Open Source Software Nonprofit Denied Tax Exemption for Being Too Charitable

"Charity" means to freely serve only the poor, not everybody else too, according to the Service.

In a private letter ruling released last week, the Service denied tax exemption to an organization that gives away open source software to anybody precisely because the organization gives away open source software to anybody, instead of only to poor people. According to the Service, the organization is not charitable because it serves the poor and everybody else too. Can you believe that? The organization gives away everything it produces but is not charitable. The ruling takes first prize for the strangest I have ever read.

I once had a conversation with an attorney close to Chief Counsel’s Office — let’s call the source “Deep Throat” — that sheds light on the strange and bizarre outcome. Deep Throat thinks “charity” as used in IRC 501(c)(3) is limited to activities that exclusively benefit poor people, but that the requirement to serve only poor people does not apply to the delineated purposes in IRC 501(c)(3). According to this reasoning, health care and educational organizations are not charities, though those activities may be tax exempt, and therefore are not subject to the requirement to serve only the poor. In effect, the Service treats “charity” “health care” “scientific research” and “education” as four different things, rather than four different manifestations of “charity” all of which may be tax exempt though they benefit everybody, not just poor people.