IRS delays make it hard for nonprofit news sites to build their businesses

Anyone with a cursory knowledge of the nonprofit news field knows the big players: VoiceofSanDiego.org, Texas Tribune, MinnPost, ProPublica, et. al.

You probably haven’t heard of the Arlington Mercury or the San Diego Newsroom.

Another difference between the first group and the second: The IRS has ruled that the nationally-known news orgs are tax-exempt organizations. The two others, along with several you may know, are still waiting to see if they made the cut.

Chicago News Cooperative had something in common with both groups; it was nationally known but never an IRS-approved nonprofit.

The hangup with the IRS wasn’t the only problem that led CNC to stop publishing Sunday. But as other, lesser-known news startups have learned, it’s even harder to build a self-sustaining news operation when the IRS hasn’t validated your 501(c)(3) status.

Major foundations, which can give life to an idea with tens or hundreds of thousands of dollars, often prefer that an organization has a 501(c)(3) designation. Without it, they’re likely to award less money and tie it to specific projects, not general operational costs, according to interviews with several people involved the nonprofit field.

And because it’s easier to make the case that money spent on free or low-costs services is a charitable expense, those funders may ask news outlets to offer their work free to consumers. That can hinder attempts to create other sources of revenue.

None of these issues is insurmountable in itself. Together, they create a long, winding obstacle course filled with legal, bureaucratic and financial challenges.

In limbo

The Arlington Mercury, near Washington, D.C., aims to help people weigh in on public policy decisions while there’s still time to affect the outcome. The site’s slogan is “Where policy hits the pavement.”

“We’re very much on a shoestring budget. We’re not a 501(c)(3) yet, so we can’t go out and start the fundraising process,” said Editor Steve Thurston in a phone interview.

Thurston, who teaches journalism at a local college, could start asking people for donations now, but he can’t promise that they’ll be tax-deductible. He applied for 501(c)(3) status in August, and when he checked in January, he was told that employees were still working on applications from June.

The San Diego Newsroom applied for tax-exempt status in January 2011 and provided more information to the IRS in September, President and CEO David King told me via email. The organization has been in regular contact with the IRS since then but hasn’t heard when the review will be complete.

Whether the IRS will approve their applications is anyone’s guess. Besides those two startups, applications for three other sites — SF Public Press, The Lens in New Orleans and CNC — appear to be in a holding pattern. Also under review is the nonprofit application for INN, the Investigative News Network. All filed for nonprofit status in 2010.

“Everyone’s trying to figure out how big this pile is because the IRS won’t tell us,” said INN Executive Director Kevin Davis. (I reached out to the IRS for this story but didn’t hear back; a spokesman told the Chronicle of Philanthropy in October that applications were being handled centrally for consistency.)

People I spoke with in the nonprofit news scene believe that a spurt of tax-exempt applications from news organizations caused the IRS to take a harder look at whether they should be considered commercial enterprises, not nonprofit. The holdup is puzzling, considering that there’s an established history of nonprofit news in the U.S., noted Columbia Journalism Review’s Ryan Chittum.

Also puzzling is that the IRS recently gave two INN members the go-ahead. The Maine Center for Public Interest Reporting received its approval letter in early February after filing its application in April 2011. Centro de Periodismo de Investigativo in San Juan, Puerto Rico, was also recently approved; it sought nonprofit status in July 2011.

“There’s no rhyme, reason or consistency coming out of the IRS now,” Davis said, noting that the agency asked the group to remove the word journalism from its articles of incorporation because that’s not an approved purpose of a 501(c)(3).

Is journalism a charitable enterprise?

Marcus Owens, former head of the IRS tax-exempt organizations division and a nationally known lawyer on nonprofit issues, said that their educational purpose is the logical justification to consider these sorts of journalism outfits tax-exempt.

“What could be of more educational value than knowing what is going on in the world around you?” he asked.

But he thinks that the IRS now views “anything that has the look and feel of a regular-news newspaper” as a commercial enterprise, not a nonprofit one. (Poynter and its Times Publishing Co. are both Owens’ clients.)

By that thinking, Owens said, VoiceofSanDiego.org and MinnPost shouldn’t have been approved.

The less a news site resembles a general-interest product, the better its chances of IRS approval. For instance, he said that ProPublica – another client – distinguished itself by focusing on in-depth, investigative reporting, not the news of the day.

And ProPublica distributes its stories for free. That’s important to the IRS, Owens said, because “no business gives away its product for free. … The provision of some good or service at little or no cost makes just about anything charitable.”

