CASH Music finished its state-level nonprofit filings in January of 2009, and we promptly proceeded to file for federal 501(c)(3) status a few weeks later in February. We did the application ourselves, but carefully and with the guidance of a friend who had successfully applied in the past and was the COO of a known nonprofit.
It was really all pretty straightforward and we carefully explained the main points of our mission: CASH Music develops open-source software for musicians and educates about technology and business models in the music industry. By the end of February we got a letter of acknowledgement from the IRS that helpfully explained that there are two types of applicants: those who can be granted final 501(c)(3) status immediately or with little additional data, and those who need additional review and development.
We didn’t kid ourselves for a minute. We knew that we would be in the latter group, so when we applied we asked for an “advance ruling” which grants you immediate pending 501(c)(3) status for five years. The trouble with an advance ruling is that you take on the limitations of a nonprofit, but many of the advantages require a final letter of acceptance from the IRS — more on that in a bit. As of February 2009 it was an exciting first step and we were prepared for a six- to nine-month wait.
So we waited.
In January of 2010 we got a list of questions detailing additional information the IRS needed from us to make a determination. This is a good sign for applicants. I called the agent assigned to our case, Peter, and he was really helpful. He let me know that they generally don’t take the time to ask questions unless they believe your organization can get its final status. He also explained that if there were any issues they would work with us to resolve them and help us achieve compliance. So I set myself to the task of answering the questions to the best of my ability. This time my answers were reviewed by a lawyer who gave them a thumbs up and even helped out a bit on the budget projections.
Aside from a huge fax bill from Kinko’s everything went off without a hitch. (Seriously…don’t do that. I’d suggest bribing a friend with an office job before dishing out a dollar a page.)
So we waited.
After a few months I called Peter to make sure everything was okay. He took the time to look over our case and let me know things looked good, they had the answers we supplied, and he reassured that they would be in touch before too long with a determination or more information.
So we waited.
Every month to six weeks I’d call and check in and every time the answer was largely the same with a little more information. I really can’t stress enough that the IRS has been very open and easy to work with, but as the process crossed two years I started asking more questions. The only semi-official answer I got from the IRS was that they’re currently looking into open-source licensing as it pertains to nonprofit organizations, and that there’s research and case law needed before organizations like ours will see final determinations.
Anecdotal evidence backed this up, and after speaking with the ED of another organization whose mission revolves around developing open-source software I’ve confirmed we’re not alone. He’s spoken to other EDs as well, and it seems that there are wait times pushing three years in some cases. It’s my guess that the process isn’t so much slow for each of us, rather we’re all in a holding pattern until appropriate guidelines or rules can be drafted internally at the IRS.
Circling back to our agent it turns out that the CASH Music case is being transferred to a new agent who has a technical focus. When I asked directly if the open-source licenses were at issue Peter could not confirm nor deny, but he did suggest that it would make sense.
So why am I writing all this? Well, mostly because no one else has. Understandably, no one wants to draw the ire of the IRS, especially while an organizational review is under way. CASH is working around public donations and foundational grants in our fundraising plans, but I think it’s very important to point out that the delays are harming other organizations who rely on those sources for core funding. Even in the case of an organization holding fiscal sponsorship larger foundational support is jeopardized as long-term pending status can be viewed as a red flag by grantmakers who are unaware of a larger open-source review inside the IRS.
My hope is to simply spark discussion and call attention to the fact that this is happening to us and other organizations.
I’m really not upset with the IRS. They’ve been forthcoming throughout the process, our agent has been easy to get in touch with and even went so far as to offer daily conversations. If this process results in fast-tracking 501(c)(3) approvals for organizations building open software then it will have been worth it — incentivizing open software is a critical issue and an important step in seeing today’s innovations become the backbone of new technologies.
I sincerely hope the current slow pace of this initiative doesn’t harm fledgling open-source foundations or developers trying to build software for the greater good. In the worst case such organizations could fold or simply set up headquarters overseas.
Here’s hoping the IRS research is nearing an end — and if not I invite them to reach out to the open-source community. I would happily spend time helping if it meant an easier road to 501(c)(3) status for future organizations building open software, and I’m sure I’m just one of many who would echo that sentiment.
I don’t buy it. The FSF is a 501(c)(3) non-profit. Software in the Public Interest is a 501(c)(3) non-profit. Each builds software, and there are more.
Yeah there are dozens of examples, which we of course cited to the IRS — as have others. This is a more recent development from what I understand. The word is they are trying to solidify their position specifically on organizations developing open-source software…so it only affects those of us waiting for a decision, not existing organizations.
