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BLOG: Open source projects aren't tax scams

Simon Phipps | July 1, 2013
IRS is eyeing open source projects and Tea Party groups as possible tax scams, raising a real question: Do open source foundations need nonprofit status?

I really believe that there are lots of different types of open source and free software projects. Some of the difference here is that classic difference between open source, which has more of a business focus (à la a 501(c)(6)), and free software, which is community-driven, volunteer-oriented development designed to make the world a better place. People have for a long time conflated these two types of work in our community. It's thus no surprise the IRS is confused: This distinction that too many people in our community ignore is very close to the distinction that the IRS is trying to draw when they consider whether an org is appropriately a (c)(6) or a (c)(3).

The important aspect of all FLOSS licensing is equity to the entire public. A license that gives the same rights and freedoms to everyone in the public — individuals, nonprofits, and for-profit companies — is a central tenant of our community. That's a point that the IRS is missing, I think: It seems they don't realize that access to software's source and the right to modify and redistribute it for any purpose empowers everyone equally. It seems as if the IRS is worried that those rights only empowers businesses. If the IRS really does think that, they've misunderstood, and we need to educate it.

Kuhn's view — that there are both good and bad open source nonprofits and the IRS is targeting all rather than just some — seems the most common outlook among the leaders I contacted. One solution suggested to me is for a panel of recognized open source community leaders to help the IRS distinguish between the character of new projects, perhaps hosted at the Open Source Initiative.

This has all assumed that "foundation" has to mean "tax-authority-approved nonprofit entity." But do they actually need to be nonprofits? Luis Villa, deputy general counsel to the Wikimedia Foundation and a fellow director at OSI, told me:

Being a registered nonprofit is a strong signal to American donors that goes beyond mere tax breaks. For individuals, it is a strong signal that the organization has a particular mission and vision.

Bradley Kuhn told me:

Remember that donations to 501(c)(3)'s deductible by citizens on their income taxes. Thus, having a 501(c)(3) status is actually a funny way of getting a government grant, in that your donors are given a government incentive to support you.

So being a nonprofit is a badge of pride that shows the IRS thinks your work is in the public benefit. But is the tax break really needed? Would donors really stop supporting open source projects if they didn't get a tax break? International donors certainly give without one; would American donors stop? I don't think they would. The people involved in a community give because they are committed to the project or because they are grateful for its work. While there might be a small dip, I doubt all funds would dry up without a tax break; indeed, I was told that donors to 501(c)(6) foundations often don't get one anyway.


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