The Council on Foundations
The IRS should change how it decides whether to grant tax-exempt status to news nonprofits, says a report released Monday morning by the Council on Foundations.
The current system presents “serious and unnecessary obstacles to critical innovation,” says the report, which was funded by the Knight Foundation.
News nonprofits have particularly struggled to become designated as 501(c)(3) organizations — a tax-exempt status that most major foundations prefer their beneficiaries have — because of rules the report says have “not been updated for the digital age.” The Chicago News Cooperative, for example, cited its inability to vault the IRS’ restrictions as one of the reasons it shut down last February.
Those hurdles are especially dangerous, the report argues, because news nonprofits often fill a void left by the cratering newspaper industry. A 2011 FCC report by Steven Waldman, who also chaired the group that produced the new report, pointed to the important role nonprofits could play when local news and investigative journalism, for instance, fall victim to budget cuts.
Among the obstacles the report says should be fixed: The IRS should reconsider its definition of journalism:
The IRS has taken the position in several cases that journalism is not educational. This position is inconsistent with the applicable federal tax regulations, which define “educational” as “the instruction of the public on subjects useful to the individual and beneficial to the community.”
Another big problem: IRS rules say that a nonprofit “must be distinguishable from ordinary commercial publishing practices,” which the report notes can be a difficult feat on the Internet. Moreover, the agency looks askance at advertising on nonprofit sites, and few can make it on grant money alone.
“Better IRS treatment of journalism non-profits was a good idea when first discussed in conferences at Duke and Poynter five years ago and later in Steve Waldman’s report for the FCC,” Poynter business analyst Rick Edmonds said in an email. “But nothing has happened, and the case deserves to be restated strongly, as it is in this report.”
Non-profits can fill some of the gap left as newspaper and other legacy journalism is weakened. But these organizations are challenged to establish sustainability in the best of circumstances. The last thing they need is uncertainty as they approach funders about their non-profit status. IRS is using illogical, analog-age criteria to slow a vital link in keeping citizens well informed.
Last February, Steve Myers wrote on Poynter.org about the long wait facing some of the nonprofit news organizations trying to achieve 501(c)(3) status. Since that article was published, the San Francisco Public Press, the Investigative News Network and The Lens have achieved 501(c)(3) status (and Myers has become deputy managing editor of The Lens). The Arlington Mercury is still waiting.
“We are nearing the end, according to the agent who has been working on our case,” Mercury Editor Stephen Thurston told Poynter in an email. “I’m feeling better, but boy it has been a long slog. It’s tough to raise money.”
Eleven journalism school deans — including Nicholas Lemann of Columbia University’s Graduate School of Journalism, Lorraine Branham of Syracuse University’s S.I. Newhouse School of Public Communications and Ernest James Wilson III of the University of Southern California’s Annenberg School for Communication and Journalism — have signed a statement endorsing the group’s recommendations.
Federal Communications Commission Chairman Julius Genachowski wrote U.S. Treasury Secretary Jack Lew on Friday, drawing his attention to the report.
“While I have not taken a position on the specific tax enforcement changes they recommend,” Genachowski wrote,
I do believe the rise of nonprofit news organizations is a crucially important trend, and this blue-ribbon, bipartisan group has taken a careful, thoughtful approach to removing obstacles to civic innovation. I hope the Treasury Department and the IRS will carefully consider the recommendations in this report.
Related: IRS delays make it hard for nonprofit news sites to build their businesses (Poynter) | A guide for nonprofit news outlets on how to get 501(c)(3) status (Nieman) | Nonprofit News and the Tax Man (CJR)