Why the IRS is Targeting Open Source Software Groups | Hacker News Reader

Why the IRS is Targeting Open Source Software Groups

motherjones.com

164 pointstalboito71 comments

The real scandal here happened in 1959. When Congress passed created 501(c)(4)s, the law said that (emphasis is mine): "Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare".

In other words, 501(c)(4)s were intended to be allowed to spend NO MONEY on politics. However, a 1959 IRS regulation decided that "exclusively" (0%) really meant "primarily"(up to 49%), and in doing so they completely changed the spirit of law, which was not only illegal, but made the new law a nightmare difficult to enforce. Every single 501(c)(4) that has spent money on politics since 1959 has been in violation of the law passed by Congress — which means that the real law is almost guaranteed not to be enforced.

http://blogs.reuters.com/great-debate/2013/06/17/the-real-ir...

As I understand it, the US method of interpretation of legislation is to take the opinions of government agencies more or less at face value. After all, they're the experts, so to speak. This is distinct from the Supreme Court's power to interpret the Constitution.

To me it seems like an abrogation of the independent role of the judicial arm. In Australia, for example, the courts jealously defend their rights and powers to interpret legislation to divine the intent of Parliament. Each government agency has no more standing or influence than anyone else.

IANAL, TINLA.

Government agencies are part of the executive branch, though...so in a sense, their professional role is to execute the law. The judiciary at every level has the power to check that execution...a criminal judge can rule against the prosecutor's office, for example.

I guess I'm not getting what you're getting at? When the judiciary interprets the intent of a law, whose opinion besides the government agency do you think they should consider with equal influence? And if you're going to say, "the public"...well, I think that is the case in the U.S. too. So how are you gauging whether Australia's courts give fairer weight to the public than America's courts?

The idea is that from day to day, agencies interpret the Acts that govern them in order to correctly give them effect. When someone challenges an agency, a US Court presumes in the first instance the agency's interpretation is correct because they are the experts in its administration.

An Australian court does not make that presumption.

It's a big deal because if you go to court against a US agency over the content of its relevant laws, you have to overcome that presumption. In practice that gives US agencies de facto interpretive powers that Australian agencies don't usually have.

IANAL, TINLA.

Here is a redacted form just stating that:

"Open Source Software

These organizations are requesting either 501(c)(3) or 501(c)(6) exemption in order to collaboratively develop new software. The members of these organizations are usually the for-profit business or for-profit support technicians of the software.

There is no specific guidance at this point. If you see a case, elevate it to your manager." http://democrats.waysandmeans.house.gov/sites/democrats.ways...

If huge corporations are hiding parts of their operations under a 501c status it SHOULD be looked into. Don't fall into the trap that Tea Party members fell into. This is not a scandal. Don't cry about it.

No big deal.

It's a bit bizarre honestly. Operations are all deductions, and so write off against revenue. Why would somebody take expenses off they P&L?

They want to be able to take large donations from wealthy contributors, without (a) having to pay tax on them as income, or (b) having to follow the normal reporting requirements for political groups.

> without (a) having to pay tax on them as income,

But that is my point: The expenses write off against the revenue in the biz, so there's no point in creating a separate org. There can't be sizeable income left in the separate org, or they get nailed for having assets.

> (b) having to follow the normal reporting requirements for political groups.

That's different, but I got the sense from the article that it was more about advertising than politics. FTA: In short, the IRS is concerned that some of these organizations exist simply to market companies' software, and perhaps the associated services sold alongside them.

The tax issue actually goes the other way--individuals can take a personal tax deduction on most donations to 501c orgs, but not to for-profit companies.

Aha, it's because they think their income will go up from donations of individuals? That makes more sense.

People complain that government doesn't do a good enough job, but then people complain when government tries to do a better job.

The key word being "tries". they need to be a bit more effective with their trying (if indeed they are trying to do good things).

"targeting" equals "tries" now? Okie dokie.

Totally. Just earlier today I was reading something about how the IRS taxes citizens who have their wealth abroad. People were very angry! But these are the same people who want more taxes on the rich. All I could think was, 'Hold up a second guys, aren't you familiar with the key ways the rich avoid taxes?'

The thing is, the IRS "taxes citizens who have their wealth abroad" even if they have no significant financial/business links with the U.S. (they live/work/invest entirely outside the U.S.), and even if they aren't wealthy...

