Will the IRS Derail Nonprofit Journalism?

At a crucial moment, the taxman drags his feet on granting tax-exempt status

In an era of newspaper closings and reporter layoffs, there has been one significant bright spot: an explosion of local, nonpartisan, nonprofit journalism enterprises focused on the kinds of accountability reporting that protects taxpayers and enriches democracy.

So it is beyond baffling that, according to CJR and other press reports, the Internal Revenue Service appears be slowing down or blocking approvals of tax-exempt status for nonprofit news startups.

Some background. As newspapers contracted, former journalists and concerned citizens worried that the watchdog functions of journalism might be neglected. It was a valid fear. The number of newspaper reporters is now at the level it was before Watergate. The number of journalists covering state legislatures has declined by a third (while state spending has risen 20 percent). For all the benefits of the digital economy, commercial media organizations—off-line and on—have found it difficult to fund the expensive, labor-intensive journalism that covers city hall, schools, and other important public institutions and issues.

But in many communities, social entrepreneurs have tried to fill the gaps. Some created national reporting organizations such as ProPublica, which already has won two Pulitzer Prizes. Some focused on local reporting, such as the Texas Tribune or Minnpost, California Watch or New Jersey Spotlight. In a recent report by the Federal Communications Commission, John Hood, head of the market-oriented John Locke Foundation in North Carolina, said he was skeptical that commercial markets alone will fill the gaps in local accountability reporting: “When you get to the state and local level, the collapse of the traditional business models imperils the delivery of sufficient public interest journalism—and we do believe that donor driven journalism can be a very important model.”

These nonprofit news organizations have tried different approaches but shared one characteristic: none asked for government bailouts or grants.

Instead, they set themselves up as private, independent, nonpartisan, nonprofit entities. This seemed a relatively uncontroversial path, since media operations have been setting up as nonprofit entities for years. Among the more well-known nonprofit media companies are National Geographic, The Associated Press, and Consumer Reports. And they have spanned the ideological spectrum from The American Spectator to Mother Jones. Even conservative provocateur James O’Keefe’s operation was approved as a nonprofit. If anything, most of the new nonprofit news organizations that have been delayed are less ideological than the ones already established.

So, the nonprofit media world has gone from puzzled to frightened by the IRS’s behavior of late. According to the Chronicle of Philanthropy, the San Francisco Public Press has been waiting since January of 2010 for approval of its tax-exempt status. The Lens in New Orleans has waited more than a year, and the Investigative News Network, a consortium of journalism outlets, has been waiting since July 2010. This prompted Kevin Davis, the INN’s executive director, to say at a recent FCC hearing that the IRS delays are “suppressing new start-up journalism nonprofits,” noting that some outlets have lost grants as a result of not having tax-exempt status.

Brant Houston, chair of the INN board, told CJR’s Ryan Chittum, “Some of these new nonprofit newsrooms could go under waiting for this, because it’s difficult to get donations if you don’t have the status.” Indeed, CJR recounts how the El Paso Community bought a dying for-profit newspaper to turn it a nonprofit watchdog, but their lawyers have told them not to publish any articles because it doesn’t yet have its tax-exempt status.

The IRS has said that it has begun bundling applications, and taking more time, because the new entities may set new precedents. The generous interpretation is that the IRS is aware of how crucially important the rise of nonprofit journalism has been and wants to create a clear, reasonable set of rules that will enable them to thrive. But these new applications appear to be just like the ones routinely approved in earlier years, so it is hard to be generous.

The delays are not the only troubling signs, though. Some outlets within the Investigative News Network have been told that until they get tax-exempt approval they should not accept advertising. The IRS has in the past said that advertising could be taxed (as unrelated business income) but could certainly be accepted. If the IRS reverses course and says that advertising isn’t allowed at all, or severely restricts its use, that will be a serious blow to those trying to develop sustainable business models. For instance, MinnPost, one of the most respected of the new outfits, gets a quarter of its revenue from advertising and sponsorships. Voice of San Diego, another standout, earns income by providing news to the local NBC TV news affiliate, a model encouraged by the FCC.

If the IRS takes a radical position against the acceptance of advertising or other business revenue, it would indicate that it is tightening up on the question of whether nonprofits can have business practices that resemble for-profits. The IRS has given mixed signals on this in the past, sometimes insisting that nonprofit operations be “distinguishable from ordinary commercial publishing practices.”

This makes no sense. A nonprofit news organization will, and must, create a website to distribute its content, just like a commercial news organization does. It will, and must, create smart phone apps, use e-mail, and tweet—just like the commercial outlets do. Some will even try to get advertisers or charge for things. For most newspapers (online or off) advertising is not ancillary income; it’s the heart of the business model. A recent study by the Knight Foundation reported that the nonprofit media most likely to survive are those with diverse revenue streams, not those that rely only on donations from foundations or wealthy individuals. If the IRS goes that route, it would be saying, in effect, that nonprofit media can exist as long as they don’t develop robust, diverse, sustainable revenue and distribution models. Which is effectively saying they can’t exist.

The biggest differences between commercial and nonprofit organizations are, and ought to be, their financial structures and missions. When people set up an organization as a nonprofit, they cut themselves off from a much larger pool of private capital and the possibility of a windfall through selling a successful entity. Their mission is not to generate profit, it is to educate, inform, and engage communities with factual, relevant news and information. They agree that should profits materialize, those profits will be re-invested in the altruistic mission of the entity instead of going to investors. And in the case of nonprofit media, they are pursuing the types of stories abandoned by many for-profits, stories that communities need. Those are the defining characteristics of a nonprofit, not whether its website has a “Buy It” button or a banner ad.

Other experts have suggested that the IRS may be struggling with whether news organizations fit the definition of “educational” institutions (and therefore fit comfortably within the definitions of an allowable 501c category). The IRS has already approved hundreds if not thousands of media organizations as meeting the tax-exempt definitions of providing educational material. With good reason. Providing civically important information is educational. If the IRS now adopts a narrower view, it will not only hurt the new wave of civically oriented groups but also call into question the status of all those existing nonprofit media.

It would also raise First Amendment questions. The INN’s Davis told CJR: “The IRS has preemptively suggested that we modify our procedures, change our policies, and modify our articles of incorporation to remove the word ‘journalism’ because that is not a charitable cause.”

I don’t mean to minimize the complexity of some of the issues with which the IRS must grapple. Its job is to interpret the current law, not make up policy that might have a particular desirable outcome. Perhaps we’ll find out that the IRS is hard at work on a coherent rethinking of their approach with an eye toward adapting to the modern digital marketplace. Or perhaps Congress will need to create a new 501c category for journalism as it has for railroad retirees, black-lung disease benefit trusts, cemetery companies, and other groups (pdf).

If that’s the case, I hope they’ll consider a few basic points:

First, a solution needs to be found that would enable nonprofit groups to develop sustainable business models.

Second, time is of the essence. Local media systems are in crisis, social entrepreneurs are frantically working to fill the gaps, and the last thing they need is unnecessary delays in setting up shop.

And finally, the future of American journalism will likely depend not only on innovations in the commercial media sector but on the ability of nonprofit media to flourish, too. What the IRS decides to do, in terms of facilitating or hampering these new outlets, will be of historic importance.

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Steven Waldman is founder of LifePosts.com, co-founder of Beliefnet, and a former newsmagazine journalist. Tags: , , , , ,