It’s strange in it’s specificity, beautiful in it’s bureaucratic efficiency, and perhaps most of all, it’s cryptically confronting in it’s expectations. Form 1023 is the U.S. Internal Revenue Service’s turn of the 20th century process for seeking recognition as a tax exempt charitable, religious, or educational organization. Undergoing this process is as much about preparation and document management, as it is precision of language and commitment to the cause.

In this discussion, we’ll explore critical parts of the process to establish a charitable organization at the federal level, I will provide some details on our organization’s approach as a software technology focused non-profit, and include the questions and determination we received from Sally, our polite and sure-spoken IRS representative. My hope is for this documentation to inform and assist future software and technology focused non-profits that are considering taking on the requirements and challenges of 501(c)(3) designation.

In 2019, when setting up an officially recognized non-profit organization, all roads lead to the IRS website. The starting point is easy to find, and right away you are being introduced to (surface level) instructions and procedures. Things are pretty straight forward at first glance; there are a few checklists, some of those checklists have checklists, and there are links to various forms, notices, and documents as you might expect.

There are also lots of helpful resources around the internet from other established non-profits that have been here before. So maybe this won’t be such a daunting process… it was. Suffice to say, if you are not already a well established organization, or are not somewhat familiar with this process, the tasks begin to fractal into various exercises in reading comprehension, authoring original documentation, tracking requirements, and following directions carefully all along the way. Are you ready?

Step 1 — Apply for Tax-Exempt Status

The first step is a breeze, just click on the “Apply for Tax-Exempt Status” link. Ok, doing great. Now you’re looking at a little bit longer list of links. The first link on the page diverts to some preparation work that will be needed for your organization to even be considered for 501(c)(3) recognition. For the sake of brevity, let’s just assume you’ve already taken the necessary time to determine your organization structure, gather your documents, determine your State’s requirements, and obtain an EIN. So now we’re getting in to the semantic tools the IRS provides along the way. Perhaps one of the most pivotal sections of the application, is properly defining the exempt purpose(s) of the organization, and including all the necessary clauses that the IRS stipulates:

“an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.” 

Clicking through each of the hyperlinked phrases, and keeping track of the tools and tips provided along the way, is an extremely helpful exercise.

When you click the term, exempt purposes, this is the verbatim guidance that is provided:

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Wait a second. Shouldn’t we know a little more about what else is even in Section 501(c)(3)? I mean after all, it’s the actual law. Unless you found Form1023.org, or you are an internet sleuth, you may not have been able to locate the original Code; it’s on Government systems after all, so it’s not directly searchable. But now you have the Code, only 21 more pages of intense small font legal jargon to study — it’s good for you! A note on Form1023.org, this was an extremely helpful non-profit guide and resource. The organization provides low cost reviewing services as well (this is not a payed or placed ad, it really was a great resource). Try to find the actual U.S. code yourself, if you dare (hint: CFR-2019-title26-vol9-sec1–501c3–1).

Although it is not easy reading by any means, the original section 501(c)(3) guidance is helpful, because you find out early on that you will be tested on how you meet the organizational and operational requirements that are set forth on the friendly IRS website and in the Form 1023 (more about this test coming up). If your prospective organization fits neatly in to this framework though, and you don’t plan to grow past $50K a year in gross receipts for the next 3 years, you may actually qualify for a much less painful process that by now you may really want to consider. 

If you can answer no to just 30 questions, including whether you’re a foreign agent or terrorist, you can opt to apply using the 1023-EZ process (yes, that’s a real thing). It’s now all done online, there are fewer filing requirements (no Part IV Narrative), and it usually comes with expedited delivery of your 501(c)(3) charitable organization status. Write your impactful purpose, review the slightly less intimidating 27 page EZ form & instructions, and you’re practically there. Otherwise, strap yourself in for deep and ponderous consideration, intrigue, prolonged periods of suspense, and not knowing what will happen.