I'm all for catching tax cheats when that's actually what's going on, but the IRS policies here are often just downright douchey...

That's a little different. If you moved to Europe, took a job in Europe, lived in Europe and paid taxes in Europe, you'd STILL have to pay US tax. Very few other countries do that.

Only if you make $100k+ though, from what I've read. You get an exemption if you make less than that, I believe?

Even still. The fact that you have to pay taxes for services you have no means to access is a little unfair.

You still have access to all the services and protection provided by the US embassy and consulates.

I'm not saying that it's appropriate for someone to pay the taxes, but it's not true to say you get no services as a US citizen abroad.

Are you really sure those are the same people? I'm guessing not.

Strangely, "no big deal" is only the top post when it concerns open source. When it concerns the Tea Party, the top post is some political rant.

I think a lot of things the government does would not be a big deal, if they at least told us about what they are doing and why.

Transparency goes a long long long way to resolve confusion and concern and prevent abuse.

Yeah, Obama seems to have promised more of that than he was able/willing to deliver.

To be fair, in the case of the Tea Party they delayed applications through the election, and there's also evidence the IRS handed donor information to outside groups.

If there "is evidence", you should provide it.

Here you go, straight from the "outside group": http://dailycaller.com/2013/05/14/irs-sent-confidential-info...

Here's the original source from your article:

http://www.propublica.org/article/irs-office-that-targeted-t...

I'm not convinced it's a targeting of opposing political groups by the white house though. If Propublica requested papers, and got them even if they shouldn't have, that's a bureaucratic error.

He said that on March 30, 2012, NOM became aware that the Human Rights Campaign, the pro-gay rights group, obtained confidential information of its donors and posted the information without redacting the names. That information later appeared on websites like the Huffington Post. NOM discovered another document with redactions that had been posted. A computer analysis, after removing the document's redaction layer, discovered the document had "originated from within the IRS itself." He said the group found the header of each page read: “THIS IS A COPY OF A LIVE RETURN FROM SMIPS. OFFICIAL USE ONLY." And that was proof that the leak originated from the IRS.

http://www.breitbart.com/Big-Government/2013/06/04/National-...

The testimony states only that documents originated within the IRS. There isn't any indication of the means in which they were released. What would be the political sense in releasing the names of donors? A rogue leaker seems more likely to me.

Testimony: http://waysandmeans.house.gov/uploadedfiles/eastman_testimon...

You asked for "evidence". Obviously, this evidence requires further investigation.

> in the case of the Tea Party they delayed applications through the election

Which shouldn't matter if they actually are social welfare organizations. If the election is that important to them, maybe they actually were hidden political orgs after all.

Wow, if you're being downvoted for saying that, I guess there must be a lot of Tea Party supporters here who are misusing downvotes to express disagreement.

Or maybe they don't get that political organizations should not ever be charitable "social welfare" organizations, on the left or the right.

In any case, it seems to me that you've got an excellent point. And the fact is that there's tons of evidence that the IRS was just being slow, not partisan, INCLUDING the linked article.

"Tea Party", being a politically based category, seems like a natural red flag for the IRS, just as "Progressive" or "Libertarian" would be. It's really hard to believe that most of these organizations WOULD have qualified. If someone created a non-profit named "Democrats for Social Justice," I would equally expect the IRS to think twice about approving "charitable" status.

First of all, the IRS admitted to and apologized for specifically targeting conservative groups. Denying it at this point is absurd.

Second of all, the legal definition of a "social welfare" organization is that it spends at least 51% of its money on social welfare. So legally it's allowed to spend the other 49% of its money on politics. Plenty of organizations, both liberal and conservative, take advantage of this rule.

>51% of its money on social welfare

That's a pretty sucky rule, but regardless, I'd still have a hard time believing a "Tea Party" group would ONLY spend 49% of its money on politics, so I'm sorry, but I have to say "ha ha" that they missed a chance to influence the election.

I don't care if they apologized. That's PR 101 these days, regardless of fault. They also targeted progressive groups. And open source groups, apparently. Maybe they did target MORE Tea Party groups, or maybe there were just more Tea Party applicants than progressive group applicants. Regardless, it's all mob mentality lynching of the IRS without enough evidence to know what was really going on.

And I guess people who point out that it's not necessarily an actual conspiracy get downvoted for bursting that particular bubble. So be it.

