UTC (Sat) by rahvin (guest, #16953) [Link]

You can challenge IRS interpretations quite easily. You have to go through the appeal process but you can still challenge them in court if the appeals don't go your way. The IRS has been trying to crack down on what they believe is abuse of the 501c category without special authority from congress to do so. Though the IRS has broad rule making authority such rules and interpretations are subject to review and rejection, it's just a harder and more involved process.

If this becomes more widespread as a broad rule from the IRS I would imagine at some point that someone it going to have to challenge this in court and force the IRS to recognize FOSS software as a public benefit. Hopefully the appropriate foundations can put the wheels in motion on this before it becomes a life or death situation for them.

Yorba, the IRS, and tax-exemption

Posted Jul 10, 2014 2:13 UTC (Thu) by JoeBuck (subscriber, #2330) [Link] (1 responses)

IANAL, yada yada.

There are some cases where the IRS's thinking may be correct. There are some software frameworks that are just intended as "open core", a free part that is meant to be built on by proprietary software or services, or that serves as a reference implementation that is shared by a group of companies. In that case, what you really have is a trade association, and those are 501-c4 (they are nonprofits, but contributions to them aren't tax deductible). I think that's why the IRS seems to be talking now about looking at the application more favorably if copyleft is used, or looking to see if the people setting up the foundation intend to make money selling services around the software.

Yorba, the IRS, and tax-exemption

Posted Jul 10, 2014 15:30 UTC (Thu) by kpfleming (subscriber, #23250) [Link]

Copyleft licensing would not have changed anything in Yorba's situation; the IRS was concerned that the software could be *used* by for-profit entities, and that's still try with copyleft (and all other FLOSS) licenses.

Also, 501(c)6 is a trade association, which is how the Linux Foundation is organized. It it also what the Open Stack Foundation was applying for. 501(c)4 is for entities that are not primarily composed of (and receiving funding from) businesses.

Yorba, the IRS, and tax-exemption

Posted Jul 10, 2014 4:23 UTC (Thu) by dlang (guest, #313) [Link] (1 responses)

just because a foundation is tax exempt, that doesn't mean that money the foundation pays to individuals is tax exempt, it gets taxed as any other income does

and no, you can't just have the foundation pay all your bills, the IRS looks at that and counts it as income (to the point that if you have a company cell phone, they count the cost of that as income and you are supposed to pay taxes on it)

Yorba, the IRS, and tax-exemption

Posted Jul 12, 2014 2:28 UTC (Sat) by giraffedata (guest, #1954) [Link]

I presume you're responding to the statement, "No doubt there are unscrupulous individuals out there who would love to be paid to write software but not have to pay taxes."

I don't know what kind of accounting scheme that statement contemplates, but a fundamental point to be made here is that 501(c)(3) does not to any substantial degree keep the organization from owing taxes. The organization wouldn't owe taxes even without the status, because it doesn't make a profit and income tax is based on profit.

And that's why the primary point of having 501(c)(3) status is not to avoid taxes. There is a slight tax advantage to not-for-profit status that has to do with making money in some tax years while losing money in others, but the main point of 501(c)(3) is the deductibility of donations by the donors.

Yorba, the IRS, and tax-exemption

Posted Jul 16, 2014 10:30 UTC (Wed) by zenaan (guest, #3778) [Link] (1 responses)

The discussion in this article is about as loose as I've ever seen here on LWN - I encourage a particular care by LWN editors regarding assumptions implied or direct and non-substantiated statements, made by government departments of any kind (caveat citizen/ caveat government constituency etc):

From The Fine Article:
> It is a tricky problem for the IRS to sort out,

This phrase presumes a problem;

this distinction and/ or presumption ought NOT be glossed over:

I would say (at most) "possible problem from the tax department's perspective only".
From the perspective of "the community" (corporate, education, general public etc), more free libre software == more public benefit - we (corporates, educates and general publicates :) ARE "the public" aka "the community".

> determining whose work is truly in the public interest

Again I assert there are unfounded assumptions being here unchallenged - the tax departments cannot be allowed to get away with such assumptions, and certainly we are contributing to the real problem(s) by speaking in _their_ assumptions!

: Prima facie, the license for the code determines whether that code "is truly in the public interest" - e.g. even if the code in question is some niche specialist area of industry, the fact that that code is under a "community availability, i.e. libre software license" at the very least implies opportunity for competition in the market/industry, with regard to that particular code.