These things matter to foundations because they could face excise taxes for spending money on non-charitable activities. So they like to give money to approved nonprofits, and if they can’t do that, they may route the money through another organization or restrict their money for specific purposes.

“If you’re in that position and you’re signing a lot of grants, you’re probably going to err on those that are safe rather than those that are risky,” Owens said. “I think at the end of the day the risk to a MacArthur Foundation is probably relatively low, but there is a risk.”

Michael Stoll, executive director for SF Public Press, said he doesn’t know of any cases in which not having nonprofit status prevented his group from getting funding. But the question has come up during talks with a “major donor,” he said. “We said, ‘Would having it make a difference?’ They said, ‘Probably not, but it would really speed things up.’ ”

Elspeth Revere, who handles media grants for the John D. and Catherine T. MacArthur Foundation, said although the foundation did ask Chicago News Cooperative about its tax-exempt status, it was still pursuing another grant without it.

But the money would have been for a specific project, not general operations. If MacArthur had gone that route, “it’s up to us to make sure it would be used for a purpose that meets the charitable purpose of the IRS.”

The problem with free

Free may be charitable, but it’s not much of a business model.

That was one of the problems for CNC, said Editor and CEO James O’Shea. Foundations are interested in seeing sites like his become self-sustaining, he said, but they also want the content to be freely available to the public. That limited his ability to sell the content.

Revere said it is important that grant-supported work be freely available. But that doesn’t mean that there can’t be some kind of licensing arrangement like CNC had with The New York Times. And although she didn’t discuss it with CNC, she said, perhaps stories could have been made available for free after an initial restriction for some period of time.

Still, she understands the difficult position that nonprofits are in. “If it all becomes earned income, is it still a nonprofit? If all you’re doing is supporting yourself through selling things, then it probably is not a nonprofit.”

Nonprofits are limited from the start in how they can raise money, INN’s Davis said, but it’s important that they have multiple revenue streams, as diverse as possible. “Being a nonprofit is not a business model; it is a tax status,” he’s fond of saying.

He expects that the major foundations will move on after helping some of these sites get off the ground, but not without helping them find other sources of revenue. For instance, INN and the Patterson Foundation are working on ways to train journalism startups in operations and business development.

And Davis sees a lot of potential with local community foundations, an area that the Knight Foundation is focusing on. “Some community foundations are evangelizing to other community foundations about the benefits of sponsoring this kind of independent, community journalism,” he said.

Waiting

SF Public Press has gone 26 months without a ruling from the IRS. In the meantime, its finances are handled by a “fiscal sponsor,” a third-party that supervises the use of grant funds in exchange for a 7 percent cut. About one-third of INN’s 60 members use fiscal agents, Davis said.

Stoll figures he can go on indefinitely like that. But it’s limiting.

“You have a better shot at getting more money if you are seen as a mature nonprofit,” he said. “If you’re seen as immature and still under somebody’s wing [the response is], ‘We’ll give you seed money but not enough to sustain you.’”

One way to break the logjam, Owens said, is to draft a ruling that the IRS would use to decide what makes a news operation nonprofit or not. That’s probably more promising than getting Congress to amend tax law, but it would take several years, he said.

The Arlington Mercury’s Thurston worries about the sustainability of his small operation, which has just three people working on it part-time, plus a few other occasional contributors.

“It’s frustrating to think that we might have to turn into a profit-run company just so we can start to get a little income in,” he said in an email. “All of us are working for free right now, and I’m not sure how long a couple people will last.”

Then again, he admitted, it’s not like they’re in it for the money.

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  • Anonymous

    Great overview Steve. Here at Free Press and SaveTheNews.org we are working to build off of the recommendations of the FCC’s future of media report, as well as the policy recommendations in our 2009 report, to identify concrete and long term policy solutions to this issue. 

    In the short term we need a good IRS ruling as Owens described, but just because a legislative solution could take years, doesn’t mean we shouldn’t pursue it. Indeed, as the uncertainty and indeed, contradictory nature of the IRS record on journalism organizations up to this point makes clear, we should not simply leave this up to the whims of an agency. 

  • Dan Hershey

    I wonder if the organizations experiencing these delays have contacted the Taxpayer Advocate Service.  Our firm, Hurwit & Associates, has employed this strategy with a couple of our nonprofit clients and found it to be useful to help stimulate a response and ultimate decision regarding tax-exempt status.