The conservative non-profit groups were not under that status they were under the one for political action groups.

The law states that 501c groups are allowed to participate in politics so long as 51% of their money goes towards social welfare. For example, [1]. Would you say the same thing if planned parenthood was denied non-profit status because it is a liberal organization.

[1] http://www.opensecrets.org/pacs/pacgot.php?cmte=C00314617&cy...

No it's more nuanced than the 51% number.

The actual law passed by Congress says "exclusively for social welfare". IRS interpretation changed that to "primarily social welfare" a few decades ago which is actually wrong since IRS cannot make laws, only implement them as written. There was a huge ruckus in congress over this matter. Can't find the video now but here's an article:

http://www.psmag.com/politics/the-irss-tea-party-tax-row-how...

Except thanks to the complexity of laws, the IRS and other federal agencies are tasked with interpreting and enforcing said laws.

If Congress didn't like the interpretation they could have just passed a new law clarifying that fact.

So... if "the sky is blue" is interpreted to mean, "the sky is green," we have to wait for Congress to pass a new law stating, "the sky isn't green?"

Or you appeal to a higher court.

Law is not static. Congress or Parliament makes its legislation, ambiguity arises in corner cases, Courts are asked to sort it out. Courts try to divine the intention of Congress or Parliament. If Congress or Parliament disagree with that interpretation then yes: it's up to them to change the law. Otherwise, by failure to further Act, they conceptually support the Court's interpretation of their intent.

To be fair, the original wording was pretty bad. If a non-profit had someone pay $1 into a political fund (potentially without approval) they could lose their nonprofit status.

This is obviously not the intent of the law, but would be the 0% everyone throws around.

You could say <1% or something, but now you are arbitrarily drawing a line. Thus I would point out that not drawing a line is by extension impossible.

So there's a law that states "exclusively for social welfare" and there's a law that says its okay to participate in non-social welfare activities? The laws sound contradictory to me and it seems like the IRS has a pretty good justification for their interpretation. Either way, whatever they rules are they should apply equally to all people/organizations.

As an aside, I wonder if you could make the legal argument that political donations are considered social welfare? If planned parenthood can call giving out birth control social welfare, then why can't it call advocating for the availability of free birth control social welfare? If advocating for the availability of free birth control is social welfare and political donations are covered by free speech, then why isn't giving political donations to candidates that support the availability of free birth control considered social welfare?

There is only one law which says exclusively. The "primarily" thing is an interpretation of the law by IRS.

I guess we interpreted this differently:

> Spurred by such concerns over unfair competition and lost revenue, Congress enacted the UBIT. It taxed any trade or business regularly carried on by Section 501(c) organizations if the activity is not related—aside from the need for funding—to the organization’s exempt purpose.

If a group could be considered a "tea party" group, that pretty much indicates that it's primarily a political group; the term "party" specifically refers to a political institution. If a tea party group does some form of social welfare, that doesn't change the fact that it's primarily a political institution.

Planned Parenthood, on the other hand, is unquestionably a social welfare organization. It has offices which have doctors who provide a wide range of sexual and reproductive medical services to many women who would otherwise be unable to obtain them. If you look at their budge, 70% goes directly towards medical services. Less than 10% goes towards public policy; and what does, is advocating for policies to be able to continue the social welfare services that they provide, nothing else. Those figures you linked to for donations to political candidates represent less than 0.05% of their budget.

Where are the tea party offices that provide medical services to low income residents? Or heck, if you want to be fair to them, where are the tea party offices that provide tax advice to people who want to lower their tax burden? Of course, it's kind of hard to come up with examples of social welfare services that tea party groups could provide, because as far as I can tell, the tea party movement is primarily about opposition to social welfare, and a variety of political goals involving the reduction of the federal government. Even trying to stretch my imagination, I can't think of any social welfare programs that tea party groups would actually provide. I suppose they could qualify for tax exempt status if they shipped 51% of their revenues to other social welfare organizations that they supported, but that seems more like a tax dodge than an honest assessment of the purpose of the organizations.