Same thing if the code is more widely applicable, but to an even greater extent - but the point is, even in the most limited sense, free libre code promotes, or at least maximises the possibility of, supplier diversity and therefore competition (and here speaking only to the base economic 'public benefits').

> and who might be developing a standard-issue software product

Aha! This new phrase - "standard-issue software product" (at least in the context of this sentence) - I assert has problems including the following:

1) it tends to normalise non-libre/ non-free software ("standard-")

2) it leads the reader closer towards thinking that there is a genuine problem being raised by said tax department, yet this "problem" has never been clearly stated, let alone proven!

So let's NOT fall into assuming that the tax department's (implied and/ or explicit) assertions are true. Doing so is certainly NOT in our interests!

> but putting an open-source license on it for tax purposes.

Look, I understand that this sentence was possibly intended to somehow "outline" the tax department's (implied or otherwise) allegations - and I hesitate to say even this much (I don't want our esteemed editors to get upset), but I DO want to raise understanding, and raise the quality of the dialog.

By way of (rough) example by suggestion of alternative, the following approach taken in future articles might be more constructive:

"
The tax department (the USA's IRS in this case) appears to have made certain assumptions which really ought be torn to shreds:

- That free libre licensed software is not a public good, and/ or

- That free libre licensed software might not be in the public interest.

- That free libre licensed software does not benefit all (industry) participants equally.

- That tax deductions for the creation of free libre licensed software might somehow be legitimately described as a "tax dodge".
...
"

Such sentences:

- take aim at what the bureaucracy has actually done or implied,

- lay out the fight (brought on by the department by assumption or otherwise) evidently being brought on by government idiots

- make it much easier for those not versed in government deception (or stupidity) (by assumption and otherwise) to understand what is happening, and therefore:

- make it easier for those who might be inclined to start to get a handle on approaches to combat this enemy of freedom and liberty rising its ugly and trollish head!

I hope you agree :)

* It is our DUTY to challenge bureaucracy gone mad!

* It is our DUTY to challenge assumptions - false or otherwise!

* It is our DUTY to each other to be wary and cautious of assumed authority which ordains with its imperious hand waving to dictate to us what is in OUR interest!

* It is our DUTY to NOT assist such crap from bureaucrats by using their assumptions which assumptions are AGAINST our interests as a global community!

And a final word: it seems we tend to implicitly fear the consequences of individual challenges to government bureaucrats and/ or other external authorities, and perhaps this is what leads us to sometimes accept or use those assumptions which have been used AGAINST us.

I say a challenge of the tax department by an individual (or especially a group) is not necessarily difficult per se - time consuming yes, requiring reading the relevant Act(s) and regulations, yes, and getting up to speed with how to write affidavits and other legal documents yes yes lots of work. If you are inspired, I suggest to work with those fine lawyers who have involved themselves in the free libre software community in support of our causes and in support of our community (they're not hard to find), to spearhead and direct in what might need to be done and to guide so we can avoid spending time on overly difficult or potentially fruitless pathways. But we can certainly do our bit regarding the leg work.

Let's stand against idiotic assumptions!

Best regards, and please be extra careful regarding government departments and their (blindly?) idiotic and/ or deceptive bureaucrats and the crappy assumptions they sometimes spout.

Thanks for listening,
Zenaan

Yorba, the IRS, and tax-exemption

Posted Jul 19, 2014 13:11 UTC (Sat) by kleptog (subscriber, #1183) [Link]

On the other hand, I think you're also asserting things without proof. Statements like: "free libre licensed software is a public good" is I think something you can have a legitimate debate on. You clearly think it is, but that doesn't make it true. Personally I'm not really sure.

Certainly from my non-US point of view it's not at all clear to me why Yorba deserves any kind of special tax status. They can continue without it, so they certainly don't need it. The point of tax deductible donations is to encourage people to support causes that the government thinks are important but doesn't specifically want to spend money on[1]. How many governments think increasing the amount of free software is important?

Basically, I think an article written your way wouldn't be worth reading because I wouldn't learn anything about what's actually going on.

[1] Since it essentially amounts to the government subsidising the receiver with the amount of tax you would otherwise pay, except without the paperwork/overhead.