Death, Taxes and Journalism: A Way Forward for Nonprofit News at the IRS

Thirty years ago, Mother Jones was in a fight for its life with the Internal Revenue Service. The IRS granted the magazine nonprofit status in 1980, but a few years later it reversed course and tried to rescind that status. Doing so would have cost the magazine roughly $400,000 in back taxes and would have undermined the fledgling newsroom just as it was getting traction. Mother Jonesfought the IRS and won the case. Last month, the magazine won a prestigious George Polk Award for its 2012 election reporting.

Now, three decades later, a range of nonprofit journalism organizations are facing a similar threat from the IRS. A new report out this week from the Council on Foundations highlights the many challenges nonprofit newsrooms face at the IRS and suggests a possible way forward.

As the Mother Jones case illustrates, this is not a new issue, but the changing media landscape has brought the issue to the fore. In our 2009 report, Saving the News, Free Press noted that out-of-date tax policy could hinder growth and innovation in the future of news. We called for a range of changes to update tax policy with an emphasis on supporting the critical accountability journalism that our communities and democracy need.

The importance of nonprofit news as a core part of the future of journalism was later reaffirmed in reports by the Knight Foundation, the Federal Communications Commission, and journalism programs at theUniversity of Southern California and Columbia University.

The Internet has lowered the bar of entry and helped catalyze a new generation of local news and investigative watchdog sites, many of which are rising up to fill the gaps created by massive cutbacks at commercial news operations. As applications for nonprofit status spiked, the IRS put on the brakes and signaled that the law may not allow journalism to be conducted as a nonprofit activity.

The new Council on Foundations report summarizes five key problems with the current IRS approach:

1. Applications for nonprofit status are processed inconsistently and take too long. Some journalists have been forced to wait as long as three years – threatening their sustainability.
2. The IRS approach appears to undervalue journalism. The IRS has gone so far as to require news organizations to take “journalism” out of their by-laws because it is not understood as “educational.”
3. The IRS approach appears to inhibit the long-term sustainability of tax-exempt media organizations. The IRS has argued that nonprofit news and for-profit news be distinct in their mode of content distribution, which is untenable as everything moves online.
4. Confusion may be inhibiting nonprofit entrepreneurs who are trying to address the information needs of communities. The field of nonprofit news has been in a holding pattern waiting for clarity from the IRS, slowing the growth of this critical new media sector.
5. The IRS approach does not sufficiently recognize the changing nature of digital media.

I would add to this last point that the IRS approach does not account for the dramatic shifts in the news industry. In fact, the Digital Media Law Project at Harvard has written a detailed analysis of the complex and contradictory precedents that the IRS is using to judge nonprofit news, and they all date back to an earlier era of journalism. In a 2009 report on nonprofit journalism for the Shorenstein Center on the Press, Politics and Public Policy at Harvard, Marion R. Fremont‐Smith points out that “[revising] prior precedent due to changed circumstances is the essence of charity law.”

The new Council on Foundations report recommends taking just that approach, revising the process inside the IRS and clarifying a few key issues, to clear the way for nonprofit journalism. Their recommendations include establishing journalism as an educational activity and shelving old guidelines related to operational similarities between commercial and nonprofit newsrooms.

Instead, the report argues, the IRS should focus on “whether the media organization is engaged primarily in educational activities that provide a community benefit, as opposed to advancing private interests.” Finally, the report says that nonprofit journalism should meet all current requirements of other nonprofits, including that it cannot endorse candidates for public office or lobby lawmakers.

There is more background and nuance underlying each of these points in the full report, which acknowledges that other issues remain to be addressed, such as an examination of for-profit news organizations that wish to transition to a nonprofit model and how best to support innovative hybrid or “low-profit” journalism models. Both of these issues would demand legislative interventions.

This administrative fix will not be easy in a bureaucratic agency unaccustomed to public pressure in its rulemaking, but given the gridlock in Congress, it is likely the path of least resistance. In the long term, the tax code may need to be amended (as it has been many times before) to codify these changes. However, in the near term, journalism organizations, foundations, and First Amendment groups should come together to take this first step.

[This post originally appeared on the Harvard Law and Policy Review]