Beneath the surface of the
new investigative unit announced this week by Arianna Huffington lurks a business model that could work for other outfits and other forms of news -- but not without some complications.
In this case,
American News Project founder Nick Penniman is setting up the investigative group in ways that suggest how nonprofit and for-profit ventures may be able to collaborate in pursuit of news.
The nonprofit Huffington Post Investigative Fund is partially funded by the for-profit Huffington Post but will remain a legally separate entity. And while the investigations produced by Penniman's group will be published on Huffington Post, the work will be made available to other publishers simultaneously.
The reports will include the work of both the American News Project (a video operation) and the Investigative Fund (a text operation). All of that sounds as if it'll be good for HuffPo, good for Penniman's group and good for readers ill-served by cutbacks in investigative reporting.
In fact, it seems to be just what HuffPo needs to counter complaints about its lack of original content and a payroll that serves a small staff but not its volunteer bloggers. Interestingly, those benefits may reflect the kind of
"private benefit" to the mothership that could attract the attention of the IRS [PDF] and potentially jeopardize the arrangement.
"There have been generations of efforts by businesses to take advantage of a tax exemption for a nonprofit whose interests are parallel to those of the business," noted attorney
Marcus Owens, who specializes in nonprofits and once ran the Exempt Organizations Division of the IRS. Typically, such businesses start nonprofits as a way of setting up "a cost center that is better funded through charitable giving of some kind. This goes back a long way in tax history."
Despite such issues, Owens said he believes the hybrid taking shape at the Huffington Post could be adapted by news organizations to sustain quality journalism in ways acceptable to the IRS.
Penniman, an eight-year veteran of nonprofit journalism with TomPaine.com,
The Washington Monthly and the American News Project, knows the pitfalls and said "four teams of lawyers" have scrubbed the HuffPo deal.
"All agree that it's kosher," he said in an e-mail Wednesday, "given a few restrictions, the most important of which being that the content the Fund produces is made available for anyone to publish at the same time it's available for Huff."
"In that respect," he added, "I would imagine that some media execs would have a problem wrapping their heads around such a venture."
Penniman said the nonprofit investigative unit will have "a sisterly or brotherly relationship" with the for-profit Huffington Post "as opposed to operating within it. This will be an important distinction for anyone looking at these models going forward. They've given us a financial contribution and essentially they're giving us their name ... but we're a separate legal entity."
Unlike many nonprofit startups that hope to develop a sustainable business model beyond contributions, Penniman indicated that the HuffPo Fund will likely return to benefactors repeatedly. He said he does not anticipate selling ads on the investigative site.
"My guess is we'll be more of a syndication service," he said, but with a twist: content free for the asking.
Both nonprofit and so-called L3C "low-profit" models have been in the news lately, with Maryland Sen. Democrat Ben Cardin introducing
legislation in the U.S. Senate to help newspapers become nonprofits, and several states passing laws setting up
the low-profit option.
Media executives will watch carefully to see how the HuffPo venture turns out, perhaps with the idea of setting up their own nonprofit operations to fund not only investigative work but coverage of areas such as education, religion or even, say, their online operations.
In an era of content partnerships and other ways of leveraging limited resources, the idea of simultaneous content sharing doesn't seem quite the non-starter it would have been even a year ago.
That kind of no-favorites sharing of benefits is critical to preserving a nonprofit's tax-exempt status because it demonstrates that the organization is not simply serving the interests of one of its backers.
At Poynter, a nonprofit school that owns the for-profit
St. Petersburg Times, we pay attention to this provision of the tax code by making sure that we don't provide our newspaper with any benefit not made available to other news organizations.
So would your average local newspaper be willing to see its investigative work show up on competitors' pages at the same time it shows up in its own? Increasingly, I believe the answer will be yes.
As Jay Rosen, a senior advisor to the HuffPo Investigative Fund, described the idea: "
Report once, run anywhere."
Owens, who represents Poynter and the
St. Petersburg Times on tax issues, said in a telephone interview that it won't be sufficient for the HuffPo Fund to offer its work to other sites and publications. To preserve their tax status, he said, they'll need to make sure their work is actually published elsewhere.
"The IRS might take the position that, if 75 percent of the stories run only on the Huffington Post and not anywhere else," he said, "substantial benefit may be resulting to a single contributor."
Before the IRS approved the 501(c)3 application of
ProPublica, Owens said, the agency expressed interest in whether particular publications would derive benefit from its work. Owens' firm represented ProPublica in the proceedings.
Penniman said the HuffPo Fund's $1.75 million startup budget is drawn from three contributions: $500,000 from Huffington Post, $500,000 from
Atlantic Philanthropies and $750,000 from the American News Project.
Both American News Project and the Huffington Post Investigative Fund are projects of the
Tides Center, a nonprofit organization that incubates other nonprofits, according to Penniman. He said American News and the Huff Fund will seek their own 501(c)3 status -- either individually or combined.
Penniman plans to hire a development director to raise additional money, a critical step to make sure the Fund meets the IRS requirement to "sustain a pattern of public support," as Owens put it.
Advantages of nonprofit ownership include a range of funding possibilities, less pressure to generate substantial revenue and the chance to focus on the journalism. Disadvantages include potentially rigorous scrutiny by the IRS, strict rules against partisan activity and the possibility of spending as much time on regulations and compliance as the journalism.
Legal guidelines for nonprofits include a prohibition against endorsing political candidates or other forms of what's described by the IRS as "campaign intervention."
Owens, the tax attorney, said that does not rule out "facts-based" reporting, investigative or otherwise, that might also have some impact on how an election turns out.
