IRS Roadblocks to Nonprofit News Orgs – Time for a Change

User .Minh Luu
Posted Date : March 11, 2013

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This nation has a proud history of journalism, long tied most closely to newspapers. But the newspaper industry, as we know, has experienced a severe decline in recent years. The signs of this decline were evident to many of us in my hometown of Detroit back in 1987, when our two highly competitive newspapers, the Detroit Free Press and the Detroit News, announced the formation of a joint operating agreement (JOA). This allowed the two newspapers to combine their business operation, while keeping their editorial staffs separate. Despite reassurances from both news organizations that robust local news coverage would continue, it was pretty clear that change was in the air for the news business, and it remained to be seen how well the local community would be served.

Since then, the emergence of digital technology has complicated the landscape for news organizations. While there is great opportunity for innovation in news gathering and dissemination, not to mention the possibility for new nonprofit news enterprises, there are also obstacles posed by outdated regulations. The Federal Communications Commission (FCC) issued a report in 2011 entitled, “The Information Needs of Communities: The changing media landscape in a broadband age.” Pointing to the severe cutbacks in newsrooms across the country, the report noted that local communities are losing out on the kind of accountability reporting necessary to make informed decisions on local issues. Nonprofit media, the report suggested, could help address this concern.

To further explore the current state of nonprofit media, The Knight Foundation and the Council on Foundations joined forces to create a working group tasked to dig into regulatory obstacles. I was honored to participate on this working group and am pleased that our report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public,” is being released on March 4th.

The Internal Revenue Service gets top billing here because the agency is using outdated regulatory approaches in determining tax exemption eligibility for nonprofit news organizations. While some nonprofits like MinnPost have been able to obtain nonprofit status, too many others have been waiting up to three years for the IRS to make a determination. Apparently the IRS does not consider journalism to be educational, an attribute key to tax exemption. Moreover, the IRS looks at operations rather than governance to see if a nonprofit news organization qualifies for tax exemption. As the working group report notes, in today’s technological environment, media distribution is identical, whether the news outlet is a newspaper, magazine, television, radio, public or private. Governance, the other hand, dictates who benefits from the enterprise – public or private interests.

The report also notes that the IRS has indicated to a number of nonprofit news applicants that their proposed revenue streams (subscriptions, ads and foundation funding) are problematic in that they resemble commercial business models. They would be better off, according to the IRS, relying solely on foundation grants for revenue. Meanwhile, the message from the philanthropic sector to the nonprofit news organizations is quite the opposite – the more diversified your fund streams, the greater chances for sustainability.

The working group report has a number of recommendations for the IRS to consider in making tax exemption determinations for nonprofit news organizations. Rigorous standards for tax exemption must be upheld, but the standards must align with intention, rather than appearance. They should also take into account new ways of doing business with 21st Century technology.

Meanwhile, back in Detroit, the JOA is still in effect and both local newspapers have now cut back home delivery. Both are much thinner than I remember them to be, but local news coverage is getting a boost. The Free Press entered a partnership in 2009 with the CBS owned and operated WWJ-TV, Channel 62 to produce a morning news program, bringing locally-produced news to the station in a long time.

Cecilia Garcia is the executive director of the Benton Foundation. This article first appeared on the Benton Foundation blog. © Benton Foundation

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