From Columbia Journalism Review:

The future of nonprofit news organizations has hit an unexpected roadblock in the agency that determines their tax-exempt status: The Internal Revenue Service.

Nonprofit news organizations applying for tax-exempt status are running into long delays as the IRS bundles them together as “precedential” and studies whether they qualify for the status under 501(c)(3). While animal protection and “fostering national or international amateur sports competition” are tax-exempt activities listed in the 501(c)(3) statute, journalism is not, and the agency’s historical position has been that newspapers or similar publications are commercial enterprises.

Consider the San Francisco Public Press.

The newspaper doesn’t accept advertising. It’s run by volunteers and has no salaried employees. It covers local public policy issues and eschews sports, entertainment news, and restaurant reviews. It loses money and is subsidized by donations and foundation grants.

But the IRS got the paper’s application nearly two years ago and still hasn’t given it an answer.

At least three other nonprofit news startups are also caught up in yearlong IRS delays, making the odds faced by the fledgling publications even longer.

And one former director of the exempt-organizations division at the IRS says the agency seems to be leaning toward the position that traditional news doesn’t qualify as a tax-exempt activity.

An IRS spokeswoman won’t comment on what exactly the agency is reviewing or how long it might take to issue its determination, but says nonprofit-news applications “have been centralized for consistency and are being worked in our DC office.”

As Steve Beatty, managing editor of New Orleans investigative startup The Lens, which applied more than a year ago, puts it, “We’ve been told our application will be reviewed up to the right hand of God.”

For decades the newspaper industry’s fat profit margins funded the bulk of the country’s local and investigative reporting. But with the implosion of its business model over the last several years, journalists have looked for other ways to sustain the kind of public-interest reporting that has been lost.

Journalism thinkers and doers have looked to nonprofits as a way to fill in the gaps left by dwindling newspaper staffs. If good journalism is going to lose money, the theory goes, then tax-deductible donations might make up the difference.

San Francisco Public Press applied for tax-exempt status in January 2010 and expected its approval would be a pro forma affair. The paper got a fiscal sponsor, a nonprofit organization that acts as a kind of tax-exempt bridge for nonprofits-in-waiting, and set to work covering beats like transportation, housing, and homelessness, while also collaborating with other nonprofit news organizations like KQED, one of the biggest public broadcasters in the country.

But after months of delays, the IRS bundled its application together with sites like The Lens, which has been told by the agency that they are being considered precedential.

That’s confusing because there are dozens of nonprofit news organizations already approved by the IRS, many of whom have been tax-exempt for decades.

ProPublica, MinnPost, and Voice of San Diego have gotten widespread attention and acclaim in the journalism industry in recent years.

But National Public Radio has long been a nonprofit, as have National Geographic, Mother Jones, Consumer Reports, The American Spectator, the Center for Public Integrity, and this magazine, the Columbia Journalism Review.

Investigative outlet The Austin Bulldog applied in August 2009 and got its IRS approval six weeks later. Conservative provocateur James O’Keefe III’s Project Veritas, famous for taking down ACORN and for using dubious journalistic practices (which in one case landed O’Keefe a misdemeanor conviction), applied well after two of the delayed nonprofits but the IRS approved its application several months ago, something that irks the straight-journalism practitioners.

“It’s frustrating to know that we’ve been hung up on this. I kick myself thinking about what if I had applied a few months earlier,” Beatty says.

What changed?

The burst of activity in nonprofit news in 2008 and 2009 caught the attention of the IRS, says Marcus Owens, a lawyer with Caplin & Drysdale who used to direct the IRS’s exempt-organizations division that decides who gets 501(c)(3) status. The agency processes tens of thousands of nonprofit applications a year from its Cincinnati office. Most are routinely processed in two to three months, but some with novel issues are bundled together and sent to Washington for further study. The IRS flagged nonprofit news because of the increasing applications and because it has historically resisted giving newspapers, or publications that seem like newspapers, tax-exempt status, Owens says.

While journalism is sacrosanct for constitutional purposes, it’s not to the IRS, which doesn’t necessarily consider it a tax-exempt activity. Kevin Davis found that out when he applied in July 2010 for nonprofit status for the Investigative News Network, an organization he runs that represents sixty nonprofit news outlets.

“There have been extraordinarily arduous and far-reaching and we think overreaching requirements,” Davis says. “The IRS has preemptively suggested that we modify our procedures, change our policies, and modify our articles of incorporation to remove the word ‘journalism’ because that is not a charitable cause.”

Because the press isn’t specifically named in the 501(c)(3) statute, nonprofit news organizations have banked on the IRS considering journalism an educational activity, which is one of the tax-exempt activities specified. But the agency has historically taken a somewhat narrow view of what is educational. News has to be for “the instruction of the public on subjects useful to individuals and beneficial to the community,” according to the IRS, and it doesn’t apply to as much journalism as you might think.

