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Oct. 9, 2015, 9:30 a.m.

If the Philadelphia newspapers wanted to convert to nonprofits, what would stand in their way?

Some sort of attachment with Temple University could be in the works. But nonprofit law could throw up a number of obstacles to making that happen.

If newspapers are having trouble turning a profit without deep annual cuts, how about becoming a nonprofit?

That question’s been asked a lot over the last decade of print decline — even though it glides past the fact that nonprofits need revenue and a business model just as much as for-profits do.

The latest possibility to be raised: the two Philadelphia dailies. The owner of the parent company of The Philadelphia Inquirer and Philadelphia Daily News has discussed creating a nonprofit organization that would “align” the papers and with Temple University, local news site Billy Penn reported last week. (The company wouldn’t elaborate on the plans, and Temple didn’t respond to my request for comment.)

But legal experts say any process of affiliating the company with the university could be tricky, and potentially requiring significant changes to the outlets’ business and editorial operations — changes that could force them to become less reliant on advertising and subscriptions, for example, or stop the editorial pages from endorsing candidates for office.

There are a number of ways in which the company could choose to affiliate with Temple. It could seek classification by the IRS as its own nonprofit organization; it could try to become a for-profit subsidiary of the nonprofit university.

In order to become a nonprofit, the company would have to reorganize its governance structure and reclassify how it’s registered with the state of Pennsylvania. It’d also need to meet the IRS’ strict requirements for what type of organizations are eligible for 501(c)(3) tax-exempt nonprofit status. In order to maintain nonprofit status, an organization must be primarily supported by the public, through mechanisms such as foundation grants or individual donations.

The typical newspaper’s business model — selling ads and subscriptions — isn’t compatible with the IRS’ nonprofit regulations. That’s part of why most nonprofit news startups, such ProPublica and The Texas Tribune, are reliant on grants and other types of donations for revenue.

“They aren’t supposed to be operating in a way that would effectively be competitive with other commercial models,” said Jeffrey Hermes, deputy director of the Media Law Resource Center and former director of the now-defunct Digital Media Law Project at Harvard’s Berkman Center for Internet & Society. “So the bottom line is you probably need to shift the economic base of your organization if you’re trying to get it ready for 501(c)(3) status.”

The tax code only affords a handful of types of organizations nonprofit status, and most existing nonprofit news outlets have qualified as educational institutions. Because nonprofit news orgs are classified as educational entities, their coverage has to be more civic-minded.

Typical newspaper coverage areas such as sports and entertainment would prove hard to justify to the IRS, and would likely anger readers who count on the Inquirer, Daily News, and for coverage of Philadelphia’s sports teams.

“General interest news or popular stories as opposed to important newsworthy stories typically don’t qualify,” Hermes said. “Entertainment news, sports news — that type of thing ordinarily wouldn’t be considered educational.”

There are also strict limitations against 501(c)(3) nonprofits engaging in political activity. As a result, nonprofit news organizations are forbidden from endorsing or opposing candidates for office and there are limitations on how they can support or oppose particular legislation. That means the newspapers’ editorial pages wouldn’t be able to endorse candidates, ballot measures, or legislation.

While becoming a typical nonprofit news organization would likely force the Philly outlets to drastically change how they operate, there are other ways they could potentially affiliate with Temple while maintaining its business and editorial structures. Nonprofit entities, like Temple, for example, are legally allowed to own for-profit subsidiaries.

That arrangement is not unheard of. The Church of Jesus Christ of Latter-day Saints owns the Salt Lake City-based Deseret News through a for-profit subsidiary. Similarly, the Poynter Institute has owned the Tampa Bay Times (formerly the St. Petersburg Times) for decades.

Nelson Poynter, the longtime owner of the St. Petersburg Times, didn’t want to leave the paper to his decedents because, as he told his lawyer, “I’ve never met my great-grandchildren, and I might not like them.” Poynter wanted to leave control of the paper to a single person, but he didn’t want them to actually own the assets. Poynter began looking for alternatives as early as the 1950s, and by the mid-1970s Poynter decided to create his own educational institution, the Modern Media Institute, which was renamed The Poynter Institute after his death.

