Delays by IRS put chills on news startups

Uncertainty about tax status puts local groups in limbo

By Debra E. Blum

Nonprofit news outfits that have sprung up across the country to fill gaps left by commercial media have hit an unexpected barrier in establishing themselves as providers of local news and information: the Internal Revenue Service.

As many as a dozen journalism startups, most of them run largely by volunteers and accepting no advertising, have had their requests to be recognized as tax-exempt organizations delayed for many months and, in some cases, years.

The Chicago News Cooperative, founded in 2009 by veteran journalists from the Chicago Tribune, was a high-profile casualty of the IRS backlog. It shut down in February, citing the IRS’s extended review of its application for tax-exempt status (earlier story).

For the groups that still await approval, the limbo has hampered their ability to execute business plans, raise money and grow at the hoped-for pace to meet the information, communication and education needs they see in their communities. The IRS has not fully explained the holdups, and observers say the delay has a chilling effect on the fledgling field of nonprofit news. Those considering starting new organizations are holding back, and officials at existing media outlets are worried about their viability.

“The lack of clarity and expedience at the IRS couldn’t come at a worse time,” says Kevin Davis, c.e.o. of Investigative News Network, a membership organization of nonprofit journalism groups. “The nonprofit news media movement is just getting off the ground — and at a time when an independent and vital press needs to be supported — and this puts a damper on it.”

Among the startups waiting for word about their tax status:

  • Arlington Mercury, an online journalism outfit covering news in Northern Virginia, filed its Form 1023, the federal agency’s application for tax exemption, last August.
  • The Lens, a nonprofit group in New Orleans that provides in-depth reporting on city government, applied in October, 2010.
  • San Francisco Public Press, providing public-interest news in the San Francisco Bay Area, submitted its Form 1023 more than two years ago.

For Michael Stoll, executive director of San Francisco Public Press, the wait has been both frustrating and surprising. The group scrupulously followed federal requirements for exemption, he says.

“We don’t make endorsements; nobody is on a salary. We’re a small organization with a small budget doing public-interest journalism, reporting that serves and educates the community,” Stoll said. “We have no reason to believe [the IRS] will deny us.”

Still his organization and others like it wait.

The IRS does not comment on specific cases, but it told Current in a written statement that it has “centralized for consistent determinations” an unspecified number of applications for exemption from nonprofit news organizations. The IRS said it will aggregate applications for further review when they come from similar groups and “present new or novel issues that may also lack precedent.”

Observers call this IRS practice “bundling,” and say its repercussions include indefinitely extending the determination process that typically takes a couple of months.

A wide range of media organizations — including Mother Jones, National Review, and NPR — received tax-exempt status years ago. By operating as 501(c)(3) organizations, they’re able to accept tax-deductible donations and philanthropic gifts, and plow excess revenues into advancing their missions.

More recently, pioneering news organizations like ProPublica, MinnPost and Voice of San Diego have come online, earning their tax-exempt stripes just like the old-school organizations.

But a growing number of journalism startups have hit roadblocks at the IRS.

Marc Owens, a Washington, D.C., tax lawyer and former head of the IRS division that monitors tax-exempt groups, speculates that the IRS pulled back on granting status to news organizations so that regulators could review and update decades-old criteria. The tax code allows no specific exemption for journalism groups — most receive their status under the educational purposes category — and it does not address factors related to the Internet.

Those are critical hurdles, Owens says, because the agency’s precedent-setting rulings in the 1960s and 1970s, and an influential court case in the 1980s, offer no guidance on how to handle online newspapers. In the past, for example, nonprofit publishers might easily distinguish themselves from commercial ones by demonstrating that they distribute their content for free. Now, Owens says, even the biggest, richest for-profit news outlets make much of their content available online at no charge.

“The IRS is going to have to come to grips with new ways to draw lines between commercial and tax-exempt organizations,” Owens says. “It’s difficult in the digital age to make the same distinctions as before with regard to revenue models, ads, marketing, underwriting.”

While the IRS grinds away at the issue, others are at work, too.

Maryland Sen. Ben Cardin (D), whose 2009 bill aimed at amending the tax code to allow for more nonprofit journalism failed to garner support, has a “continuing interest in this issue and efforts to maintain an independent media,” according to a spokesperson. Cardin’s office contacted the IRS about the delays earlier this month, she wrote in an email.

The Knight Foundation has backed a panel of grantmakers and journalism and legal experts to examine how IRS rules impact media groups. Its members expect to  issue recommendations in the fall.

And the media-reform group Free Press is circulating an online petition urging the IRS to grant tax-exempt status to the news organizations whose applications are pending. Free Press says more than 15,000 individuals have signed it so far.

