Nonprofit Media Working Group Report Calls on IRS to Modernize Rules for News Startups

Outdated, inconsistent IRS rules hamper creation of innovative nonprofit media
Friday, March 1, 2013
Washington, DC

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 group, created by the Council on Foundations, released a  report, “The IRS and Nonprofit Media: Toward Creating a More Informed Public,” which states that the agency’s “antiquated” approach to granting tax-exempt status has undermined the creation of new media models. 

Although the IRS has a long history of approving the tax-exempt status of media organizations ranging from National Geographic to Pro Publica, in recent years it has become inconsistent and slower in its approvals.

“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 Nonprofit Media Working Group was created by the Council on Foundations with a grant from the John S. and James L. Knight Foundation, following the recommendation by the Federal Communications Commission that a group of nonprofit tax and journalism expert convene on the topic. The new report highlights five key problems with the current IRS approach to granting nonprofit status:

1.  Applications for tax-exempt status are processed inconsistently and take too long.

2.  The IRS approach appears to undervalue journalism by sometimes not viewing it as “educational.”

3.  The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations.

4.  Confusion may be inhibiting nonprofit entrepreneurs trying to address the information needs of communities.

5.  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.

Among the most significant recommendations:

  • 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.
  • News and journalism do count as “educational” under the tax-exempt rules.
  • 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.

“With the growing lack of accountability and investigative reporting, particularly in local communities, the Council convened a panel of experts to make recommendations on how the IRS can better facilitate the creation of new nonprofit media,” said Vikki Spruill, the Council’s president and CEO. “We strongly encourage the IRS to implement the recommendations made by the Nonprofit Media Working Group, as they will allow nonprofit media to fill the void in today’s reporting.”

Eric Newton, vice president of the Knight Foundation, said clearing up the IRS issues is important for efforts to improve local news. “The recession and the digital age combined to slash local news, leading to many new nonprofit media applications,” he said. “But the IRS fell back on industrial age standards and suddenly started delaying or denying requests strikingly similar to ones it had approved just months earlier. Applying 1970s rules to Web media makes about as much sense as telling spaceships they have to use the freeway.”

The Nonprofit Media Working Group includes: Chair Steven Waldman, journalist and former senior adviser to the FCC chairman; Clark Bell, Robert R. McCormick Foundation; Jim Bettinger, Stanford University; Kevin Davis, Investigative News Network; Cecilia Garcia, Benton Foundation; John Hood, John Locke Foundation; James T. Hamilton, Duke University; 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.