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March 19, 2012, 2:09 p.m.

Passing the nonprofit test: A guide for nonprofit news outlets on how to get 501(c)(3) status

How can a nonprofit news organization maximize its chances of securing 501(c)(3) status from the IRS? The Digital Media Law Project is publishing a guide, and we’ve got a sneak peek.

Nonprofit news organizations were supposed to be journalism’s next great hope. Like a rocket shooting from the dying planet of print news, nonprofit outlets were supposed to be able to focus on the tough, gritty investigative reporting newspapers were no longer doing enough of while not being beholden to advertisers.

But the past few months have seen the nonprofit news sector take some big hits. In December, Voice of San Diego had to layoff staff when fundraising totals didn’t hit targets. The came the impending merger of the Bay Citizen with the Center for Investigative Reporting. And then the demise of the Chicago News Cooperative.

But beyond money issues, there’s a structural problem nonprofit outlets are dealing with: getting all-important 501(c)(3) status from the IRS. Many nonprofits (or nonprofits-to-be?) have arrangements with existing entities that allow them to receive donations. But 501(c)(3) status is the key to standing on their own and cementing an operational structure. And at the moment, the IRS appears to have a rising backlog of journalism groups applying for nonprofit status, with waits approaching two years. And the question on many minds is: Why?

Our friends over at the Digital Media Law Project (formerly the Citizen Media Law Project — they’re in the process of rebranding) decided to take a deeper look at this issue; they’re planning on releasing a report in the next few weeks that can serve as a guide for journalism organizations trying to apply for nonprofit status. Reviewing decades of case law around nonprofit news organizations as well as previous IRS rulings, the guide tries to make the complex 501(c)c(3) process less of a mystery.

“It seems to us there’s a lot of confusion about why the IRS is asking certain types of questions, applying certain standards, and reaching certain results,” Jeff Hermes, the project’s director, told me.

While DMLP puts the finishing touches on its report — “Guide to the Internal Revenue Service Decision-Making Process under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations” — Hermes shared some of the key points with us.

Education, not journalism

The single biggest problem for news organizations seeking 501(c)(3) status, Hermes said, is that they don’t properly identify themselves when applying. Namely, they make the mistake of calling themselves journalism organizations. That’s a problem, because the IRS doesn’t recognize journalism as one of the defined categories eligible for nonprofit status. But what is eligible? Education. And civically oriented news organizations can make a very strong case that what they do qualifies as educational.

The problem is that some journalists, in their applications, are willing to leave that journalism-to-education up to interpretation — as a step for the IRS to take. Wrong: The IRS doesn’t deal in interpretation. “If you have journalism listed as your purpose, the IRS will look at that and say, ‘journalism isn’t on my list of eight categories,'” Hermes said.

(The eight categories? “Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations.”)

Any journalist can make the case that their work is educational in nature, but in this instance it really does have to be spelled out, Hermes said. “The key to passing this side of the test is whether journalism is your purpose or the method by which you’re achieving the educational purpose,” he said. Think journalism as tool for education.

Who’s wearing what hat?

In keeping with the educational standard, potential news nonprofits have to pass a kind of operational test that shows they are structured to educate the public. What does that look like? Hermes said the IRS will look at whether you provide researched, factual information to a specific audience and are not engaging in advocacy. They’ll also want to know how your work is being distributed and whether you are trying to reach a targeted group or mass audience. As an educational entity, journalists fill the role of researchers and experts — the kind of structure the IRS is looking for, Hermes said.

Another note on that advocacy issue: Hermes said the IRS scrutinizes groups for whether they are lobbying for specific political candidates or campaigns. That means no editorial-page-style endorsements of candidates.

About that money

Another point on the organizational issue: How closely does your shop resemble a commercial newsroom? If your publication looks and acts like a newspaper, only with a big “nonprofit” sticker slapped across the masthead, that won’t suffice. Specifically, if your group plans to (or already does) generate revenue through subscriptions or advertising, that’s a red flag that could sink your application, Hermes said. “There’s a common misconception among applicants that it’s okay to earn advertising revenue and other revenue as long as you pay taxes on it,” Hermes said. “That’s not quite right.”

While nonprofit news organizations are allowed to do those activities, income from those areas can’t make up the main source of money for an organization. What the IRS is looking for is whether or not your organization makes money like most nonprofits (memberships and foundation support for instance) instead of like a commercial business.

Ads and subscriptions typically fall under what Hermes calls “unrelated taxable income,” or, taxable dollars made by a tax exempt group. One exception is if your advertising is connected to your work (and is educational itself) and doesn’t just support your operation.

Again, it’s not that more traditional means of money aren’t allowed — it’s that they can’t be the bulk of how you get paid. “The IRS wants to see you try to use traditional nonprofit sources of funding before turning to regular commercial revenue models,” Hermes said. “It will help if you are using commercial revenue models to augment your nonprofit style fundraising or show you tried nonprofit fundraising and failed.”

The business of experts

In looking at the organizations that have been granted 501(c)(3) status, Hermes and his team found that having a specific focus and area of expertise can make a difference. If your news organizations is designed to report on specific issues — say, politics, the environment, health care, or a limited community — that can help. Also, a specific focus, such as investigative reporting or other watchdog work, can help. This ties into the organizational structure (do you have an experienced, expert-like staff?) as well as meeting the overall idea of an educational purpose. “The organizations that are most successful are those involved in investigative journalism and show some institutional expertise in researching particular topics,” Hermes said.

Hermes said they are currently reviewing the final report, as well as talking with foundations that support journalism to they could add further insight to the report. There’s clearly a lot at stake here — even as some nonprofit news shops merge or close, new ones are starting up. In the eyes of many journalists as well as some charitable groups, nonprofit news remains one of the more viable ways of supporting journalism going forward. Hermes said that even with a guide and concrete suggestions in place for news outlets, the 501(c)(3) process will remain byzantine in how it applies to journalism.

“The current structure is very complex in terms of standards the IRS applies — it’s not always intuitive,” he said. “The mixing of consideration of content-related issues — what the content of your publication is — with issues of your business model and where you’re getting revenues give rise to what sometimes look like contradictory results.”

While Hermes didn’t want to speculate on the IRS motives or reasons for the delay, one possibility for what looks like increased scrutiny could be last year’s FCC report on the information needs of communities, which discussed the need for support of nonprofit journalism. The IRS, like most federal agencies, wants to be very careful around setting precedent, Hermes said. “They are sensitive to the fact that ruling on these things can have a dramatic impact on an entire industry,” Hermes said.

(One final note: Nonprofit news organizations struggling these issues — along with waiting to see the full report — might consider reaching out to the Online Media Law Network, a DMLP project that connects online news outlets to attorneys willing to do legal work for them, often at no cost. Helping with 501(c)(3) applications is one of the areas where OMLN can provide help.)

Image by arsheffield used under a Creative Commons license.

POSTED     March 19, 2012, 2:09 p.m.
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