What happened to 501c3?

Published on 10/1/2010

In other related posts, Dan Hoffer and I discuss the challenges we faced in getting 501c3 status, and our new goal of becoming a B Corp. Pursuing a different, and ultimately better, legal structure is a big change so it was really important to us that we properly explain how it came about.

For those of you who aren’t familiar with all the of the US tax categories, 501c3 is a legal category in the United States for non-profits and charities. In the beginning I incorporated CS as a non-profit because CouchSurfing is about creating social change and at the time, this was the best legal structure to match those goals. I didn’t want our focus to be on money. I wanted to focus on how we could make a better world and how to create magnetic, inspiring experiences for people to learn about each other and the world. Rest assured, non-profit or not, this remains our goal.

Nevertheless, we didn’t come to this decision easily. It took many years of hard work and research before we concluded that the IRS, the U.S. government agency making the decision about our fate, was never going to grant us 501c3 status, even though we went to great lengths to try to convince them they should.

We did do our best, hiring the best attorneys we could find, and amassing stacks of evidence that showed how we were operating with a charitable purpose. In the end, though, it seemed to be more of a question of this current moment in time as it was of anything else. Part of the problem is simply that fewer and fewer organizations are being awarded 501c3 status. This year alone 275,000 501c3’s lost their status; that’s almost 20% of the total number, and it signals a big shift in the US government’s attitude toward 501c3’s in general. But, this quote from the denial letter we received from the IRS shows how differently they see us from how we see ourselves:

“As your members are not required to host or to travel, any cultural exchanges that occur are independent of your control and supervision.”

Of course we’re not looking to control and supervise our members’ experiences. We think CS experiences are important precisely because they’re voluntary and self-organized.

In a phone call with the IRS we asked them why they wouldn’t grant us the status. We felt our attorney had done an excellent job of articulating ten different ways in which we were charitable. Unfortunately, the IRS just didn’t agree. They tend to view “charity” in a much more traditional sense, such as soup kitchens, shelters and hospitals. It may take a few years but I hope that at some point down the road, the IRS will widen their views to consider organizations like ours as charitable. I’ll admit though, at the time I was a little frustrated so on the call I asked them “Please level with us. What is it really that you don’t like about CouchSurfing?”

They were very candid with me which was helpful.They explained that while they can see that cultural exchange happens, to them it seemed that most people used CouchSurfing to save money. They were also in a tricky situation because they considered us a social network like Facebook, and they didn’t want to open the door for other social networks to claim the status too. I know that we’re very different to other social networks, but I can see why someone less familiar with CS would be wary. At least now we understood where the examiners at the IRS were coming from.

Another reason it may have been difficult for the IRS to agree to CS becoming a 501c3 was this report [link to PDF report] by Stanford University’s Center on Philanthropy and Civil Society (PACS) released in 2010. At this point our case was still being reviewed despite us having first applied a couple of years earlier. The report looked at how easy or difficult it was to achieve 501c3 status by the IRS and found that approval ratings were at nearly 98% and that some of the organizations being approved sounded pretty strange. There is an appendix to the report called the TOP 60 Most Eccentric Organizations Approved as 501(c)(3)s in 2008, which is a fun read. My personal favorite is The Woohoo Sistahs but Planet Jelly Donut comes in a close second. Even though publicly they stood by all of their decisions the report was a little embarrassing for the IRS and since then it seems like they have not looked favorably on any organizations with strange names. And yes, to them CouchSurfing is a strange name.

It took a lot of reflection and internal debate but we eventually had to concede that we were not going to sway the IRS in their decision, and that really, we just didn’t fit the 501c3 model, plain and simple. We’re too dynamic and innovative, and the IRS doesn’t know what to do with us. They’ve never seen a model like ours before — some have said to us that we should take this as a compliment. We also realized that being under government control, the way we would have been as a 501c3, would actually make it more difficult for us to achieve our vision. Any time we saw an opportunity for improvement in the hosting and surfing model, we would have to ask for approval from the IRS to make the upgrade. We would have to prove that it fit within the narrow framework of 501c3. Even if we were able to make that case, it would be time-consuming and would take a lot of resources, which would slow things down and make it harder for us to accomplish things at the rate we’d like.

This is a big change but it’s going to mean really great things for the future of our community, so I would like to leave you with this final thought.

CouchSurfing’s Guiding Principle # 6 is:

We reflect on our challenges as opportunities.

I believe that this point in our history is exactly that: an opportunity. After struggling with different frameworks and learning a lot about ourselves in the process, we’re now in a position to achieve our goals. We have an opportunity to take on an organizational structure that works with us, not against us, in pursuit of our vision.