Delays by IRS put chills on news startups
Uncertainty about tax status
puts local groups in limbo
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. (Story below.)
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.
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 grant-makers 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.
Rumors started quickly, trying to explain why the Chicago News Cooperative was closing. The Internal Revenue Service had rejected the co-op’s application for nonprofit status. Then it was said that the MacArthur Foundation had refused to fund the startup out of fear it might take down City Hall friends.
The truth was more prosaic. Several events — its tax status, its inability to lasso a deep-pocket donor and the demands of its publishing partner the New York Times — moved the news co-op to suspend operations in late February.
The nonprofit news experiment began in November 2009 with a plan to produce high-quality public-service reporting about Chicago using seasoned journalists recently laid off by the Chicago Tribune. Its business model combined grant funding, individual donations, web subscriptions and revenues from its partnership with the Times.
The model failed because the co-op couldn’t get permanent nonprofit status from the IRS, said James O’Shea, co-op head and former Tribune managing editor.
The co-op applied for federal 501(c)(3) status in September 2010, but it fell into an unresolved policy quagmire. “We could never get the IRS to rule on our application, and that hurt us with funders,” said O’Shea. In two rounds of queries about the co-op’s application, regulators asked about the organization’s involvement in political activities, he said. Federal law prohibits nonprofits’ involvement in electoral campaigns and limits their activity around legislation.
Public TV station WTTW acted as the co-op’s fiscal agent, giving it temporary nonprofit status, but the station had no authority over operations. The co-op had received $1 million from the MacArthur Foundation since 2009, and was hoping for more when the foundation’s legal counsel decided that its tax status had been in limbo too long, according to O’Shea. Other foundations reportedly concurred.
“Once one turns you down, the others follow,” said O’Shea. “They all talk to each other.”
The accusation that MacArthur was more skittish about the co-op going after the foundation’s friends at City Hall was advanced by Geoff Dougherty of the Chicago Current, a competitor of the co-op.
O’Shea adamantly refuted the charge. “No one at the foundation ever complained or interfered with our coverage in any way,” he wrote in an email. “At all times, MacArthur and everyone involved in our relationship acted with integrity and professionalism.”
In a statement, the MacArthur Foundation denied any meddling: “In no case do we monitor or get involved in any editorial decisions at these organizations.”
The co-op was also hampered by its Times partnership, which required the fledgling news operation, with eight full-time and nine part-time reporters, to produce four pages of copy for the Times regional edition every week on top of their other work.
“The good news and bad news was their early relationship with the New York Times,” said Dan Schmidt, WTTW president. “It gave them immediate credibility and visibility. But feeding that deadline became pretty much what they did. It diverted the initial energy and vision of staffing City Hall and the state capital. So the vision lost its fizzle in the philanthropic community.”
“I’d do it all over again,” said O’Shea. Don’t count him out yet. He says he just needs time to regroup for the next Chicago news venture.
Copyright 2012 American University