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.