So you answered yes to one of the 30 questions, or you decided that you “just want to do it the right way,” now what? The actual Form 1023 is a 30 page document that details the full information requirements and provisions for applying for Recognition of Exemption. The IRS provides an “Interactive” presentation in case you are already lost, and a 37 page instruction manual. You will need it. The most worth while part to touch on in my view is in Part III and Part IV, specifically the Purpose Clause and the Narrative Description of Your Activities.

Form 1023, The Narrative and The Purpose

The narrative portion of the form has been hailed as the backbone, the heart, and the logic of the application that the IRS will use to judge if you pass or fail their test. The way I would describe Part IV is this: it’s the charter and the contract that you propose to follow, between your organization and the public, with the IRS serving as the decision authority and officiator.

To briefly summarize, the instructions for Part IV are to document the who, what, where, why and how of all the organization’s past, present, and future activities that you intend on undertaking; and it needs to be “complete and in detail.” The purpose clause, described in Part III of the instructions, shows up in the often mentioned “organizing document” i.e the Narrative.

This is what the IRS says about writing an effective purpose clause:

“If your purposes are limited by referring to section 501(c)(3), your organizing document also properly limits your purposes. For example, the phrase “relief of the elderly within the meaning of section 501(c)(3)” in your organizing document also properly limits your purposes.

However, if the purposes listed in your organizing document are broader than those listed in section 501(c)(3), you should amend your organizing document before applying for recognition of exemption. A reference to section 501(c)(3) will not ensure that your purposes are limited to those described in section 501(c)(3). All of the language in your organizing document must be considered. The following is an example of an acceptable purpose clause:

The organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.” – Instructions Form-i1023.pdf

The Take Away: A charitable purpose must be limited by appropriately referencing the provisions of Section 501(c)(3), and also be exclusive to an accepted charitable class. Limited and exclusive. Is the IRS basically saying “You can’t very well be helping anyone, if you’re helping everyone.”? That was my interpretation, at first anyway.

Oh yes, back to the Purpose Clause. Reading through the one example provided and paying attention to the format that the IRS provides as closely as possible is highly recommended, but it’s just not sufficient to write a good purpose statement. Which means more research. One of the tips in the Form 1023 states there are “more examples of how to limit your purposes” available in the lengthy and robust Publication 557, Tax-Exempt Status for Your Organization. Sure, there are more examples, but not exactly the kind you may think, or were probably hoping for.

What they’re actually referring to is a list of 8 examples the IRS says help illustrate “the organizational test,” which doesn’t tell you exactly how to define your organization’s purpose, but it does tell you a few ways you can pass or fail the test. I recommend reviewing the entire list, but here are a couple examples:

Example 1. Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). These articles appropriately limit the organization’s purposes. The organization meets the organizational test.

Example 2. An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. The organization won’t be properly limited as to its purposes since all research isn’t scientific. The organization doesn’t meet the organizational test. — Pub 557

Examples from Pub 557. 

Qualifying organizations include:
Nonprofit old-age homes,
Parent-teacher associations,
Charitable hospitals or other charitable organizations,
Alumni associations,
Schools,
Chapters of the Red Cross,
Boys’ or Girls’ Clubs, and
Churches. — Pub 557

More Examples from Pub 557.

So, where does software as a public good, something that can be virtually unlimited but can’t be seen or held, fit in to this schema?

Open Source software may very well be the most true to form “public good” that can exist, or will ever exist. It’s characteristically non-excludable due to being free and open to anyone who obtains a copy, and it’s non-rivalrous because its infinitely reproducible and can’t be used up. Software code doesn’t depreciate or diminish with use like other tangible public goods can, such as a library, a retirement home, or biodiversity to broaden the scope. Yet the only acceptable purpose and scope of a charity is intended to be limited and exclusive by definition.

