FOSS & the IRS: Now We’re Talking

By Eben Moglen | July 18, 2014

We’ve been watching with great interest this week as the travails of FOSS organizations with the US Internal Revenue Service have become a hot topic. When our client, Jim Nelson of Yorba, discussed blogging about the IRS rejection of Yorba’s application for 501c3 status with us, we hoped but did not expect that the situation, to which we had discreetly called community and company attention for years, would finally receive some. We’re very glad that’s now happening. Unfortunately, it’s really too late. Because of the long delays in determination imposed by the IRS in its increasingly anti-FOSS positioning, neither the full consequences of the IRS’s present position nor the state of our legal technology in response can be seen from the materials currently under discussion.

Because SFLC does more legal work on behalf of FOSS non-profits than anyone else in the world, including setting up FOSS non-profits and seeking tax exemption for them, we were both the first to recognize the problem’s existence, and the first to begin designing new solutions. Whatever the arrangements that succeed the days of relatively easy 501c3 determination, existing FOSS 501c3 organizations need not be concerned about losing their exemption status as long as they remain within their mission, for reasons well explored by Karen Sandler in her recent blog post for the Software Freedom Conservancy. For new projects seeking fiscal and administrative arrangements that free them to make software everyone can share while gaining US federal income tax deductibility for fiscal donations by supporters, we are increasingly convinced that the approaches we have devised for our clients will scale. In the next months, we will be publicizing the generally-applicable lessons of our search for creative alternative solutions.

But the IRS intellectual misunderstanding of FOSS has meanwhile metastasized more widely throughout the exempt organizations division. From wondering whether free software was a legitimate public charity, given that its use was not restricted by license to disadvantaged recipients, the IRS has moved on to wondering whether making FOSS is a tax-exemptible activity at all. The recent negative determination on the 1024 of the Open Stack Foundation means that this is no longer a problem of the non-profit, non-commercial FOSS community that our donor companies are content to let SFLC take care of. Now the problem has spread to the 501c6 trade associations, in which businesses naturally take a more intimate interest.

Although SFLC has traditionally had a small 501c6 practice, we expect that to change, as we bring to the problems of the business-focused FOSS organizations some of the same creative thinking we have brought to solving the problem of the unavailability of new 501c3s. We will be presenting our analysis of the problem, and some possible routes to innovative solutions, at our next SFLC Legal Conference, to be held at Columbia Law School in October. Firm dates and agenda should be available in the next few weeks. Save the date when we announce it, and plan to be in New York for our meeting, if this problem is now on your radar as it has long been on ours.

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