IRS Urged to Revamp How It Grants Charity Status to News Outlets

A group of foundation and media experts issued a report today urging the Internal Revenue Service to overhaul its “antiquated” approach to determining whether to grant tax-exempt status to nonprofit news outlets.

The current system has led to significant delays and confusion at a time when financially struggling commercial media have cut back on their local reporting and new online startups are attempting to fill the vacuum, the report says.

“Applying the 1970s rules to Web media makes about as much sense as telling spaceships they have to use the freeway,” Eric Newton, vice president of the John S. and James L. Knight Foundation, said in a statement. The Knight Foundation made a $220,000 grant to the Council on Foundations to set up the group of experts.

Meeting Standards

The IRS has granted many news publications tax-exempt status in the past, for example Consumer Reports and Mother Jones, the report notes.

But the agency has slowed down its work in recent years, questioning some applicants about whether their work is “educational”—a key standard they must meet for tax-exempt status—and apparently relying on old rules that deny charity status to nonprofits that gather or distribute news in a similar way to commercial outlets, it says.

Such rules make it difficult for nonprofit media outlets to thrive since foundations that provide grants increasingly require them to charge readers, attract advertising, or find other ways to produce money so they can eventually operate independently, the report says.

Among the incidents cited by the experts:

• The San Francisco Public Press, a nonprofit newspaper that specializes in covering the poor and the places they live, received its tax-exempt status more than 32 months after applying in January 2010. While waiting, it could accept foundation grants only through a fiscal sponsor and had to pay a 7-percent fee to the sponsor to oversee the grants. The IRS told the group that nonprofit news outlets would find it easier to get approved if they had grown out of a university or other education center.

• El Paso’s Newspaper Tree was founded in 2003 to offer policy-focused and investigative reporting on the U.S.-Mexico border area. After it failed as a commercial operation, it applied for tax-exempt status in April 2011. It has still not received approval, and the IRS has asked for additional information about the paper’s sources of revenue.

• The Oshkosh Community News Network won tax-exempt status but shut down after five years, partly because its operator feared that it could lose its charity status if it increased its revenue.

• The Johnston Insider, an online news site in Rhode Island, reported that the IRS wrote: “While most of your articles may be of interest to individuals residing in your community, they are not educational.”

The report urges the IRS to stop asking whether nonprofit media applicants resemble commercial operations since the digital revolution has upended both business models.

The agency should evaluate whether the outlets are engaged primarily in educational activities that benefit their communities rather than advance private interests, it says. “Educational” could include providing information on important public issues or the performance of public institutions, it adds.

The 12-person committee was headed by Steven Waldman, a journalist and former senior adviser to Julius Genachowski, chairman of the Federal Communications Commission.

Mr. Genachowski wrote a letter urging Treasury Secretary Jacob Lew to consider the report’s recommendations, referring to a report his agency issued in 2011 expressing concern about the collapse in local journalism and its impact on “accountability reporting.”

Eleven deans of university journalism schools also issued a statement urging the IRS to “look more favorably and act more quickly” on the applications from nonprofit media outlets.

The IRS did not respond to a request for comment.

Send an e-mail to Suzanne Perry.