Open source projects aren’t tax scams

Why does the IRS think open source projects are like Tea Party chapters? Recently released IRS papers show the agency has been flagging and obstructing applications for nonprofit status by open source communities — since as far back as 2010 and probably earlier.

Think of an open source project: Firefox, LibreOffice, Apache HTTPD, Eclipse. All are projects hosted by nonprofit organizations. Many of them have the word “foundation” in their name — Mozilla Foundation, Document Foundation, Apache Software Foundation — so many people collectively call them “foundations.” There are now so many of them that the informal mailing list their leaders use to discuss matters of mutual interest, called the FLOSS (free/libre and open source software) Foundations List, now numbers hundreds of people.

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Why do we have foundations? Simply because they are the best way for a community of open source developers, deployers, and users to organize themselves in a way that optimizes everyone’s mutual benefit. When a single interested party has the controls, the interests of smaller participants are subjugated. But when a community is run as an uncoordinated free-for-all, the stringent needs for traceable copyright and patent defenses that corporations have go unmet. An independent foundation can meet both of these needs. As Paula Hunter and Stephen Walli — leaders of the OuterCurve Foundation, whose founders focussed on meeting corporate concerns — said in a recent law journal paper:

Neutral nonprofit FOSS foundations have proved to be a solution to these problems, providing for the IP management needs of corporations while offering additional business and technical services to the project communities to encourage further growth and adoption.

Foundations are independent corporations, able to have processes that manage copyright, patent, and trademark needs, but also able to embody a democratic process for every good-faith participant, not just the ones with money. They serve as the perfect vehicle for these provenance and governance roles as well as shared administration of events, as an entity able to take legal advice on behalf of the community, and perhaps even enforce rights against abusers. Plus, they provide a huge range of other shared services, none of which directly result in code being developed.

Having been personally involved in a good number of them, I can attest to their value in delivering a level playing field for open source developers. I would even suggest avoiding projects that don’t have one. Single-company-run projects tend to skew their benefit toward that single company. Cleverly managed ones even make you believe that’s good!

So why is the IRS targeting open source nonprofits? I have asked several very well-informed people, and while they have theories, no one really knows. Some wonder if a big proprietary corporation has at some point complained that it can’t compete with these open source upstarts. Others, like Bradley Kuhn of the Software Freedom Conservancy, think the IRS has simply become confused by this valid but new use of old rules. He told me:

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.

There’s no doubt the targeting by the IRS — especially its uncertainty and opacity — is an annoyance to and a drain on nonprofits. Kuhn told me:

We work hard to ensure beyond a shadow of a doubt that we’ve followed the spirit and letter of every possible IRS rule, but it’s admittedly extra work for that level of perfection. I wonder sometimes if the IRS realizes they’ve caused that sort of staffing consequence for orgs like ours.

Maybe the answer is for open source foundations to get out of the nonprofit world. Tax breaks are fine, but they aren’t the primary goal of open source foundations. What matters to their communities is that they have transparent, equal governance that allows everyone to contribute to and benefit from the project without obstruction. The IRS does not warrant that; it’s a matter instead of community scrutiny. Maybe this newly publicized IRS behavior is an opportunity for us to refocus open source communities on what really matters to them — open, accountable community governance — and perhaps even do without nonprofit status altogether, at least until the IRS has reviewed its processes and gained a better understanding of the true nature of open source.

What if you really do need nonprofit status? Perhaps instead of trying to start your own nonprofit, you should join an existing one. There will be a parade of possible candidates in a session Bradley Kuhn is running at OSCON in Portland, Ore., on July 25. If after all this you really believe you should start a new open source organization, please come to the “Community Foundations 101” tutorial I am running at OSCON on July 23, when a distinguished group of leaders from the FLOSS Foundations List will share their experience and insight with you.

After that, I doubt you will think there is any connection at all between open source projects and the Tea Party.

This article, “Open source projects aren’t tax scams,” was originally published at InfoWorld.com. Read more of the Open Sources blog and follow the latest developments in open source at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.