Panel urges IRS to revisit its ‘antiquated’ nonprofit rules

Delays in conferring 501(c)3 status to startup nonprofit news organizations have stymied development of new models for producing community-based journalism, exacerbating the shortage of locally produced news coverage, according to a report released March 4 by the Nonprofit Working Group of the Council on Foundations.

The group was created by the Council on Foundations with a grant from the John S. and James L. Knight Foundation to study the impact of the Internal Revenue Service’s approach to granting nonprofit status to media organizations. The report described the IRS’s methods of granting tax-exempt status as outdated and criticized the agency for hobbling efforts to establish new local newsrooms.

“Our main finding is that the IRS is relying on antiquated rules — rules that were created in the 1960s and 1970s to determine whether groups should be given tax-exempt status,” said Steven Waldman, chair of the Nonprofit Media Working Group. “Not surprisingly, they don’t match modern realities.”

The group recommended several fixes to the IRS, including that it revise its criteria determining nonprofit status to qualify news and journalism as “educational” under tax-exempt rules. It also recommended that the IRS prohibit nonprofit news organizations from sharing ownership with shareholders or investors. In addition, the panel urged the IRS to evaluate whether the media organization provides a community benefit, as opposed to serving as a platform for private interests.

The IRS’s rules for granting 501(c)3 status are skewed against journalism startups, the report claims. They reflect the media landscape of 50 years ago, Waldman said, when distinctions between commercial and nonprofit media were clear cut: For-profits sold subscriptions to the public, while nonprofits distributed their reporting and solicited contributions from supporters. In the digital age, these lines have blurred, he said.

News startups must be entrepreneurial and cultivate diversified revenue streams, such as ad and subscription sales, Waldman said; yet these activities can torpedo an organization’s bid for nonprofit status.

Unless the rules are changed, he warned, the only organizations to win approval would be those that rely solely on donations and foundation grants.

“We don’t want to get into a situation . . . where the IRS is only approving those organizations that are destined to fail,” Waldman said.

A spokesperson for the IRS did not return calls for comment.

The report was released in conjunction with a panel discussion at the Newseum in Washington, D.C., during which the council presented data highlighting the dearth of “accountability reporting” by local news media.

Waldman presented a video of TV news clips demonstrating that the average 30-minute TV newscast produced by Los Angeles stations devoted one minute to coverage of news related to education, health care and government.

On March 4, the deans of 11 journalism schools jointly issued a letter backing the task force’s recommendations. “During the past few years, we have become increasingly alarmed over the steep decline in accountability journalism, especially in local and regional journalism. The main cause of the decline has been the diminution in the reportorial resources of newspapers, which historically have borne the lion’s share of reporting in American communities,” the deans wrote. Signatories of the letter are task force members of the Carnegie-Knight Initiative on the Future of Journalism Education.