Policy delay of nonprofit status spikes Chicago News Cooperative

Rumors started quickly, trying to explain why the Chicago News Cooperative was closing. The Internal Revenue Service had rejected the co-op’s application for nonprofit status. Then it was said that the MacArthur Foundation had refused to fund the startup out of fear it might take down City Hall friends.

The truth was more prosaic. Several events — its tax status, its inability to lasso a deep-pocket donor and the demands of its publishing partner the New York Times — moved the news co-op to suspend operations Feb. 26 after two-and-a-half years.

The nonprofit news experiment began in November 2009 with a plan to produce high-quality public-service reporting about Chicago using seasoned journalists recently laid off by the Chicago Tribune.

Its business model combined grant funding, individual donations, Web subscriptions and revenues from the co-op’s partnership with the Times.

The model failed because the co-op couldn’t get permanent nonprofit status from the IRS, said James O’Shea, co-op head and former Tribune managing editor.

The co-op applied for federal 501(c)(3) status in September 2010, but it fell into an unresolved policy quagmire. “We could never get the IRS to rule on our application, and that hurt us with funders,” said O’Shea. “The IRS is holding up lots of applications from news nonprofits while they wrestle with whether our primary purpose is public education.”

“We had two rounds of questioning, many asking if we engage in political activity,” O’Shea said. Federal law prohibits nonprofits’ involvement in electoral campaigns and limits their activity around legislation.

Public TV station WTTW acted as the co-op’s fiscal agent, giving it temporary nonprofit status, but the station had no authority over operations. The co-op had received $1 million from the MacArthur Foundation since 2009, and it was hoping for more when the foundation’s legal counsel decided that its tax status had been in limbo too long, according to O’Shea. Other foundations reportedly concurred.

“Once one turns you down, the others follow,” said O’Shea. “They all talk to each other.”

The accusation that MacArthur was more skittish about the co-op going after the foundation’s friends at City Hall was advanced by Geoff Dougherty of the Chicago Current, a competitor of the co-op.

O’Shea adamantly refuted the charge. “Even a cursory amount of reporting would show that to be totally untrue,” he wrote in an email. “No one at the foundation ever complained or interfered with our coverage in any way. At all times, MacArthur and everyone involved in our relationship acted with integrity and professionalism.”

In a statement, the MacArthur Foundation denied any meddling in co-op coverage: “In no case do we monitor or get involved in any editorial decisions at these organizations.”

O’Shea had sought a seven-figure donor to give the co-op the financial stability that philanthropists had given nonprofit news outfits in San Francisco and Texas, but no such angel came forward.

The co-op was also hampered by its Times partnership, which required the fledgling news operation, with eight full-time and nine part-time reporters, to produce four pages of copy for the Times regional edition every week (two on Friday, two on Sunday) on top of their other work.

“The good news and bad news was their early relationship with the New York Times,” said Dan Schmidt, WTTW president. “It gave them immediate credibility and visibility. But feeding that deadline became pretty much what they did. It diverted the initial energy and vision of staffing City Hall and the state capital. So the vision lost its fizzle in the philanthropic community.”

Both WTTW and pubradio station WBEZ occasionally featured co-op reporters on their air, but the nonprofit newsroom did not have the visibility of a permanent arrangement. Schmidt and O’Shea admit they should have worked harder at that relationship.

Torey Malatia, head of Chicago Public Media, saw the Times as the culprit behind the co-op failing.

“The New York Times’ demands on CNC staff delayed the introduction of their website by over a year,” Malatia said. “This was no small thing. It essentially meant that they weren’t on mission as an organization until that happened. And only recently has the website evolved to a level of reasonable sophistication and deep content to have any hope of becoming a destination site for local reporting.”

Toward the end, O’Shea asked the Times for more money and tried to partner with the Sun-Times. But neither relationship solidified into a lifeline. And now they are out of money.

“I’d do it all over again,” said O’Shea. Don’t count him out yet. He says he just needs time to regroup for the next Chicago news venture.