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.”