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Why is ICANN Tax Exempt?

John Levine

ICANN, as we all know, is a California non-profit that is tax exempt in the US as a charity, under section 501(c)(3) of the US tax code. But it's a rather unusual charity. Typical charities support the arts, or education, or sports, or relief for the poor. ICANN doesn't do anything like that. So what's the basis for its tax exemption? We don't have to guess, it's all in the application they filed in 1999.

The tax code just says "charitable purposes", but the IRS has a detailed explanation of what charitable means, including "lessening the burdens of government". If we look at ICANN's application for examption (knon as Form 1023) it says:

ICANN's sole activity, to which it devotes 100% of its time and resources, is the administration and management of various technical and policy functions necessary to ensure the continued stability, interoperability and effective performance of the domain name system of the Internet, through the development of consensus concerning those issues. Because the domain name system is the collection of names and addresses that enables the Internet to properly route information, the purpose of this activity is to maintain and enhance the performance and availability of the Internet for the general public. The performance of these technical and policy functions furthers ICANN's tax-exempt purpose of lessening the burdens of government because, if it were not for ICANN's willingness to assume responsibility, the U.S. government would be obligated to continue to perform these functions so that the Internet would continue to be a viable and useful resource for individual and business users around the world. The performance of this activity will be conducted in accordance with the Memorandum of Understanding currently in place between the U.S. Department of Commerce and ICANN, which is reproduced at Appendix 14. The activity will be conducted by ICANN, by employees of ICANN, and by independent contractors hired by ICANN. (bold face added)

That was all certainly true in 2000 when the exemption was granted, but will it be true after the IANA transition? The whole point of the transition is that the US government is getting out of domain name management. Indeed, one of NTIA's explicit requirements for the transition is that the new oversight is not by a group of governments.

So if the reason for ICANN's tax exemption goes away, what are ICANN's options?

One possibility would be to change to a trade association, known as a 501(c)(6) "business league" in tax law. It seems to me that ICANN would certainly qualify, it already looks a lot like a domain name trade association, so now it would just make the theory agree with the reality. The organizational rules for a business league are pretty much the same as for a charity, with the only significant difference being that if a business league takes contributions, they're not tax deductible. (Payments such as registry and registrar domain fees are deductible as business expenses, no difference there.) icann shows about $2M in contributions in its form 990, but those appear to be mostly or entirely from ccTLDs which, being outside the US, aren't affected by US tax law.

Another would be to forget the whole tax exempt thing and just be an ordinary corporation. ICANN's surpluses would become taxable profits, but since they've always claimed to be setting budgets to cover expenses, any profits would either be negligible, or perhaps just a lucky mistake so who cares if some of them are taxed away. More interestingly, a corporation has shareholders, perhaps the SO and AC members could be issued stock. (I realize this could present issues for the GAC and ALAC.) Or they could be a B Corporation, one whose bylaws recognize public benefit goals, which California corporation law specifically allows.

Regardless of what kind of corporation ICANN became, it would make the issues of who's got influence over what a lot clearer, since now it would be about who's got the stockholder votes to install board members who favor their positions, not the current squishy policy stuff.

By John Levine, Author, Consultant & Speaker
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Logic flaw, to some extent... John Curran  –  Sep 07, 2015 2:23 PM PDT

John - An interesting proposition, but one has to remember that the "US government is getting out of domain name management" precisely because (and enabled by) ICANN's success.  This has been a key goal of ICANN since formation, and we're now potentially at the point of realization. 

Your argument would be quite applicable if the function itself had someone disappeared over last decade or so, but the functions are still quite important and have been seen by the USG as a burden prior to ICANN's formation.  ICANN's exception application quotes relevant IRS GCM (General Counsel Memorandum) in this area -

"[w]hen a particular activity has been engaged in by a governmental unit on a regular basis for a significant length of time before it is taken over by an organization, it may be apparent that the activity is a burden of government."

i.e.  the fact that the functions are being done by ICANN with or without a direct USG relationship is likely not germane, so long as the IRS considers the history of the functions indicative of potential governmental burden.

in the near term John Levine  –  Sep 07, 2015 4:26 PM PDT

I agree that ICANN's tax exemption isn't going away, if for no other reason than that the Commerce Dept and Treasury Dept don't talk to each other.

In the longer term, the IANA functions are clearly what the USG would be doing otherwise, the other 98% of ICANN not so much.

Excellent point re IANA functions vs ICANN-the-DNS-trade-association John Curran  –  Sep 07, 2015 6:43 PM PDT

John - Excellent point, as I was indeed referring to the IANA functions aspect of ICANN, and not per se the ICANN roles of DNS trade association doing policy development, nor ICANN the shared services organization for that community. 

If ICANN were on its original blueprint, with an organizationally distinct DNSO which represented the DNS community, then that entity would make a fine trade association, and there'd be remarkable clarity between it and ICANN's coordination role. (One might have hoped that the IANA stewardship transition planning and related ICANN accountability work would have produced similar clarity of roles, but it was not to be...)

I'd go with "maintaining public works" John Berryhill  –  Sep 10, 2015 1:06 PM PDT

"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."

Maintaining the root zone file for use by the public seems a good fit.

I'm often accused of being juvenile, but ICANN has provided me with many opportunities to avoid being delinquent.  So there's a second choice there.

the other 98% John Levine  –  Sep 10, 2015 2:15 PM PDT

Like I said to John Curran, that certainly describes the IANA function. But what about the other 98% of what ICANN does?

A similar question could be posed about a lot of 501(c)(3)'s John Berryhill  –  Sep 11, 2015 1:45 AM PDT

I'm not sure how you arrive at a figure of 98% as being unrelated to that function.  Formulating policy in relation to the namespace, administering registry and registrar contracts, etc., all relate in some way to that function. 

I understand very few deities see much of the cash collected by religious organizations.

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