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.