“[T]he perception that nonprofit media can’t get its tax exemption is having a detrimental effect on the sector,” says Josh Stearns, journalism and public media campaign director at Free Press, who worries that media organizations are inhibited from moving forward on their nonprofit business plans. “[T]here are so many mixed signals out there that growth of the whole sector — of independent, nonpartisan, local, investigative journalism and media enterprises — may be slowed,” he says.

IRS looks for educational intent in editorial work, business models

As more and more tax-exempt applications from nonprofit news groups piled up at the IRS, Jeffrey Hermes, director of Harvard University’s Digital Media Law Project, decided to take a closer look at the approval process.

He reported on the complex and multifaceted standards that the agency has applied over many years in “Guide to the Internal Revenue Service Decision-Making Process Under 501(c)(3) for Journalism and Publishing Non-Profit Organizations,” published last month by the Berkman Center for Internet & Society. Free downloads are offered.

The guide takes no position on whether the IRS rules, and its decisions applying them, are appropriate, Hermes says. While he insists it’s not a how-to for groups seeking tax exemptions, he says the report does include some key takeaways for news startups looking to hew closely to the standards the IRS applies — at least for now. Among them:

• It’s not enough for nonprofit news organizations to say they are educational in nature; they must design their work and business models to fit the legal contours of that IRS designation.

• Organizations must establish a clear bright line between themselves and for-profit entities with which they might collaborate. For example, if a nonprofit provides news content to a commercial publisher for distribution, it must also establish a firewall between that business relationship and the nonprofit’s own editorial choices and operational decisions.

• Nonprofit news groups should fund startups through nonprofit revenue sources, like foundation grants and donations, though they won’t necessarily have to forever eschew the types of income pursued by commercial outlets, such as advertisements and subscriptions.

“The IRS might be skeptical if you went in saying, ‘We can only do this using the for-profit model,’” Hermes says. “That doesn’t mean you can’t make a reasoned decision down the line that changes are needed, and you flip over to some commercial revenue.”

But Hermes is quick to admit that his advice is just an educated guess.

“What we are really all waiting for is greater clarity from the IRS,” Hermes says. “We can’t keep relying on precedents that haven’t changed for 30 years. The digital news world is completely new, and needs rules and precedents that have evolved.”  — Debra E. Blum

Earlier story: Policy delay of nonprofit status spikes Chicago News Cooperative

Tweaking your operation can nail tax exemption

Some of the journalism groups that encountered delays getting their applications for tax exemption approved by the Internal Revenue Service have been able to make changes to their operations based on concerns and questions that regulators raised during the review process.

The IRS’s queries to the Lens of New Orleans, the Maine Center for Public Interest Reporting and the Investigative News Network shed some light on the issues the agency is grappling with as it works through the recent spate of charity applications from nonprofit news startups around the country. The agency approved nonprofit status for two of these groups, but the Lens is still waiting for the IRS’s determination.

The Lens filed its application for tax exemption in October 2010, and the IRS replied last summer with dozens of questions about its relationship with a local for-profit television station, WVUE-TV Fox 8. The Lens’s editorial team was using space in the station’s newsroom free of charge, and a WVUE staff member served on the Lens’s governing board.

To allay the tax agency’s concerns, the Lens removed the staff member as a trustee, began  paying rent and sped up its plans to collaborate with additional media groups, including the Louisiana Weekly, a newspaper serving the region’s  African American and minority communities.

The Maine Center for Public Interest Reporting, a nonprofit that publishes an online investigative newspaper, received its tax exemption in February, but only after responding to concerns expressed by the IRS in two letters. The Maine group, which applied for nonprofit status last April, won approval after adopting a conflict-of-interest policy with wording suggested by the agency. It also submitted copies of a solicitation letter to demonstrate that its fundraising appeals highlighted the group’s investigative reporting and its work training young journalists.

“They wanted to see that we were stressing the educational aspect of what we do,” says John Christie, publisher at the Maine Center.

INN, a membership group of nonprofit news organizations, waited 18 months before receiving its tax-exempt status. The approval, made in March, came after INN responded to questions and concerns laid out in four letters from the IRS.

In one correspondence, the IRS advised INN to strike from its articles of incorporation the word “journalism,” because journalism is not specifically considered a charitable function in the tax code. INN amended the language.

“The suggestion that public-interest journalism is not educational, or in itself a charitable purpose, is troublesome, but the IRS is working off a tax code written decades ago and outdated precedents,” says the network’s CEO, Kevin Davis. “That must change.” — Debra E. Blum

RELATED LINKS

American University’s J-Lab published a Knight-sponsored online how-to guide on launching a nonprofit news site.

Steven Waldman’s FCC report, “The Information Needs of Communities” (PDF), discusses nonprofit tax rules starting on page 328.

Harvard’s Berkman Center for Internet & Society published the Digital Media Law Project report, “Guide to the Internal Revenue Service Decision-Making Process Under 501(c)(3) for Journalism and Publishing Non-Profit Organizations.”

Copyright 2012 American University

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