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A New Era for Free Software Non-Profits

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OSS
Legal

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?”

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