You may be familiar with open source software. If you are, you know it is software people can modify and share because its design is publicly accessible. Would efforts to develop open source software qualify as an exempt purpose under tax law? It’s not commercial and it benefits the public, right? Not according to the IRS.
Developing, promoting, and licensing open source software is not per se an exempt purpose according to the IRS (PLR 201717048, issued by the IRS on April 28, 2017). The IRS denied recognition of 501(c)(3) tax-exempt status to a software developer (“Developer”) that created open source software that it licensed for free. Membership in the Developer was open to any organization that supported its mission and used its software, including universities, research firms, non-profit organizations, and for-profit businesses. The Developer organized conferences and provided online resources for the general public to promote the software and to provide training in its use. One of the Developer’s events gathered users and developers of the software in one location to foster ideas for using and developing the software, to educate others about the software, and to promote its use as a free and successful service in multiple fields.
Under the operational test, an organization must be organized and operated for exempt purposes to qualify for 501(c)(3) tax exempt status. The Developer was organized to foster and support the development of, access to, and adoption of the open source software. According to the IRS this is not an exempt purpose. Similarly, the Developer’s operations did not further exempt purposes because they advanced the private interests of the Developer’s members by developing and improving the software that they use. The Developer’s educational activities were incidental to its primary purpose of providing software to its members. In some circumstances, providing goods or services free of charge can qualify as an exempt charitable purpose, but not in this case. The IRS concluded that providing free software did not further a charitable purpose because it was directed to the general public, who could afford to pay for the software, and not a charitable class.
This decision shows that merely providing goods or services for no charge is insufficient to support tax exemption under Section 501(c)(3).
This article is provided for general information and is not intended to be legal advice for any specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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