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June 3, 2019, 12:38 p.m.
Business Models

Here’s The Salt Lake Tribune’s plan for securing 501(c)(3) status

Now it’ll take the IRS judging whether a nonprofit newspaper needs to stick to hard news of civic importance — or whether it can cover Jazz games too.

The IRS is complicated. So is running a 148-year-old newspaper in 2019.

Three weeks and one New York Times profile after announcing its shift to staffers and readers, Utah’s Salt Lake Tribune officially submitted its bid to the IRS to become a nonprofit May 30. The Tribune joins a small handful of newspapers in North America relying on nonprofit status (mostly by being owned by a nonprofit rather than being a nonprofit themselves), but it’s making a new case to the IRS.

“This ability to give to seek and share information that’s difficult for residents to do on their own is a fundamental purpose of journalism and it is fundamental of a 501(c)(3),” Fraser Nelson, the Tribune’s vice president of business innovation, told me. “We’re saying that’s what we’re doing already.”

Nelson comes from philanthropic and entrepreneurial circles of Salt Lake and identifies with the Tribune’s “super-compelling mission that makes your mom go, ‘You finally got a job at a university with benefits!’ — but I gotta go save democracy.” (She had previously been managing director for strategic partnerships at the Sorenson Impact Center, which is attached to the University of Utah’s business school.) She joined the Tribune in March, almost three years after it was purchased by Paul Huntsman, he of the Utah power family that includes former governor John Huntsman, Jr., his brother. He, like basically every other local newspaper owner in America, has struggled to make it work.

(Reminder: Nonprofit ≠ not having to worry about the business. The Philadelphia newspapers, owned by the nonprofit Lenfest Institute, recently announced buyouts as part of a plan to cut 10 percent of the guild’s 302 full-time members. “A unique ownership structure means that we are not saddled with profit goals set by corporate owners or shareholders,” publisher Terrance C.Z. Egger said in the announcement. “However, that does not make us immune to the dramatic economic challenges that weigh heavily on the news industry.”)

“I have always seen The Salt Lake Tribune as Utah’s institution, much like our libraries, hospitals and the arts and cultural organizations that enrich our lives and reflect our shared civic goals. I will continue to serve as publisher, and Jennifer Napier-Pearce will continue in her role as editor,” Huntsman wrote to readers when the shift was announced. “By transitioning to a nonprofit business model we are ensuring that Utahns will continue to have the impactful, empowering journalism they need in perpetuity.”

This business model actually involves two separate nonprofit organizations — one for the Tribune itself and the other as the Utah Journalism Foundation, whose endowment will attempt to support local outlets across the region — most notably the Tribune. Nelson said they’re aiming to raise an initial $60 million in fundraising, but the full endowment will be “sizable.” (She declined to give an exact figure.) And it also involves answering a load of the IRS’s questions to determine how this shift isn’t just a for-profit company replicating its commercial operations and banking the tax benefits.

So what exactly are they proposing? How will the 501(c)(3) Salt Lake Tribune actually differ from the for-profit Salt Lake Tribune?

Federal tax code outlines eight specific exempt purposes under which an organization can apply for nonprofit status, and the Tribune is applying under the “educational purposes” standard. (Not the “testing for public safety,” “national or international amateur sports competition,” or “prevention of cruelty to children or animals” standards. The code can be oddly specific.)

“Education, according to the IRS and the regulations we’re applying under, includes instruction of the public on subjects useful to the individual and beneficial to the community. That’s journalism in a nutshell, right?” Nelson said.

And that label isn’t limited to traditional hard-news topics like politics, governments, and investigations. They’re also including arts, sports, and nature coverage, for example, as educational: “We’re not only informing them in the case of reviewing the local opera. We’re giving them information that can educate them about the decisions they want to make about participating in those cultural organizations that enrich our community,” she said. (Also Ricky Rubio’s impending free agency.)

That’s a “clever argument,” says Jeff Hermes, but “would it be educational within the IRS’s view of that term?” That’s TBD.

Federal regulations state that an organization will not be regarded as tax-exempt “if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” So what’s “insubstantial”? One tax court ruling found that there is some wiggle room (“a nonexempt purpose even perhaps somewhat beyond a de minimis level has been permitted without loss of exemption”), but notes that “nevertheless, there is a limit beyond which the statute may not be stretched.” The IRS will be the judge of that.

Hermes is deputy director of the Media Law Resource Center and the former director of the Digital Media Law Project at Harvard’s Berkman Center. His team tracked nonprofit news’ journey into IRS legal-land for seven years until the project closed in 2014, but the guide to navigating nonprofit tax code for journalists is still a solid resource. (You also find him quoted in many past Nieman Lab stories about news organizations and nonprofit status.)

The number of nonprofit newsrooms is growing rapidly — but they’ve all still got to go through the IRS process as individual applications. The increased interest “doesn’t necessarily translate directly into the IRS having an appreciation of the nonprofit model being appropriate for journalism,” Hermes said. But it’s getting there; applications used to routinely take a year and a half or more to go through, and that pace has improved.

