The New York Times just ran a piece on the BOLO (be on the lookout) practices of the IRS. They’re at the heart of a story where some groups are saying they were unfairly targeted by the IRS. CASH Music and the role of open source software were both mentioned in the NYT piece, and as we’ve long suspected (known) the IRS has indeed been flagging all tax exempt applications from groups mentioning open source software.
That the IRS is placing close scrutiny on certain applications makes perfect sense. In the case of open source nonprofits they argue that many applications are actually attempts by for-profit entities to gain tax advantages by creating token open source software to lower their tax burden. If that were actually the criteria by which they were judging applications the story would end there and we’d all be better for it. Unfortunately it appears that there is an argument inside the IRS that all open source software grants competitive advantage to for-profit businesses and that argument is being used to deny applications across the board.
This is unfortunate, and we cannot stand for it — open source in the nonprofit space is a vital piece of a healthy open web. If the IRS wholesale blocks that piece of the open web we will face new challenges that CASH Music has been quietly dealing with head-on for some time.
We applied for nonprofit status in February of 2009. We were formally rejected in June of 2012. I handled the initial application myself, which as anyone will tell you, is dumb. But we had no money for help, so it was the only option. (I made mistakes in the application, which were pointed out in the process, but they did not lead directly to our rejection.) Our review was handled by a very nice agent named Peter. It involved several amicable back-and-forth phone calls clarifying what we’re trying to do, followed by a five page questionnaire in January of 2010.
The questions asked us to project three years of revenue, what activities are underway, what sort of educational goals we have, what data we could contribute to the public benefit, and specifics about the licenses of the software we had built and are building. A lot of work, but reasonable enough.
After our answers were submitted I’d call and ask how things were going. The answer was always “we’re busy, but I’m sure it’ll be soon.” Then almost a full two and a half years later we got a 14 page rejection letter signed by Lois Lerner, not the agent I had spoken to so many times.
There were things in the rejection we could have argued, but the heart of their argument was simply that open source creates competitive advantage for individual companies by allowing them to not pay for software where others may have chosen a commercial option. So free software, available to all, creates competitive advantage and therefore creating with and distributing it for free for the benefit of all is not an exempt activity in the eyes of the IRS.
In their words:
"[Your] audience derives a commercial advantage from your open source programs because, in its absence, the musician or company would either need to develop their own software or would have to purchase commercial software. Thus, by providing open source software, you reduce or eliminate production costs and provide musicians and music companies with a distinct commercial advantage."
This is a scary and dangerous argument that all open-source advocates should fear.
After all the scrutiny the IRS clearly determined that we were not affiliated with any for-profit entities or efforts. With revenue projections and detailed questions they determined that we were not trying to directly benefit from the work on an individual financial basis. They rejected our application because we want to build free software to help musicians and that would take advantage away from commercial options.
We continue on today as a nonprofit organization in the state of Oregon but without federal tax exempt status. This means we’re barred from raising money via traditional investment, but we are also unable to offer tax refunds and unable to apply for many sources of traditional nonprofit funding.
I’m raising this issue not for us, but for other groups in similar situations.
We will continue to offer free software for musicians. It will always be free. We will always be a nonprofit organization. We are building up and rolling out our educational efforts. They will always be free. By denying our application for federal 501(c)(3) status the IRS has significantly slowed us down but it will not stop us from our mission of artist sustainability. We are finding other ways forward and have had help from our lawyers figuring out the best avenue to federal status — we do plan on reapplying because we believe that building free software to allow direct participation by all in the open web is a vital role for nonprofits to play.
In the meantime fundraising is a constant and time consuming challenge.
If you believe in what we’re doing and want to help you can donate to CASH Music or help contribute to the software.