This post was originally published on Forbes Mar 5, 2015Somebody in the IRS must think that open source software is even icikier than the Tea Party. During the same period Tea Party applications appeared on BOLO lists and were held up interminably, the same thing was happening with applications from organizations developing open source software. Previously applications by open source organizations had sailed through. One of the better known open source organizations is The Linux Foundation which is exempt under 501(c)(6) like the NFL.
Because your software competes with other commercial products, does not serve a community within the meaning of § 501(c)(4) (analyzed infra), and benefits a narrow class of people, then you are unlike the organizations described in our favorable rulings. Accordingly, your development and distribution of open source software does not promote the social welfare and you are not operated for § 501(c)(4) exempt purposes
The only common connection between all of your users is that they are users of the OS operating system. They are located everywhere in the world. Everyone with an OS controlled computer and interne access may use your software without regard to citizenship or location. The world is a geographical unit but does not bear a recognizable relationship to an area ordinarily identified as a governmental subdivision or unit or district. Accordingly, the world is not a community within the meaning of § 501(c)(4) and you are not operated to promote the welfare of a community.
My sense is that LEAP did not have the assistance of experienced exempt organizations counsel when it prepared its application. Assuming the IRS denial accurately characterizes the application -- and this is not a sound assumption -- it looks like the application focused too much on the general benefits of open source software and not on the particular benefit provided by LEAP.
LEAP's activities, which promote human and civil rights secured by law (including the rights to free expression and freedom of association), in my opinion should qualify for exemption even under the stricter standard applied to 501(c)(3) organizations. This is underscored by the fact that two organizations with similar purposes (one whose purposes actually included contributing to the LEAP software!) were recently recognized as exempt under 501(c)(3). The first of these is Brave New Software, which produces software (with grant funding from the State Department) to enable circumvention of internet filtering in repressive countries. The second is the Calyx Foundation, which provides privacy-preserving ISP-like services, developers privacy tools including the LEAP platform, and educates people about the need for and use of information security tools.
Any number of exempt organizations charge fees for their services, and a carefully drafted application probably could have avoided the problems LEAP ran into there. That said, absent the hostility at the IRS for open source-related applications, this one might never have been flagged.
The logic of the IRS is deeply flawed. The IRS is grossly unqualified to determine if the security offered by our free software is a difference of kind or degree from existing expensive solutions that are vaguely similar on the surface. The idea that the existence of some security software somewhere precludes any other security software from ever having a social benefit is deeply troubling, since most existing software is complete crap and is not up to the task of ensuring the right to privacy online as affirmed by the UN as an essential human right.
Also, many foundations that fund non-profits have started to structure their giving in the form of a contract, in order to be able to more closely monitor the work of the non-profit. This is the case with our funders. The IRS would like to classify these grants as simple normal business activities, but LEAP entirely conceived of the projects and entirely directed the development and the funders received no product from us. The only thing it has in common with a normal business activity is the word "contract" at the top of the funding agreements.
We were advised that we could probably be successful in an appeal, but that it would be very expensive and time consuming. We are a small non-profit on a limited budget and we had no means by which we could mount an effective appeal.