It seems to me part of this process is to make the case for the purpose you’re defining and the activities that you want to undertake as a tax exempt organization, but to do so carefully within the parameters that are laid out. There was an inherent difficulty in providing well defined limits and exclusions to a specific charitable cause regarding open source software. How can an open source software focused organization actually satisfy the limits and exclusion requirements without betraying their mission to bring software to everyone? Ultimately we had to answer some tough questions.

The following document includes our Narrative 1023, and accompanying exhibits that were sent in our application. 

PLAN Systems is organized and shall be operated for charitable, scientific, and educational purposes, including: To research, develop, deploy technology solutions that overcome significant challenges in human communications, logistics, and self-organization; To train and educate organizations and communities about PLAN technology and its benefits. — FAIL

As it turns out our organization did not exactly nail the purpose statement in the first submission. After putting an over achiever’s amount of effort into the process, and submitting our completed Form 1023 package, 10 page Narrative, and 8 exhibit documents, it took approximately 10 months to hear back from the IRS. The first question back to us was, “a. What is your charitable purpose?” followed by 14 more questions of varying degrees of intensity.

The Full List of Questions From The IRS

a. What is your charitable purpose?

b. Since your software is accessible by everyone, how do you define your charitable class?

c. Do you keep records of how many copies of your software are distributed for charitable purposes and non-charitable purposes? Please explain.

d. What steps have you implemented to ensure that you serve an exclusively charitable class?

e. Please provide a fee schedule of any fees you charge for your services.

f. How do you determine that your fees for services are fair and reasonable?

g. Please provide a sample copy of your training materials.

h. How often do you conduct training classes.

i. How are your training classes conducted.

j. Your narrative states that this open source software will help solve or alleviate significant humanitarian challenges faced by low-income populations? Please explain.

k. Define what a “significant need” entails.

l. What percentage of time and resources do you plan to spend on all your activities.

m. Do the copyright holders of the code donate their copyrights? If not, why?

n. Describe in detail your current and planned research activity

o. How is your organization different from a for-profit entity?

The IRS provided a four week response period and the questions brought about much consideration and even philosophical discussion. We actually had a direct phone line to Sally, who was great at staying on message and not giving us any kind legal advice. We requested one extension, and were given another few weeks to reply. We talked to as many supporters, non-profits, and advisors as our relationship network allowed. Just a few introspective and uncertain weeks later, it was time to either ask for another extension, or to submit the answers that we had.

Our Revised Purpose Statement & Clause

a. The specific purposes for which this corporation is formed are exclusively charitable, within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, to provide freely accessible tools and resources for the purpose of advancing science, education, and the underprivileged. We do this by ensuring communities have access to tools which allow them to securely communicate and safeguard their vital information. — PASS

We use open source software to develop solutions for our charitable class in order to foster the public good through education and accelerated improvements to these tools within humanitarian, scientific, and academic communities. As societies move to embrace digitization, people urgently require tools to safeguard their communications, data, and digital identity that are not reliant on a business, a gatekeeper, or the internet to continue functioning. This is especially true in a disaster zone, for a person with disabilities, a school, or a community service oriented non-profit with few resources. We carry out our mission by providing technical support, systems education, custom development, and software/hardware integration free to qualifying communities. — Still PASSing

The Results

On October 10th 2019, we received notification from the IRS that we are a recognized 501(c)(3) charitable organization. This process took 10 months from the time we initially sent off the 1023 application to get our first reply, and around 14 months from start to finish. We went through one round of questions, and then shortly after received the approval letter.

If you would like to read about how we answered the rest of the questions, check out our Charitable Purpose FAQ.

If you would like to support our project, please send us a donation of any size! 

PLAN Systems is an Austin Texas based 501(c)(3) charitable organization. We are building our team and working towards creating a functional prototype that demonstrates our technology.

Special thanks to the following advisers for their insight and guidance through this process:

Wendy Hanamura, Director of Partnerships at the Internet Archive – http://www.archive.org

Keith Chreston Consulting

Allen Gunn, Executive Director of Aspiration – http://www.aspirationtech.org/“