Poynter’s will bequeathed 74 percent of his company’s assets, which at that time also included Congressional Quarterly and a commercial printing business, to the Institute, which would receive profits from the various ventures. In his book A Sacred Trust: Nelson Poynter and the St. Petersburg Times, Robert N. Pierce explained how the arrangement worked:

How would the asset be divorced from control? MMI would have the asset — company shares — but not control of it. Poynter’s successor would have control as holder of the proxy to vote the shares. The new chief would get no financial benefit other than the right to set his or her own salary. MMI would have a board of trustees, but the one who was chief executive officer of the Times would have the deciding word because that person held the proxy.

In order to not run afoul of the IRS, the Institute had to maintain all its finances completely separate from the newspaper. If any Times journalist wanted to enroll in classes at the Institute, they still had to pay all the fees, and any journalist who came to the Institute and was not already a Times employee had to wait three years before they could take a job there, Pierce wrote.

Poynter and the Times got dispensation from the IRS before they set up this arrangement, and if any news organization wanted to undertake a similar setup today, they’d need to be sure that the finances are truly separate, said David Ardia, codirector of the University of North Carolina Center for Media Law and Policy.

“The biggest part of that is the financial — so it’s maintaining a set of financial records that allows the IRS to clearly see where profits are coming from and how they’re being utilized,” Ardia said.

“You have to be certain that the transactions that happen between the two entities are properly accounted for with a value that is an arm’s-length transaction. You can’t bring in all this money on the nonprofit side and then sell it cheap to the for-profit side. All you’re doing there is shifting the profits through the for-profit entity that were taxed at the lower nonprofit entity’s rate.”

A spokeswoman for PMN told me that the company’s 85-year-old owner L.H. “Gerry” Lenfest “has stated publicly that he wants to leave the company in good hands. He continues to explore all sorts of options to that end. Nothing is imminent.” That’s the same statement she gave Billy Penn.

After a protracted ownership battle, Lenfest together with his partner Lewis Katz bought the papers last year, but Katz died in a plane crash only four days after the deal closed. Katz’s stake in the business then reverted to his son, who sold it back to Lenfest. Lenfest is also a member of Temple’s board of trustees.

The money troubles of the Philadelphia papers are likely to be a challenge no matter what form they take. The Tampa Bay Times hasn’t been immune to the challenges of the newspaper industry, and the last time it made its traditional dividend payment to Poynter was in 2010. In 2013, the most recent year for which records are available, the Institute lost $3.48 million.

Lenfest, however, with a reported net worth of $430 million and stated commitments to philanthropy and nonprofit news, likely wouldn’t leave Temple or the papers in too precarious a financial situation. Then again, Nelson Poynter probably never imagined the Institute he founded would ever be in financial trouble. In 1989, the newspaper paid out $3.2 million to Poynter, and in 1990 the Institute turned down a $270 million offer to buy the Times.

But if Lenfest does decide to go the nonprofit route, it’s likely that it’ll take some time for the IRS to process the changes. For example, it took the nonprofit San Francisco Public Press 32 months to get its 501(c)(3) status finally approved in 2012. At one point, the IRS had a backlog of 60,000 applications from all types of organizations for tax-exempt status. While IRS commissioner John Koskinen said last spring that the logjam had been eliminated, experts said it can still take several months to get approval for the most basic organizations, much less one with a newspaper’s complications.

Lenfest made his fortune after selling his cable business to AT&T in 1999. Since then, Lenfest has given $1.2 billion to charitable causes, Philanthropy magazine reported last year, adding that he’s stipulated that the foundation he and his wife established be closed within 10 years of their deaths.

And when it comes to nonprofit news, Lenfest told the magazine that he’s supportive of nonprofit journalism. “I think eventually it would be wonderful if nonprofits would own newspapers,” Lenfest said. “And they’re allowed to do that in the U.S. code now, to take in that kind of revenue. Eventually I foresee foundations taking ownership of newspapers.”

Photo of the former Philadelphia Inquirer building by Kevin Burkett used under a Creative Commons license.

POSTED     Oct. 9, 2015, 9:30 a.m.
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