[Board] Questions from IRS vs our 501(c)(3) status

[Daniel Morissette]

Hi Board,

I spoke to our attorney last week and got some answers to Frank's 
questions below which I also had:


On 12-10-30 1:23 PM, Frank Warmerdam wrote:
>
> It would be helpful to have some sense of:
>   - the cost/complexity of setting up a "for profit" subsiduary.

The cost of setting up a corporation is low. It is the accounting and 
whatever professional support we use in managing it that is the main 
cost (expect 5k$ to 10k$ per year?). My advice for the future will be to 
use a book keeper and accountant to manage OSGeo stuff instead of trying 
to do things ourselves as we have in the past.

I know we've discussed and agreed to this before, but the problem is 
that being canadian I do not know any book keeper and CPA that knows the 
US law (I can point you at several canadian ones though), and the quote 
we got earlier this year from an organization specialising in this kind 
of admin services was way too high. More research will be required on 
that front.


>   - the practicality and implications of us opting instead of 501(c)6
> status.

Sounds like c6 is not an option for us either. And anyway it seems that 
our type of org would not be a good fit for a c6 which is for "Business 
Leagues, Chambers of Commerce, Real Estate Boards, etc." i.e. a group of 
corporations working on a common goal which is NOT providing a direct 
business advantage to any of the members. Our members are not businesses 
so that solves the question.

The issue is not one of c3 vs c6, it's about being a non profit of any 
category. Non profits (c3 or c6) are simply not allowed to engage in 
activities that would compete with taxable corporations. Those taxable 
corporations (e.g. proprietary software vendors) are complaining to the 
government that open source foundations with a c3 status compete with 
them with an unfair advantage... that's the root of the problem.

It seems that our only option if we want to maintain the project 
sponsorship program is to move it to a taxable subsidiary (for profit 
corporation) which would be 100% owned by the 501c3 foundation. It could 
even return all of its profits (if it makes any) as a donation to the c3 
foundation.

With respect to the FOSS4G, my interpretation is that we could possibly 
keep FOSS4G inside the c3 foundation if we treat the booth and 
advertizing revenues (a small subset of the FOSS4G sponsorship amounts) 
as "unrelated business income" (UBI). There is a cap of max 15% of your 
total revenues/donations as a c3 that can come from UBI. I also believe 
that you need to pay taxes on UBI.

e.g. on a 5k$ sponsorship which includes a booth and a 1/4 page ad, we 
would treat e.g. 500$ for the booth and 500$ for the ad as UBI, and the 
remaining 4000$ as a donation. It would actually be even better to avoid 
the ads and just include "thank you" notes in our program and 
banners/slides. That would leave only the booth revenues to deal with as 
UBI.


>   - the tax implications for us of failing to achieve any sort of
> 501(c)x status. (ie. will we have a big back tax bill)
>

I got some hints but no clear answer on this.



So the question we need to ask ourselves now is:

"Do we want to maintain the project sponsorship program and setup a 
taxable subsidiary for it, or do we drop the project sponsorship program 
completely?"


I think the taxable subsidiary is manageable, but to justify it, we'd 
need to put more efforts in the project sponsorship program since at 
this time it is mostly dormant. (OpenLayers and GRASS are interested but 
I've kept them on hold, and GDAL is... well, quiet)


-- 
Daniel Morissette
http://www.mapgears.com/
Provider of Professional MapServer Support since 2000