Nonprofit Group Calls on IRS to Modernize Rules for News Startups

Washington, D.C.—The Nonprofit Media Working Group, a nonpartisan group of foundation and nonprofit media leaders, today recommended that the IRS modernize its rules to remove obstacles in the way of nonprofit news outlets.

The agency’s “antiquated” approach to granting tax-exempt status has undermined the creation of new media models, the group said in its report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public.”

“Over the last several decades, accountability reporting, especially at the local level, has contracted dramatically, with potentially grave consequences for communities, government accountability and democracy,” said Steven Waldman, chair of the Nonprofit Media Working Group. “Nonprofit media provides an innovative solution to help fill this vacuum, but only if the IRS modernizes its approach.”

The working group, created by the Council on Foundations (COF), grew in part out of a May 2009 conference at the Sanford School of Public Policy, organized by Professor James T. Hamilton, director of the DeWitt Wallace Center for Media and Democracy. At that time, many conference attendees co-signed a letter to the IRS outlining the problem and requesting a review of the tax code with respect to philanthropic support of news media. It went unanswered. The importance of the tax issues also was highlighted in the 2011 FCC report, “The Information Needs of Communities.” Hamilton served as a consultant to the working group that produced that report, and also was a member of the COF working group.

As more online publications have begun applying for nonprofit status, the IRS noted the trend and slowed down approvals, Hamilton said. Foundations often will not provide financial support to organizations that don’t have 501(c)(3) status. For small-scale news operations the delay in achieving nonprofit status can be fatal. Some, such as the Chicago News Cooperative, which for a time provided content to The New York Times Chicago edition, “died on the vine,” Hamilton said.

As a member of the COF working group, Hamilton provided the economic argument in favor of granting tax-exempt status to nonprofit news organizations. “Accountability journalism should be considered a ‘public good,’” Hamilton said. “There is a market failure in news, although the FCC is still not willing to say that. Because of this, organizations trying to provide ‘broccoli journalism’ should receive indirect public support through tax benefits.”

The report highlights five key problems with the current IRS approach to granting nonprofit status:

  • Applications for tax-exempt status are processed inconsistently and take too long.
  • The IRS approach appears to undervalue journalism by sometimes not viewing it as “educational.”
  • The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations.
  • Confusion may be inhibiting nonprofit entrepreneurs trying to address the information needs of communities.
  • The IRS approach does not sufficiently recognize the changing nature of digital media.

Several of these problems stem from the IRS apparently relying on rules developed in the 1960s and 1970s. Under these rules, the IRS may deny tax-exempt status to nonprofits that gather or distribute news in a similar way to commercial outlets.  This approach, the group concluded, is no longer a sensible standard.

“There must be clear rules distinguishing nonprofit and commercial media but they should be logical rules,” continued Waldman.

The report states that the IRS methodology for analyzing whether a media organization qualifies for exemption should not take into account irrelevant operational similarities to for-profits. Rather, the IRS should evaluate whether the media organization is engaged primarily in educational activities that provide a community benefit, as opposed to advancing private interests, and whether it is organized and managed as a nonprofit, tax-exempt organization.

It also recommends the IRS should maintain the key structural requirements for being a tax-exempt media organization that properly distinguish it from commercial enterprise, such as: it cannot have shareholders or investors, it must have a governing board that is independent of private interests and it cannot endorse candidates or lobby lawmakers.

In addition to Waldman and Hamilton, members of the working group are: Clark Bell, Robert R. McCormick Foundation; Jim Bettinger, Stanford University; Kevin Davis, Investigative News Network; Cecilia Garcia, Benton Foundation; John Hood, John Locke Foundation; Joel Kramer, MinnPost; Juan Martinez, John S. and James L. Knight Foundation; Jeanne Pearlman, Pittsburgh Foundation; Calvin Sims, Ford Foundation; and Vince Stehle, Media Impact Funders. Legal Counsel was provided by Marc Owens, former director of the IRS’s Exempt Organizations Division, and Sharon Nokes of Caplin & Drysdale.

The full report can be read at www.cof.org/nonprofitmedia.

This report was adapted with permission from the COF March 4, 2013 news release.

 

 

James “Jay” Hamilton
James “Jay” Hamilton