The IRS and the Chicago News Cooperative (UPDATED)

I wrote back in November that the tax man was making it harder for the nonprofit-news movement to flourish or even survive.

Now the IRS figures prominently in the downfall of a major nonprofit news organization, the Chicago News Cooperative.

The CNC will “suspend publication” this weekend after the MacArthur Foundation withdrew its funding limited the grants it was eligible for, citing concerns about its status with the IRS.

Acquiring 501(c)(3) nonprofit status for a news organization used to be a relatively routine matter. But after a flurry of nonprofit startups submitted applications in 2008 and 2009, the IRS began scrutinizing the sector more closely. It has since bundled nonprofit-news applications together (with James O’Keefe III being a notable exception), sent the matter to headquarters, and sat on them. Some applicants have been on hold now for two years, which means they have to funnel donations through so-called fiscal sponsors—nonprofits that act as a tax-exempt bridge while applications are pending. It’s unclear when, or even whether, the IRS will rule on the nonprofit news sector.

The CNC was one of the organizations caught up in the delays. And its editor and CEO James O’Shea said that triggered concerns at the MacArthur Foundation.

Chicago Reader’s Michael Miner interviewed him:

“McArthur’s legal counsel said, ‘You have a relationship with (fiscal sponsor) WTTW but they don’t exert any legal control and I don’t think that will pass muster with the IRS. So we won’t support you.’ Our counsel totally disagreed with him. What this means is that they’d continue to support us with program-related investments, but the reporting requirements are onerous, the totals are usually far smaller, and the penalties are severe — foundation executives can be personally fined.”

The New York Times, which ran CNC’s reports twice a week in Chicago, also ended its relationship with the organization after “a change in circumstances that triggered questions about the economic wisdom of commitments between the CNC and the New York Times,” O’Shea writes.

In the Chicago Current Geoff Dougherty questions whether the IRS delays are really what caused MacArthur to change its funding plans for CNC.

As excuses go, MacArthur’s is the nonprofit version of “I have to wash my hair.”

After spending years dealing with foundation executives, tax lawyers and the IRS, I can tell you this: If the president of the MacArthur Foundation wants to give you half a million dollars, he’s got enough lawyers to find a way to do it legally, whether it’s as a grant, a loan, a program-related investment or a happy birthday present.

Even if that’s so (and O’Shea says it’s not), the IRS’s delays still provided the excuse. And when a major foundation uses it, it’s likely to raise questions—valid or not—with other major funders of nonprofit news organizations, which are already being hit by the delays.

The CNC’s problems and the stated reasons for them have just added that much more uncertainty to nonprofit news. Whether or not the 501(c)(3) holdup now has a body count, it’s past time for the IRS to give the sector, one of the few bright spots in hard news, some clarity.

UPDATE: MacArthur has more on the CNC decision and says, “In no case do we monitor or get involved in any editorial decisions at these organizations.”

UPDATE: And I’ve corrected the third paragraph.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,