This past Monday, the Council on Foundations released a report  by its Nonprofit Media Working Group that advocates a new approach by the IRS in evaluating whether news organizations qualify for Section 501(c)(3) status. The report was funded by the John S. and James L. Knight Foundation, and was spurred by a 2011 FCC report that concluded that accountability reporting has contracted dramatically, particularly at the local level.

Decline of Local News Resources

Many news readers may be personally familiar with the shrinking availability of local news—it is an area that media organizations have struggled to fill as their revenues have fallen and they’ve been forced to take measures such as cutting staff and publishing less frequently. This development largely can be traced to sharp declines in traditional print advertising revenue, which came about as more advertising—and other content—migrated to online sites. People also became accustomed to being able to read national news stories online in nationally targeted publications, along with entertainment and sports pieces, and moved away from local publications.

The FCC report shows that, between 2000 and 2010, the number of daily newspaper newsroom employees declined from 56,400 to 41,600—about the level of staffing before the Watergate scandal in the 1970s. During that time  many newspapers have merged, reduced their publishing schedule or gone under entirely; here in the Denver area, the Rocky Mountain News ceased publishing in February 2009. What this largely translates to is reduced coverage of local and community affairs like city council meetings and statehouse developments, and insufficient resources dedicated to labor-intensive, investigative pieces that can hold government and industry accountable to the public.

Nonprofit Sector Offers Potential

Small, online startups have attempted to fill the void in local and public affairs reporting, and often have sought tax-exempt status in order to do so. This status can signal to readers that profit is not a main motivator, and also can attract donors in order to supplement the revenue stream. However, several such organizations have faced an uphill fight with the IRS in trying to obtain recognition as a 501(c)(3). For example, the San Francisco Public Press, which targets low income and underrepresented communities, faced a review process of nearly three years before it obtained tax-exempt status in late 2012. Another organization, The Lens in New Orleans—formed to specialize in labor-intensive, investigative and accountability reporting—received its status after more than two years.

In order for a news or media organization to qualify as exempt under Section 501(c)(3), it must establish that its activities are charitable, meaning that they further educational purposes. This requires the satisfaction of four criteria:

• The content must be educational. This requires articles or publications to contribute to the public’s knowledge on substantive issues of public policy, the arts and the humanities.

• The method of publication must be educational. This means that it must be prepared in accordance with non-commercial methods, and generally requires the selection of content based on educational value rather than popular mass appeal.

• Distribution must advance the organization’s exempt purposes. This requires that the use or distribution of a publication is required to accomplish the organization’s exempt purposes, and where there is a public benefit derived from the distribution.

• The manner of distribution must differ from commercial communications. The focus here is largely on whether the financing is demonstrably different from commercial publications.

These requirements place some barriers in the path of many organizations that would seek 501(c)(3) status, primarily in terms of whether their content fits within what the IRS considers educational, and whether their methods are too similar to commercial, for-profit media operations.  For example, the IRS has held, in Revenue Ruling 77-4, that a general news newspaper failed to qualify for exemption. The IRS emphasized that the paid staff had no skills or abilities that differed from staff at commercial papers, and that the organization’s revenue was derived solely from advertising and sales of subscriptions to the general public. More recently, the editor of the Johnston Insider, an online news site in Rhode Island, reported that the IRS told them that the bulk of their articles were of interest to individuals residing in the community, but that they were not educational; and the INN, a consortium of nonprofit journalism outlets, received 501(c)(3) status only after agreeing to remove the word “journalism” from the purpose clause in its articles  of incorporation. And the overall changes to the media sector can make it harder to distinguish between nonprofit and for-profit operations using the traditional IRS analysis, because many organizations on both sides distribute content for free, and use similar methods to gather and distribute information.

Principles for a New Approach

The working group emphasizes that tax-exempt media entities continue to be different from commercial entities, and should be held to rigorous standards in order to remain tax-exempt. However, the group recommends changes to the analysis, largely by removing the comparison of operational practices of nonprofits to for-profits, analogizing to hospitals to show how this is already accomplished. Rather, the group advocates that the IRS should primarily be concerned with whether the 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. Factors that would indicate the organization is pursuing educational purposes might include:

• The organization provides information on important public issues or the performance of public institutions;

• The organization has procedures in place to ensure that editorial decisions or content are not determined by private interests;

• The organization has a governing board that is independent of private interests and generally representative of the community it serves; and

• The organization must not officially endorse or oppose any candidate for public office.

Further, the working group recommends that the following factors not be part of the analysis:

• The overall manner or medium,  by which the editorial content is gathered, collected, displayed,  or disseminated

• Whether a fee or other payment is required. While any fee to access the editorial content should be reasonable and not set at a level intended to restrict public access, a tax-exempt media organization should be free to experiment with earned revenue models, as long as it simultaneously adheres to its broad educational purpose; or

• Whether the organization is supported by grants.

For more information on this effort, including the full report, a summary report, and a letter of support from the FCC chairman, visit the Council on Foundations dedicated webpage.

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Note: Schauble Law Group attorney Becky Farr Seidel worked  as a journalist at a daily newspaper for  several years prior to law school, and remains committed to the future viability of this sector, including the crucial local news component. Schauble Law Group will continue to monitor developments in this area, and please contact us at kschauble@leafferlaw.com or bseidel@leafferlaw.com with any questions.