Knight Blog

The blog of the John S. and James L. Knight Foundation

Do IRS nonprofit media rules need a digital-age update?

May 3, 2012, 3:36 p.m., Posted by Eric Newton

Funders, nonprofit journalists and academics gathered this week at the Council on Foundations convention in Los Angeles to discuss challenges nonprofit news outlets face in getting charitable 501c3 status. It’s part of a project called the Nonprofit Media Working Group, a partnership between Knight Foundation and the Council.

The working group is chaired by Steve Waldman, senior media policy scholar at Columbia University. Waldman was the lead author of the first major government report in a generation on the state of local news. Among the findings of that FCC report are that IRS nonprofit media rules appear out of date and thus unhelpful to the growing field.

Steve Waldmann

On Monday night, Waldman moderated a foundation convention panel to discuss the issue. Attendees watched a HDTV segment from Dan Rather Reports outlining the story of Public Press, a small San Francisco news outlet that has been seeking nonprofit status for more than two years.

The Rather segment reported the growth of nonprofit media. It speculated that the IRS may be confused or overwhelmed by the nonprofit digital media requests, noting that the rules under which the IRS grants nonprofit media status were created long before the internet. Rather’s story did not interview any IRS officials; the service issued a statement saying it could not comment on the specifics of any single case. It said when it receives “novel” applications, they get special consideration.

Why is this important? At Knight Foundation, we believe in informed and engaged communities. We think news and information are core social needs, every bit as important to community vitality as safe streets, clean water or good schools. Our bi-partisan Knight Commission on the Information Needs of Communities said we need new thinking and aggressive action to increase both information flows and community engagement. Knight has been involved in hundreds of experiments to do just that.

Waldman’s follow-up study at the Federal Communications Commission, also named Information Needs of Communities, detailed the loss of more than 15,000 journalism jobs in recent years, nearly all on the local level. It concluded that this amounted to a crisis in “local accountability journalism.” This is the journalism that produces the news we need to run our governments and our lives.

The FCC report pointed directly at nonprofit tax regulations as being unfriendly to new media models. At the same time, there were several publicized cases of 501c3 status being long delayed. So Knight funded a working group with the Council on Foundations to look into the issues raised by the FCC report. The group is asking questions: Are the rules being misunderstood? Are there confusing or contradictory regulations that need to be clarified or updated? Does the underlying law need to be addressed? The working group’s study includes outreach to all interested in the issue.

With that as a backdrop, a panel chaired by Waldman considered the nonprofit media questions. Working group member Cecilia Garcia of the Benton Foundation said the nonprofit sector must play a larger role in media, but that foundations by themselves can’t sustain nonprofit news. Kevin Davis of the Investigative News Network noted that in-depth journalism was cut more than other forms during the commercial contraction because it is, as a general rule, simply not a profitable activity. During INN’s long effort to get charitable status, it had to strike the word “journalism” from its mission statement, and agree to operate at a “substantial loss.”

Marcus Owens, attorney for the working group, from Caplin & Drysdale, is a former IRS official who once oversaw nonprofit  applications, including those from media organizations. He noted that the original nonprofit rules “reached back” to a 1601 English law to define what is charitable. So public “education” projects may be charitable. But “journalism” projects do not automatically fall under that definition. (So much for Henry Ward Beecher’s  1873 quote: “Newspapers are the schoolmasters of the common people.”)

A major issue, Owens said, is a part of the rules saying nonprofit media need to be produced differently from commercial media. That’s why the IRS has questioned nonprofit revenue generated by ads, subscriptions and syndication. Since commercial media depends heavily on those sources, the logic goes, nonprofit media shouldn’t. The working group will need to consider whether that distinction is still valid in an era of collapsing ad models and, indeed, the convergence of for-profit and non-profit business models. In the digital age, can you really tell the difference between a sponsor, an underwriter, an advertiser and a marketing partner?

Garcia of Benton said foundation money alone can’t even come close to bridging the local “market gap” being left by commercial media. Foundations (including Knight, which studied the issue) often urge nonprofit media to be entrepreneurial. “Once we seed an organization,” Garcia said, “there needs to be a systematic, strategic way to replace our funds.”

Joel Kramer, a working group member whose MinnPost has become one of the models of successful nonprofit news, said his $1.5 million revenue includes 25 percent from advertising and sponsorship, and only 20 percent from foundations. He draws other revenue from events, syndication and other sources. A diversity of revenue sources, Kramer said, is crucial to nonprofit media success.   

Kramer and other members of the panel wondered if revenue source was a necessary test of whether a news organization deserving of nonprofit status. Better, they said, might be sticking to the basics: Nonprofit news status should hinge on whether a news outlet benefits the community rather than shareholders, and whether it provides news and information that adds to our common knowledge on matters of public interest.

It’s too soon to say what the working group will conclude, but I like the emphasis on the relationship between news producers and the communities they serve. That’s one of the reasons I’m proud of our Knight Community Information Challenge: it’s the community foundations that choose the news and information projects; Knight only matches their funds. We also think the community benefits when a news organization is transparent: To ask Knight for media grants, nonprofits must agree to list all donors of more than $5,000 on their web sites. People should know who is paying for their news. Once, you could know that just by looking at the ads: today, that’s outdated, and we need to organize ourselves in new ways to ensure transparency.

The working group will continue to meet during the summer, and the Council on Foundations will create a special web page to chronicle its activities. Members are Steven Waldman, chair; Kevin Davis, Investigative News Network; Joel Kramer, MinnPost; Sue Clark Johnson, Arizona State University; Jim Bettinger, Stanford University; Jeanne Pearlman, Pittsburgh Foundation; Cecilia Garcia, Benton Foundation; Juan Martinez, Knight Foundation; Calvin Sims, Ford Foundation; Vince Stehle, Grantmakers in Film and Electronic Media, James Hamilton, Duke University; Clark Bell, McCormick Foundation and John Hood, Locke Foundation. Project director: Shelton Roulhac, Council on Foundations. Legal counsel: Marc Owens and Sharon Nokes, Caplin & Drysdale.

By Eric Newton, senior adviser to the President at Knight Foundation