Open-Source Coders Who Benefit the Public Should Be Tax-Exempt

The IRS’s recent denial of tax-exempt status to an open-source software organization exposes its outdated framework for defining charity. The agency should update its exemption standards—either through revenue rulings or guidance—to explicitly recognize open-source software as a charitable output when it serves an educational, civic, or public infrastructure purpose.

The denial of 501(c)(3) status to an unnamed nonprofit shows how the agency yet again hasn’t evolved for the digital era. Even when the resulting software is free and publicly licensed, and designed for use by educational institutions, nonprofits, and public sector organizations, it seems producing code isn’t a valid charitable purpose.

This doesn’t appear to be a mere bureaucratic quirk, but a deeper flaw in how the IRS evaluates modern public goods. One might think the IRS is simply resistant to recognizing charitable work in intangible form.

But the agency has accepted nonphysical outputs, such as legal documents, educational materials, and preservation plans, as valid charitable purposes. The sticking point for open-source software seems to be an arbitrary distinction between what counts as a public benefit in theory versus in practice.

The result is a policy landscape where a plan to restore a historic gazebo may be charitable, despite it producing no more tangible output than code. Similarly, producing architectural blueprints for a museum may be a charitable endeavor separate from building the museum.

Depending on what your organization outputs for public benefit, you may or may not earn yourself a tax exemption. In effect, it seems what you tap out on your keyboard—say, source code or a legal covenant—determines whether you get a tax exemption, rather than whether the work serves the public. That logic threatens the nonprofit digital ecosystem the public increasingly relies on.

Illustration: Jonathan Hurtarte / Bloomberg Law

The IRS has a long history of approving tax-exempt status for organizations with a primary deliverable of ideas, documents, and strategies. The throughline, if there is one, has been that they’re aimed at public benefit.

For instance, in Revenue Ruling 86-49, the IRS gave its blessing to a nonprofit that preserved historic buildings—not by owning or restoring them indefinitely but by acquiring them, subjecting them to a restrictive covenant to limit future changes, and reselling them at market rate. The organization’s core output wasn’t the buildings, but merely paperwork: a legal instrument that protected cultural assets in perpetuity. The IRS concluded that was a charitable intangible output.

There are other examples, such as education nonprofits that produce free textbooks or curriculum guides, intended to provide resources to underfunded schools. Their output is information—unquestionably intangible, and with the potential to be distributed widely. The IRS doesn’t strip them of status just because a for-profit tutor or test preparation company might also download and use the materials.

If organizations that produce legal covenants and curriculum PDFs can be charitable, then why can’t an organization that produces publicly licensed software?

In the open-source organization’s case, the group wasn’t selling proprietary tools or monetizing user data. It was creating free, permissively licensed code, made available to help other nonprofits, public institutions, and educational organizations avoid expensive proprietary options.

The IRS reasoned that because anyone might use the software, the organization’s activities weren’t “exclusively” charitable. That is a strikingly narrow and difficult-to-uphold reading of the law. It ignores actual purpose and organizational design and treats open accessibility as a bug rather than a feature.

But as it turns out, the open-source community already has the tools to curtail undue private benefit through well-established and time-tested licensing frameworks—the IRS just has to be willing to use them.

Open-source licenses such as the GNU General Public License can be used and modified to prevent software from being privatized or monetized without sharing derivative works subject to the same permissive licensing structure. To minimize private benefit, charitable status could simply be limited to organizations that release their code under specific open-source licenses.

Concerns about private benefit from open-source code also calls into question how an organization can ever be said to provide exclusively charitable benefits. Take the aforementioned preservation easement—that legal document can raise an adjoining property’s market value by boosting its prestige or protecting neighborhood architectural cohesion. It also benefits every passerby who enjoys the view, regardless of whether they are part of an underprivileged class or the Monopoly man.

Open-source tools are powerful because they’re collaborative, transparent, replicable, and not subject to any restrictions beyond the restriction against restrictions. They reduce duplication of effort, increase interoperability between systems, and foster innovation—often flourishing in sectors where for-profit software providers have little interest or find little competition.

The federal government also depends on open-source software every day. From operating systems to encryption protocols, databases, and webservers, the infrastructure that runs government systems is laced with open-source components. Agencies such as NASA, the Department of Defense, the Veterans Administration, and even the IRS all rely on codebases developed and maintained by open-source communities.

Giving open-source software projects and the organizations that support them their due is about applying the definition of charity consistently. That begins with the Department of the Treasury issuing updated guidance explicitly stating that open-source software, properly licensed, can qualify as a charitable activity under Section 501(c)(3) when it serves recognized exempt purposes.

Those purposes should include advancing education, improving public infrastructure, easing government burdens, and serving nonprofits and underserved communities. Incidental private benefit shouldn’t disqualify the effort.

The IRS doesn’t need to reinvent any standards; it just needs to apply current ones with a little bit of an expanded vision. Until then, the message is clear. Write plans for a public park and you may be a charity; write code for the public and you’re on your own.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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