The US Internal Revenue Service has ushered in a new and much more favorable treatment for free software projects seeking to have 501c3 tax exempt non-profit organizations of their own. After years of suffering from a specially prejudicial environment at IRS, free software projects—particularly new projects starting out and seeking organizational identity and the ability to solicit and receive tax-deductible contributions for the first time—can now do so much more easily, and with confident expectation of fast, favorable review. For lawyers and others counseling free software projects, this is without question “game-changing.”

At SFLC, we have ridden all the ups and downs of the US tax law’s interaction with free software non-profits. When I formed SFLC—which in addition to being a 501c3 tax-deductible organization under US federal tax law is also a non-profit educational corporation under NY State law—in 2005, we acquired our federal 501c3 determination in less than 70 days. Over our first several years of operation, we shepherded several of our clients through the so-called “1023 process,” named after the form on which one applies for 501c3 determination, as well as creating several 501c3-determined “condominium” or “conservancy” arrangements, to allow multiple free software projects to share one tax-deductible legal identity.

But by the middle of the Obama Administration’s first term, our ability to get new 501c3 determinations from the IRS largely ceased. The Service’s Exempt Organizations Division began scrutinizing certain classes of 1023’s particularly closely, forming task forces to centralize review of—and, seemingly, to prevent success of—these classes of application. In our practice on behalf of free software projects seeking legal organization and tax exemption, we began to deal with unremitting Service pushback against our clients’ applications. Sometimes, the determination to refuse our clients’ applications seemed to indicate a fixed political prejudice against their work; more than once we were asked by IRS examiners “What if your software is used by terrorists?”

In this hostile climate, the condominium organizations—both the ones we formed and/or represented, and the ones we made for our own clients to join up with—were indispensable. Unable to provide projects with self-governing tax-deductible organizations of their own, we used the existing condominiums to house as many projects as possible. We also created new forms of organization, like the Free Software Support Network, to provide services from non-profit to non-profit, aiding the work of projects that wanted their own legal identity but could not successfully apply for treatment as a tax-deductible charity.

All this has now changed. The Exempt Organizations Division also applied the discriminatory hard-look approach it was applying to FOSS applications (for whatever reason) to applications by organizations linked to the “Tea Party” political movement. The resulting political furore against the Obama Administration’s IRS in the Republican Congress led to the resignations of senior IRS officials and the adoption of new practices by the Service for initial review of applications by fledgling and small-budget non-profits. FOSS organizations benefitted both from the new rules for small-scale organizations, and from the abandonment of the particular procedural burdens under which our clients had been laboring.

At SFLC, we have been more than watching these developments. By careful repeated experimentation with the new procedures, we have built confidence in our ability to interact favorably and reliably with the Service’s new application types and review procedures. We can now confidently take a free software project from scratch through state incorporation, governance formation, application for federal tax deductibility, to complete legal and fiscal independent self-governance, with the right to receive tax-deductible contributions, in 90 to 120 days, or even less.

This transformation gives us and our clients the best of both worlds. We can give every community of free software developers its own independent free-standing tax-deductible charity. That means complete self-government and independence. But our experience in building “collaboration organizations” such as the Free Software Support Network—non-profits that exist to help other non-profits perform tasks like fiscal administration, tax filings, etc.—means that we can help these fledgling non-profits administer their affairs appropriately and meet all their legal and regulatory compliance obligations inexpensively, by providing those services semi-centrally, in collaborator-organizations that enjoy economies of scale, but do not limit the governmental independence of the non-profits with which they work.

This arrangement is a clear advantage over the compromises between tax-deductibility and true organizational independence that we had to strike in the era of “condominiums” and “conservancies.” Such organizations will continue to serve good purposes for the software projects whose special conditions require them. But from now on, for the foreseeable future, every free software project that wants to govern itself in a secure, independent, tax-deductible federal charity can do so, while working with other organizations to get the asset management, fiscal administration, tax filing and regulatory compliance services that it needs from fiduciaries who are legally required to put its interests first. Legal independence, fiduciary duty for service providers, and tax-deductibility no longer need to be traded off or compromised. If you are part of a FOSS development community that wants to form a new legal organization, or which is dissatisfied with your present arrangements, contact SFLC. We can now help you achieve your goals faster, better, and with more independence than ever before.

Please email any comments on this entry to press@softwarefreedom.org.

Tags: IRS, Eben Moglen, non-profits, Tax

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