Now, back on topic, I think that the software groups are sometimes more of a grey area. While there is a lot of open source software that is developed solely for social welfare reasons, there's also a good deal that is developed primarily by for-profit corporations. If there will be more than one for-profit company working on a joint project, it is common to set up a non-profit foundation that organizes the collaboration, or use an existing one. On the one hand, this can sound an awful lot like for profit companies trying to claim that their joint venture is actually a social welfare organization. On the other hand, due to the fact that the code is shared publicly and available for anyone to study and modify, it is arguably promoting social welfare and thus should be eligible.

If you check the actual recommendation, you will see that they have no specific recommendation for this type of situation; all it advises is "The [sic] is no specific guidance at this point. If you see a case, elevate it to your manager."

The entire point is that you really can't separate politics and social well-being. Often the most effective way to improve some groups life is through politics. Killing separate but equal for example.

No, the entire point is that political contributions shouldn't be tax deductible, no matter the goals.

I make lots of political contributions with the intent of improving social well-being. I just don't expect to also be able to deduct those contributions from my taxes.

The IRS wasn't preventing these groups from collecting money in support of a cause. It was preventing those donations from being deducted from your taxes.

I'm willing to take that tax hit to help people. It's the Tea Party supporters who hate taxes so much that are making a big deal of the fact that they can't get a deduction on their taxes on contributions made to elect people who will then try to reduce their taxes.

They want to double dip. Screw that. Make sure that the rules are fair in preventing any such political organization from being considered a "social welfare" organization, by all means. But don't let political contributions become deductible, no matter the politics.

So spending 10% of your budget on public policy is okay, but 49% is too much? You have to draw the line somewhere, they've chosen 49%. You can't just have IRS agents going "oh that sounds too political." You need actual enforceable rules.

You're creating and then trashing a strawman.

He said that he couldn't come up with ANYTHING that a "Tea Party" group could do outside of politics with the 51% of their money, other than launder it by giving it to other groups.

Why don't YOU come up with something OTHER than changing public policy that a Tea Party group would do with that 51%? Any Tea Party group is a political group by definition, and shouldn't qualify as a charitable group. Period. It's just a tax dodge, plain and simple. Heck, that's pretty much the point of the party is they don't like taxes, so it's a blatantly obvious tax dodge.

My point was that it doesn't matter that HE can't come up with anything. The IRS agent can't just be like, "well I don't think there's any way that a tea party group could be doing social welfare. Denied!" They have to use actual facts. They look at where their money was spent. They look at the rules and regulation for what is considered social welfare and what isn't. Then they determine whether or not 51% of that money was spent on social welfare.

>They have to use actual facts.

If I understand the process, it DOES involve judgement of IRS agents. The IRS requires that applicants describe what social welfare activities they're going to take part in. If they didn't put something in that blank that was reasonable, then of course they weren't rubber stamped.

The Tea Party is pretty much all about reducing government size and spending and reducing taxes, with a few other standard conservative (guns, military) and libertarian (privacy, intrusive government) positions thrown in [1]; what could a "Tea Party" organization do that would promote the social welfare? Looking at teaparty.org, there's nothing in their set of 15 core beliefs that fall under "social welfare", [2] except arguably "Traditional family values are encouraged." Pretty much a stretch to expect 51% of their money to be spent "encouraging family values" and only 49% on politics.

[1] https://en.wikipedia.org/wiki/Tea_Party_movement.

[2] http://www.teaparty.org/about-us/

They're not using the same definition of "social welfare" that you have in your head.

http://en.wikipedia.org/wiki/501(c)_organization#501.28c.29.... http://www.slate.com/articles/news_and_politics/explainer/20...

But those of us trying to organize funds for FLOSS projects serving the public commons have a harder time raising money. That's a big deal. It's not really new info, though perhaps more confirmed - this is what people were telling us before even the Tea Party piece of this broke.

Neither this nor the original post seem to link to any additional information about which FOSS groups have been hit by this. Does anyone know?

Via huffingtonpost, here is a link to the IRS document which is the source of this report about "Open Source" firms being targeted.

What is released here is a "Be On the LOokout" (aka "BOLO") list - instructions to examiners. It talks not about specific companies but about criterea for evaluating applications for not-for-profit status. Regarding Open Source organizations, it notes that applicants may be the for-profit developers or for-profit support providers for the software. The advice given to examiners is to take it to their manager, since no more specific guidance is or was then yet available.

http://democrats.waysandmeans.house.gov/sites/democrats.ways...

