Backlog, Precedent Stall Tax-Exempt Status of News Groups

There were almost 60,000 applications filed with the Internal Revenue Service (IRS) last year by organizations seeking tax-exempt status. More than 82 percent – almost 49,000 – were approved. SF Public Press was not among them. Neither was the Investigative News Network (INN).

And it appears that exempt status for them might not be in the cards for 2011, either.

As the news media landscape continues evolving, the IRS appears to be taking it slow when it comes to granting tax-exemptions to fledgling nonprofit news organizations, often started by former journalists at for-profit publications that have downsized.

About 500 applications last year — less than 1 percent — were not approved, and more than 10,500, about 17 percent, were withdrawn or did not provide required information, according to the IRS’ annual data book. Most times, applications for tax-exemptions are approved within a few months, mainly through the IRS’ Covington, Ky., office, outside Cincinnati.

The Investigative News Network (INN) is still waiting for confirmation of its exempt status, originally filing through the Cincinnati-area office in July 2010 and going back and forth with IRS agents and managers as the application got kicked upstairs to the chief counsel.

Kevin Davis, executive director for the Encino, Calif., organization, said he was “sympathetic” to the IRS but felt that his organization wasn’t asking for anything unprecedented. “I think the IRS is understaffed and ill-equipped to handle some the trends in news organizations asking for nonprofit status,” he said. “It’s not a ‘right’ to be a nonprofit, but it is ironic that as the government is under scrutiny for its largess, we are asking for no money and instead asking the public to support us.”

An IRS spokesman said he could not comment on specific tax-exempt applications but offered a general comment on the application process. “When we receive applications from groups that have an exempt purpose that may be novel, we consolidate those applications for consistent treatment,” said Anthony Burke.

Marcus Owens, an attorney with Caplin and Drysdale in Washington, D.C., and who ran the Exempt Organizations Division of the IRS for 10 years, said his firm has worked on some media-related cases and it would appear that the IRS is “grappling with questions of whether or not a regular news newspaper qualifies as an education organization” for tax-exempt status.

Some variations of that have achieved exempt status, such as ProPublica, which does investigative reporting but gives away its reports. Other online-only “newspapers” have been granted exempt status in recent years, including MinnPost and Voice of San Diego, both of which are considered members of INN. Both of those, Owens added, received their exempt status through the Cincinnati-area office rather than the national office of the IRS in Washington, D.C.

“Because of the visibility of those two organizations, the national office has, I believe, opened a study project involving news media organizations, and educational tax-exemption,” Owens said. “It’s going to take time for any organization that appears to be representing regular news as educational to get tax-exempt status, if they do,” he said.

“Historically, the IRS position has been that a regular news newspaper doesn’t qualify as educational organization,” Owens said. For tax-exemptions, historically organizations have been those that educated the public on some relatively narrow issue, he said, such as the environment, civil rights, or medical journals that would educate doctors.

“I think the IRS is trying to figure out what the correct position is, but it hasn’t gotten there yet. They’re taking a fairly hard, conservative line. Whatever they announce is likely to set the standard for tax-exemption,” Owens said. “The signs I’m seeing are a reaffirmation of the old position.”

Owens described the IRS’ Cincinnati-area operation as a “triage process” intended to move simpler applications along, processing them in about three months. If it involves a “relatively novel issue,” he added, it could be another 12 months or so before there’s an answer.

If an application isn’t complete or raises issues that the IRS wants to explore, it goes into a queue, which could take about another six months, according to Owens. As part of that consideration, a determination is made that the national office become involved, perhaps because the organization seems unique, lacks published precedence, or to provide guidance.

Considerable backlog at the IRS, Owens said, seems to be adding another six months to 12 months for applications to reach the Washington office. “If a case gets shunted to D.C., it could take a considerable amount of time,” he said. Given the backlog of applications at the IRS, however, it could be 15 months before the agency really gets to work on it.

As for INN’s application, Owens surmised that after almost 18 months, “means it’s somewhere in the national office, and someone may or may not be working on it at this point.”

The Sunlight Foundation was granted tax-exempt status in early 2006 after a routine few months, pre-dating “this tremendous and positive role of nonprofits in news production, particularly entities devoted solely to news,” said Ellen Miller, co-founder and executive director. “We see them popping up, various alternatives to mainstream media as they’ve laid off many good reporters who are moving into online arenas to create nonprofits to produce news, which is inherently, seems to be in the area of public education,” she said.

“We see ourselves more as a technology group, demonstrating the use of technology as a powerful tool,” said Miller.

The delay could hurt some organizations. “When you get recognized as a tax-exempt organization by the Internal Revenue Service it’s almost as if you’ve ‘matured’ as an organization,” said Stoll. “When you say you are tax-exempt it shows you’re independent and donations can be tax-deductable, you’re going to find a lot more support,” said Michael Stoll, executive director of SF Public Press, which filed its application for exemption in January 2010. The group’s health insurance company might not cover it next year without tax-exempt confirmation. In addition, Stoll feared that many of the grant applications they are currently working on would fall through.

During a recent telephone interview, Stoll said he was “confused” by the lack of communication coming from the IRS. His organization had properly filed for exempt status as an education organization, a common practice for media organizations seeking to be nonprofits.

“What is clear is that they (the IRS) don’t understand what is going down in this field and want to do ‘due diligence’ on its growth,” said Stoll. “We create content for public consumption and events that concentrate on matters of the public. If anyone should get nonprofit status, it should be us.”

SF Press’ application made the rounds going from one grant officer to the next after it was submitted to the IRS. In the spring, a new IRS grant officer asked three more rounds of new questions.

Davis recognized that filing for tax-exempt status meant his organization could not endorse candidates for office, write pieces for or against legislative issues or do advocacy journalism.

“We understand in order for us to be sustainable we are going to have to engage philanthropy and citizens at the most local level,” said Davis. “Today the majority of our funding is coming through foundations. It’s crucial for us to be a nonprofit. A lot of our content is community focused and we are trying to appeal to citizens who understand our democracy hinges on having a viable fourth estate.”