Nonprofits Hit Trouble at the IRS

Last week, the Chronicle of Philanthropy reported on a troubling trend that has many of the most innovative new journalism nonprofits stuck in a bureaucratic black hole at the IRS.

The rise of local nonprofit news organizations has been heralded as one of the most promising signs in the news industry’s rapid transformation over the last four years. Veteran reporters, tech-savvy journalists and citizens are starting vibrant local journalism nonprofits to fill the gaps commercial media are leaving behind as they consolidate and slash newsroom jobs.

The early results have been promising. Nonprofit journalism sites like ProPublica have won Pulitzer Prizes, pioneered innovative community-engagement efforts and begun important collaborations that are putting public service back at the heart of local media. All of this is threatened by out-of-date tax laws that may not accommodate what is both a new kind of journalism, and a new kind of nonprofit.

The Chronicle reports that many nonprofit journalism organizations have been waiting for more than a year to hear whether the IRS has approved their 501c3 tax status. While they wait, the Chronicle says, "The organizations cannot accept foundation grants or tax-deductible donations. Instead they must line up other charities to accept donations for them — and some have to give a percentage of their revenue to those organizations."

Tax lawyers interviewed by the Chronicle suggest that the IRS is bundling all the nonprofit news organization applications together and studying them carefully because they have the potential to set precedent. The question is, how long can these small publishers wait?

Some fear this delay, and a possible negative decision from the IRS, could hinder a growing movement for more noncommercial news just when we need it most. In an interview with the Chronicle, Brant Houston, the chair of the new Investigative News Network, says he fears “the delays could slow down a journalism movement that is ‘supplying some of the best investigative work and public service work in the U.S.’”

He’s not alone. Free Press raised concerns about the rigidity of IRS journalism-related definitions in our 2009 paper “Toward a National Journalism Strategy,” and last year the issue came up extensively at both FTC and FCC hearings on the future of journalism. This spring the FCC highlighted the issue in its Information Needs of Communities report:

“In the past, when it became clear that a particular set of IRS rules did not fit an industry, lawmakers created a new 501c category that better reflected the realities of that group, e.g., railroad retirement funds (501c28) or cemetery companies (501c13). Some have suggested, therefore, the creation of a subsection of the tax code for nonprofit media. Other tax experts reject that idea, suggesting that the current tax code could work adequately if the IRS were to clarify some of its positions. Either way, it’s important that tax ambiguities or restrictions do not stand in the way of essential nonprofit media innovation.”

And the FCC made cleaning up these ambiguities one of its key recommendations for policymakers.

While the ranks of nonprofit media are swelling, nonprofit news outlets have existed for quite some time. These examples have taken many forms. One of the most celebrated models is the St. Petersburg Times, which is actually a for-profit newspaper owned and operated by the nonprofit Poynter Institute. Another prominent example is England’s Guardian newspaper, which is owned by the Scott Trust. Similar nonprofit models — or for-profit ventures owned by nonprofits — include the Christian Science Monitor; Manchester, N.H.’s Union Leader; New London, Conn.’s The Day; and the Delaware State News. Other longstanding examples of nonprofit news organizations include Harper’s, the Washington Monthly, Ms.  and Mother Jones.

In fact, Mother Jones was once called to defend its tax status at the IRS, and won the case. At the time, Mother Jones released a statement saying the IRS had “finally accepted what we’ve said all along. That the magazine is published not to make a profit, but to make a point.” But as Mother Jones publisher Steve Katz notes in his recounting of the battle, “This IRS decision was never published [and] the IRS instructed its staff and interested attorneys that the decision ‘may not be used or cited as precedent.’” This is a troubling fact given where we are now.

In the wake of the FCC’s call for action, the Chronicle reports, the Knight Foundation gave $200,000 to the Council on Foundations “to study whether tax laws and rules should be changed to stimulate nonprofit news media and make it easier for them to attract philanthropy.” This study will be a vital next step in the process of updating our media policies to better align with and support the future of journalism. However, in the meantime noncommercial journalists and media makers need to organize to ensure their voices are heard when the IRS decisions are made.

And that’s where we can help. Free Press is working with citizens, journalists and policymakers to ensure that the people who are most affected by these decisions have a real seat at the table. Visit SaveTheNews.org for updates.

People + Policy

= Positive Change for the Public Good

people + policy = Positive Change for the Public Good