CASH Music and Yorba have been mentioned publicly

http://faif.us/cast/2011/jul/05/0x13/ http://faif.us/cast/2011/nov/11/0x1C/

Link to first broken, see post/comments at http://web.archive.org/web/20110828144502/http://blog.cashmu...

I wonder if this was an intended consequence of cutting IRS funding or whether those doing the cutting literally didn't think about it beyond "fuck'em!".

And now I'm wondering which scenario is more dissapointing.

Why is the response to incompetence to increase funding? Incompetent businesses go out of business, they don't get more money. Others could do this job better - assuming we even want the job being done. The US became one of the most powerful nations in the world without any IRS for its first hundred plus years, gaining most of its revenue through tariffs rather than taxes:

http://en.wikipedia.org/wiki/Tariffs_in_United_States_histor...

If funding was at one level, and you decrease it, and the backlog of undone case work increases afterwards, it points to a pretty simple conclusion.

I'm talking very specifically about administrative issues here, philosophical musing about the nature of taxation is besides my point (and more generally completely unhelpful when it comes to actually getting stuff done).

If people want to eliminate IRS case work by eliminating a bunch of these 501(c)(abcdewhatever) categories, that's fine by me. But the work exists and it needs to get done. The way you get it done is by people doing it, for salary.

As far as 'others could do this job better', you're suspicious of taxes and want to hand it off to a private contractor or something? I can't say that that makes sense to me.

"without any IRS for its first hundred plus years"

And rivers caught on fire, slavery was rampant, women couldn't vote, children died in factories. Don't romanticize history.

The idea may work, it may not. It's certainly my favorite libertarian idea after ending the drug war. But don't "look back to the good old days" like they were better. They weren't.

Unless you're relating the end of slavery, women's suffrage etc to the founding of the IRS, this is a fallacious argument. It's perfectly reasonable to imply or outright state that some things worked better in the past.

I consider 19th century architecture objectively superior to that of the 20th century. You may disagree, but cholera is not relevant to that discussion.

Most 19th century architecture is completely unfeasible to build today. If only we had more of those non-union wage slaves to build are elaborate monuments like the good old days!

Dubai has that now I guess.

The US really didn't have much to do on the world stage in its first 100 years. Separated from the rest of the "civilized" world by a few thousand miles of ocean in each direction it was able to be the biggest player in the western hemisphere, but the game was much smaller.

If you think of how private-sector companies manage their internal divisions, sometimes the answer to problems in a division is to increase funding. For example, if your products have major safety problems, it might be because your quality-control and risk-assessment groups are understaffed, and increasing the funding you allocate to that task, rather than decreasing it, might be a rational response.

How is using resources to do something improper (targeting groups) a consequence of not having enough resources to do other more proper things?

Edit: OK, gotcha.

Having a first-pass flag for keywords that correlate with skirting the edges of the law is actually completely proper. Not clearing them quickly enough if it turns out they're completely kosher is the problem here.

Take something as simple as Mozilla. Most of their work revolves around publishing the Firefox browser, they collect donations from Google for using Google's home page. After that it gets murky because there is another for-profit Mozilla in the background that makes its own deals for things like the Firefox Phone OS where "Free Spftware" isn't allowed. The IRS starts caring who gets what cut of those Goohle "donations"? Who owns the offices, pays the wages, and who owns the IP? It gets extra murky when an Open Source project get SOLD and more money starts changing hands... Suddenly a "non-profit" gets its assets sold for millions of dollars... The IRS wants its TAX moment cause they got to feed Uncle Sam.

I think the problem they have are 2 college kid companies that start as "open source" while they build something (and its true they eat Ramen the whole time) only to sell that for millions later. The ITS doesn't like giving away tax money if they don't have to.. Especially when they could have been collecting it all along ... Big companies know this and I'm sure "help" the IRS know which kids to go after.

Which is interesting since they use open source software.

Tax-exempt status is a privilege created by Congress for which some FOSS groups don't happen to qualify, despite the organizations' beliefs that they do. "Targeting" is a misleading word here - the IRS isn't trying to shut these groups down, it's just paying more attention to whether or not they have to pay taxes like everyone else.

"Targeting" was a misleading word with regard to the Tea Party groups, too. IRS wasn't trying to shut them down, it was just paying more attention to whether or not they have to pay taxes like everyone else (including groups with certain forms of political activity)

Reply on news.ycombinator.com