Recently, the Philadelphia media publications The Inquirer, Daily News and Philly.com were donated to a new nonprofit media institute. While this sounds relatively simple, the details of the transaction reveal a novel but untested approach to preserving quality journalism.

The Philadelphia Model

The three publications were assets of the Philadelphia Media Network (“PMN”), and were donated by PMN owner H.F. “Gerry” Lenfest to the newly created Institute for Journalism in New Media, LLC (the “Institute”). The Institute in turn is housed at a 501(c)(3) subsidiary of the Philadelphia Foundation (itself a 501(c)(3) community foundation)—in more technical terms, the Institute is a single-member LLC of the Philadelphia Foundation’s 501(c)(3) subsidiary, which means that donations to the Institute are treated as if they are made to the 501(c)(3) itself. This structure opens philanthropic avenues to fund certain aspects of PMN’s journalism. For instance, contributions and grants can be made to the Institute for specific reporting efforts and journalism projects and undertakings (e.g., a donor could give money to the Institute to endow an investigative-reporting team or support coverage of the city schools, similar to endowments of professors’ chairs at universities). Another goal is for the Institute to explore and discover content-delivery models that could at some point assume the role of printed newspapers—with PMN serving as a test lab of sorts.

However, the overall structure is even more complex because, while the Institute owns the media publications, it has no governance power over them. The publications are still produced by PMN, a separate entity run by a separate board, and the Institute cannot simply transfer charitable funds to PMN to cover general operating expenses or deficits. Rather, grants from the Institute to PMN must specifically set out the journalistic use of the funds. In fact, the Lenfest gift agreement stipulates: “The editorial function and news coverage of PMN shall at all times remain independent of the Institute, and the Institute shall not attempt to influence or interfere with the editorial policies or decisions of PMN.”

PMN has converted from an LLC to a public benefit corporation, which means it is still a for-profit, taxable entity but that it has a mission or purpose apart from making money. See our previous blog posts here and here for more information on public benefit corporations.

Other Journalistic Approaches

The Tampa Bay Times in Florida has been owned since 1978 by the Poynter Institute, a 501(c)(3) journalism nonprofit, but is held as a taxable subsidiary. This means that income produced by the paper is taxable, unlike any income that will be produced by the PMN publications.

Other publications have become, or attempted to become, separate and standalone 501(c)(3) entities in their own right. However, this can be a difficult path, as there are specific requirements for qualifying as a 501(c)(3) publication that can be tough to meet. 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 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. For more information on 501(c)(3) status for newspapers and a recent recommendation for a new approach by the IRS, see our previous blog post here.

The PMN/Institute structure was reportedly established in part to avoid the delay in seeking a standalone 501(c)(3) designation. However, it remains to be seen whether the IRS will challenge any aspect of the structure.