To publicly clarify before I dive into more meetings, I meant that I don’t buy the IRS saying there’s little to no history.
Thank you for blogging publicly about this. Being an Executive Director myself in the Free Software space (although we fortunately got our 501(c)(3) status before all this mess happened), I have heard a lot of stories from many different non-profits who are facing this problem. You are not alone. Email me privately and I would be happy to put you in touch with others who have reached out to me on this issue.
Honestly, my initial reaction was one of fear to this. I was afraid that organizations that I’m involved with — I’m on the Board of Directors of FSF and Executive Director and President of Software Freedom Conservancy — might have their status revoked or reviewed. Like you, I didn’t want to draw the ire of the IRS.
I’m past that now myself. Frankly, we have a serious track record going back to 1985 (when FSF received its 501(c)(3) status) that development of Free Software and its distribution to the public under Free Software licenses is a charitable endeavor in the public good, and also serves educational purposes as well.
I hope you’ll keep the public posted on what happens. I theorize that the IRS is genuinely unsure what they ought to do, and as such they are delaying. Should they ultimately deny any 501(c)(3) application for a non-profit charity whose mission is to develop Free Software, we will all be prepared to help in any way we can to do something about it.
First: If anyone from the IRS is reading this, we would be very glad to help you with developing an agency-wide policy for approvals and denials. There is a large group of administrators of open source NPOs who would be happy to give you advice and information so that you can develop a policy which is uniform and fair. Get in touch with me at josh-at-postgresql.org.
Second: if any OSS project is being hamstrung by this delay in approvals, I might suggest applying to SPI or the Software Conservancy for membership while you wait for your certification.
–Josh Berkus
A nice write up about a subject not too many people understand. We (the BSD Certification Group) went through a similar process. While our wait was not as long, we found the IRS friendly, and willing to review our case on its merits which we presented as benefiting the public as a whole by increasing the ability of people to use computers.
As it happens, the IRS uses established precedents to help in its decision making. One such group was for a medical certification group that looked very similar to the BSDCG. They determined that group to be a “Business League” – a group of like minded persons with a common business interest. The “Business League” is a 501(c)(6) organization for which donations are not tax deductible. They did listen politely to our appeal, but in the end, precedent won out.
Keep in mind that there is a lot of case precedent to review. If you have a new agent, it’s just going to take time for them to come up to speed on thousands of established precedents. It is what it is.
Good luck with your application, and please let us know what happens!
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I’m willing to admit I am one of the referenced EDs in Jesse’s piece and our experience at the Sahana Software Foundation is almost identical to that of Cash Music. We’ve had the same pleasant experience dealing with the IRS – they have been very transparent and honest about their process, and they seem supportive and understanding of the charitable nature of our organization; we are unfortunately stuck in a process that is taking a while. (Our application was submitted in February 2010… and our list of 27 questions just came to us last month – we are submitting our reply this week and are hopeful that the queue starts to get processed more quickly).
I am understanding of the IRS’s need to understand a new industry better and set a standard based on precedent and case history; but for our organization, which planned to rely on traditional grant-making organizations (private and corporate foundations), it has been financially crippling to not have received a determination by now. We’ve lost at least one grant because the review committee took it as a sign of uncertainty in our organization that the IRS was taking so long to approve us as a 501(c)(3) and we’ve been unable to apply for others without it. (Having fiscal sponsors is great for newly formed organizations who have not yet applied or are in the normal 3-6 month waiting period for approval; for organizations who have been in existence for over 2 years and have had an application in for 18 months, it’s not going to answer the question about our fiscal responsibility for most grant-making organizations doing due diligence research on an organization that a 501(c)(3) determination does).
We have had to change courses dramatically and are currently only seeking funding from sources that do not care about 501(c)(3) status until we get through this process.
Thanks Jesse for laying our your story.
I am the Executive Director of an open source foundation in the exact same boat. I even think we have the same IRS examiner, Peter. If anyone knows of an organization that is systematically trying to work on this problem, I’d be very interested to know about that group. Peter hinted that there was such an organization based in California.
Can anyone provide an status update? How is the IRS currently viewing open source development entities? This would be extremely useful for future clients. Hopefully you have been granted status by now.
No real change. We’ve got council working pro bono on things but still no status or new movement. Heard from our agent with nothing really new to report so it would seem things are still being discussed internally. Will definitely post an update when there’s one to post.