Newsrooms contemplating nonprofit status — both existing and aspiring ones — need to be prepared to jump through a few logical hoops. Here are some of the biggest questions the Tribune and others face:

Are you using commercial revenue streams such as advertising or subscription fees without attempting fundraising?

Fundraising will be a big part of the Tribune’s new model, with that aforementioned endowment, private donations, and grants. (One thing that can get the IRS a little suspicious about a nonprofit is when it gets all or nearly all of its grants from a single foundation, Hermes said.)

But the Tribune also expects to continue its subscriptions and even advertising — though it acknowledges any advertising revenue would be treated as unrelated business taxable income. “We fully acknowledge that advertising revenue is not related to the core business of providing information in local journalism,” Nelson said. (“Who knows if it will even exist in five years?”)

The goal of the dual nonprofits is to enable Utah journalism to be self-sufficient. The endowment could still support the Tribune even if the newspaper itself doesn’t receive nonprofit status (though Nelson emphasized her optimism) — though they’d have to pay taxes on the support then.

Hermes pointed to a prior case where a health publication sought 501(c)(3) status under the educational standard and argued that its ads for medical devices and health products were helping inform readers about the types of products that would be useful for them.

“Subscriptions, newsstand sales, advertising: They don’t want to see organizations competing with the same models the for-profit models use,” he said. “There’s a long history of internal memoranda at the IRS that explains why.”

Ads and subscriptions — well, those sound a lot like traditional commercial revenue streams. The Salt Lake Tribune only put up its paywall a year and a half ago, now allowing for seven free articles a month. Previous leadership there (under Digital First Media ownership) attempted a membership approach built on events and an ad-free experience.

Now, Nelson compares a subscription to an entry ticket: “What we provide is a program. You go to the opera or the symphony, you buy a ticket — you’re buying it to be able to see that program. The opera doesn’t say that ticket is tax-exempt. If you give the opera a donation, that’s different,” she said. “We don’t want to say we have to drastically change our business model in order to qualify as a charitable organization.”

“Just because they have some types of income more traditionally associated with for-profit does not necessarily disqualify them, but will be a consideration,” Hermes said.

Are you engaged in political activity?

That includes endorsements or “if the organization contacts or urges the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation or advocates the adoption or rejection of legislation,” according to the Digital Law Media Project’s guide.

“We’re very lucky Paul Huntsman is willing to give up a powerful voice in that regard for this broader civic good,” Nelson told me. (“I’m looking forward to getting out of the endorsement business,” Huntsman told The New York Times a few weeks ago.) And hey, maybe endorsements are outdated anyway, she says: “People want to make up their own mind. They don’t wake up in the morning and say, ‘I wonder who so-and-so is going to endorse.'”

(In case you’re keeping track, the Tribune endorsed Hillary Clinton in 2016 and Barack Obama in 2008 and 2012, though George W. Bush in 2004. It’s traditionally been the more liberal editorial page in Salt Lake City, as opposed to the Deseret News, which is owned by the Church of Jesus Christ of Latter-day Saints.)

But Hermes says it’s not just about formal endorsements — there’s more to tiptoe around. “The problem is ‘endorsement’ within IRS parlance is not limited to the editorial board coming out and saying ‘We support Ms. X in the upcoming election.’ It also includes the publication of material that could work for or against a particular candidate,” he said. That could mean something like a scorecard of candidates’ positions could “fall within the electioneering bar,” according to recent rulings.

(It would be more than a little ironic if the IRS were to go after a news organization’s coverage as political electioneering. Another class of tax-exempt nonprofits — 501(c)(4)s, or social welfare organizations — are also theoretically not supposed to be primarily engaged in political activity, and yet they are the so-called “dark money” that pays for many of the TV ads you see every election season. Some 501(c)(4)s you may have heard of include the rather politically engaged National Rifle Association, the Koch brothers’ Americans for Prosperity, Planned Parenthood Action Fund, and Barack Obama’s Organizing for Action.)

Is your ownership ready for this?

Paul Huntsman is raring to go; he’s said they expect to get approval from the IRS in 2020’s first quarter at the latest. But it’s important to remember for other markets that all owners of a newspaper need to be on board for this sort of a transition to be possible, Hermes said.

“All the ownership of the organization needs to be transferred to the nonprofit itself,” he said. “They have to make sure the existing ownership is extinguished so they don’t have individuals or organizations benefiting from the operation.”

Nelson kept bringing up the local-news-as-a-civic-good-like-the-opera example that other local philanthropists, most notably John Thornton with the Texas Tribune and the American Journalism Project, have been pushing.

“Newspapers are cultural heritage organizations that record our history. They record the things we care about as a community. They help set an agenda, a geographic sense of who we are as a people. That includes things as which restaurants are safe and which one closed because it failed economically. These are the things that create a common web of us, who we are as a people here in Salt Lake and Utah,” Nelson said.

Photo of The Salt Lake Tribune’s offices at The Gateway by Paul Fraghton courtesy of Jeremy Harmon.

POSTED     June 3, 2019, 12:38 p.m.
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