The Internal Revenue Service or Congress should explicitly authorize any independent news organization substantially devoted to reporting on public affairs to be created as or converted into a nonprofit entity or a low-profit Limited Liability Corporation serving the public interest, regardless of its mix of financial support, including commercial sponsorship and advertising. The IRS or Congress also should explicitly authorize program-related investments by philanthropic foundations in these hybrid news organizations—and in designated public service news reporting by for-profit news organizations.
Many of the startup news reporting entities are already tax-exempt nonprofits recognized by the IRS under section 501(c)(3) of the tax code. Some magazines with news content, including Harper’s, Mother Jones, and The Washington Monthly, as well as public radio and television stations, also have been nonprofits for years. All are able to receive tax-deductible donations, along with foundation grants, advertising revenue, and other income, including revenue from for-profit subsidiaries. Their nonprofit status helps assure contributors and advertisers that they are primarily supporting news reporting rather than the maximization of profits. Tax deductibility is an added incentive for donors, and the nonprofit’s tax exemption allows any excess income to be re-invested in resources for reporting.
However, neither the IRS nor Congress has made clear what kinds of news organizations qualify as nonprofits under section 501(c)(3), which specifies such charitable activities as the advancement of education, religion, science, civil rights, and amateur sports. News reporting is not one of the “exempt purposes” listed by the IRS, which has granted 501(c)(3) nonprofit recognition to startup news organizations individually by letter rather than categorically. News organizations cannot be certain whether they would qualify—or whether they would be able to keep their 501(c)(3) status, depending, for example, on how much advertising or other commercial income they earn or the extent to which they express political opinions.
The IRS has not made clear whether a certain amount of a nonprofit news organization’s advertising revenue might be considered “unrelated business income” subject to tax or even might be regarded as an impediment to continued nonprofit status. And, while its regulations stipulate that a 501(c)(3) nonprofit “may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates,” it is not clear whether that restricts political editorial opinion apart from the endorsement of candidates.
Congress should add news organizations substantially devoted to public affairs reporting to the list of specifically eligible nonprofits under section 501(c)(3), regardless of the amount of their advertising income. Or the IRS itself should rule that such news organizations are categorically eligible under the criteria already established by Congress. The IRS also should explicitly allow news nonprofits to express editorial opinions about legislation and politics without endorsing candidates or lobbying. The Obama administration, in which the president and some officials have expressed their openness to ways to help preserve public interest news reporting, should weigh in on these policy decisions.
A possible alternative for news organizations is a Low-profit Limited Liability Corporation, known as an L3C, a hybrid legal entity with both for-profit and nonprofit investments to carry out socially useful purposes. Both private investors and foundations could invest in an L3C, with private investors able to realize a limited profit. A small but growing number of states, beginning with Vermont in 2008, have passed laws enabling the creation of L3Cs to make it more economically feasible to set up businesses for charitable or education purposes that might have difficulty attracting sufficient capital as either commercial firms or nonprofits. Illinois, Michigan, Wyoming, and North Dakota also have recently enacted L3C laws.
Each of the state laws was written to enable foundations to make “program-related investments” in the new hybrid organizations. The IRS created the concept of program-related investments in the 1960s to enable foundations to make socially useful grants to for-profit ventures. But foundations have been hesitant to make such grants because they are not certain which ones the IRS would allow. Congress or the IRS should provide a process by which a qualifying journalistic organization seeking a program-related investment from a foundation could be assured that it would qualify.