Are open source foundations nonprofits? The IRS says no

OpenStack and Yorba are denied nonprofit status. Does this challenge the role of foundations -- or signal open source's maturity?

News that the Yorba Foundation, which creates productivity software for the Gnome desktop, has been denied nonprofit status follows on reports that the huge industry initiative the OpenStack Foundation met the same fate in March.

It's likely both denials by the IRS reflect a change in the the government's understanding of the role of open source software. It seems that the IRS no longer thinks collaborating on open source is a public good.

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The board of directors of OpenStack was told on May 11:

The objections from the IRS boil down to their feeling (a) that the foundation is producing software and, as such, is "carrying on a normal line of business," (b) that the foundation isn't improving conditions for the entire industry, and (c) that the foundation is performing services for its members.

This week, the trend continued. The Yorba Foundation was told:

You are the copyright holder of some Tools code. Private persons are the copyright holders of the portion of Tools code you do not own. ... Even though you are the copyright holder to a portion of Tools code, the portion of Tools code owned by private persons cannot be a public work within the meaning of § 501(c)(3).

Both of these decisions by the IRS signal a change in direction. Equivalent organizations such as the Eclipse Foundation and the Apache Software Foundation have long enjoyed nonprofit status. But the open source method and the "software freedom" concept seem to have become so successful that the IRS now regards them as the norm and requires communities to demonstrate more to achieve nonprofit status.

This would seem to be a bad sign for open source -- or is it? As I wrote last year when it first became clear that the IRS was thinking afresh, open source may not need nonprofit status as such. Rather, an open source community needs the shared rules that protect its members from bad actors. Those may be enacted on the road to nonprofit status in many cases, but one is not dependent on the other.

Nonprofit status is not a magic talisman that mystically makes a community activity good. Open source communities don't require much in the way of cash donations, so nonprofit status is a nice-to-have rather than an essential. This becomes even more the case as communities become international, because nonprofit benefits don't extend beyond the United States. Most people I speak to treat nonprofit status mainly as a sign of good faith, offering confidence that the bylaws of the organization have been checked by the IRS.

Should we instead be seeking to deliver the same benefit in a different way? Communities need rules that create a permissionless environment that allows easy collaboration with minimum friction. It may be that we need templated bylaws for new open source communities that protect community member rights, coupled with best-practice governance and maybe even an organization to check that these things have been accomplished and certify them in the way OSI approves copyright licenses. If necessary, an existing nonprofit fiscal sponsor like Software in the Public Interest (SPI) can even host shared copyrights and trademarks and managed donations, saving the need for a new legal entity.

Whatever happens, open source has clearly become the norm. That's why the IRS is changing the rules.

This article, "Are open source foundations nonprofits? The IRS says no," 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.

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