“The IRS has a longstanding position that a regular-news newspaper is not educational—that there has to be something more… it hasn’t articulated it, but I suspect the word would be ‘academic,’” Owens says. “Something like Foreign Affairs is tax exempt because it’s educational, whereas a regular-news newspaper is going to report what happens but without any intent to educate the reader. A regular-news newspaper, typically one that carries advertising, looks and feels like a commercial activity, and the IRS is sort of locked into that.”

In recent years, Owens represented a group, which he declined to name, that wanted to turn a small-town newspaper into a nonprofit and focus more on civic issues than on day-to-day news.

“If ever there was going to be a place for IRS to narrow their historical view, this was a good option,” Owens says. “But the IRS wasn’t going to go there and eventually the organization just gave up.”

This isn’t the first time the IRS has eyeballed nonprofit news. Thirty years ago, the IRS told Mother Jones it was revoking its tax-exempt status because it couldn’t tell why it was different from a commercial publication, as CJR wrote at the time. The IRS later reversed itself, but didn’t commit to a precedent on how to determine a journalistic organization’s tax status.

Mother Jones, at least, took ads and sold subscriptions. SF Public Press, INN, and The Lens do not (Beatty says the IRS had questions about its relationship with the local Fox affiliate, which housed the small organization and partnered on some stories. The Lens now pays rent).

By stalling approval for new nonprofit news outlets, the IRS is making it harder for them to get past the startup stage and fill the coverage gaps left by weakened for-profit newspapers. But it’s difficult to quantify the damage, says Michael Stoll, San Francisco Public Press’s executive director. “A lot of funders see you in a very different light if you have not passed that milestone of becoming your own independent organization. It’s also more work for them to research you to make sure you’re doing the right thing. I suspect were going to lose a lot of money because of this.”

The Lens, which is fiscally sponsored by the Center for Public Integrity while it awaits approval, faces a particular challenge. The largest foundation in New Orleans, Baptist Community Ministries, won’t give money to fiscally sponsored organizations.

Brant Houston, the Knight Chair of Investigative Reporting at the University of Illinois sees the difficulties firsthand as chairman of the Investigative News Network but also through the struggles of its prospective members. “Some of these new nonprofit newsrooms could go under waiting for this, because it’s difficult to get donations if you don’t have the status,” he says.

For El Paso’s Newspaper Tree, the IRS delays mean that it doesn’t publish at all. The El Paso Community Foundation bought it after its for-profit owner went under intending to run it as a nonprofit watchdog in a community with weakened institutional journalism.

“People have called clamoring for it: ‘Where is Newspaper Tree? We need it, we need it,’” says Eric Pearson, the foundation’s president. But its lawyers have advised the foundation not to publish the paper, which it estimates would cost it about $200,000 a year to run, until it gets its tax-exempt status.

While it’s certainly possible that the IRS could rule in favor of all these pending nonprofits and even establish an official precedent that would clear the path for future publications, Owens, the former head of the IRS’s exempt-organization division, isn’t optimistic. “It’s conceivable that the IRS will nuance its stance,” he says. “But I think the most likely outcome is that the IRS will just sit there.”

The idea of the IRS ruling raises obvious First Amendment issues. Nonprofit news organizations are prohibited by the IRS from endorsing candidates and face restrictions on pushing for legislation. That the agency effectively decides whether a press outlet can exist or not is a problem. The Mother Jones incident, coming as it did at the start of the Reagan administration and accompanied by scrutiny of other left-wing publications, raised questions about political interference at the time. And there’s something unseemly about the tax man telling a news outlet to remove the word “journalism” from its mission statement.

What’s needed to ensure a stable future for nonprofit news is for Congress and the President to approve a new part of the 501(c) statute that specifically exempts non-commercial journalistic organizations. It already has for other important American institutions, like labor unions and pension funds. It’s also carved out specific exemptions for activities that aren’t enshrined in the Constitution: 501(c)(7) for social and recreational clubs and 501(c)(13) for cemetery companies. Steven Waldman, in his “Information Needs of Communities” report for the Federal Communications Commission this summer, raises a new category as one solution for the questions surrounding nonprofit news.

If congressional action isn’t forthcoming, political pressure on the Treasury Department could facilitate a favorable ruling, Owens says. Litigation is also an option, though it’s one that would require backers with deep pockets. A suit could cost seven figures and the nonprofit news outlets obviously can’t afford that.

Until then, the future of nonprofit news will depend in no small part on deliberations in the Washington office of the IRS.