As you might have seen from our home page, the Digital Media Law Project [FN] today released our Guide to the Internal Revenue Service Decision-Making Process under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations. The Guide is intended to demystify the standards applied by the IRS in determining whether a journalism-oriented non-profit is entitled to a federal tax exemption.
Many new journalism ventures consider forming as non-profit corporations. This should come as no surprise in the current market, where making a profit in the news business remains a dubious proposition even for mainstream outlets. As of December 2011, the number of clients who had contacted our legal referral service, the Online Media Legal Network, for help forming non-profit organizations was about twice the number looking to form traditional for-profit businesses.
For that reason, it was disturbing when a trend began to emerge last year in how the IRS was responding to applications from journalism-related non-profits for a federal tax exemption. Many non-profits count on receiving tax exempt status under Section 501(c)(3) of the Internal Revenue Code, not only to avoid federal taxes but to enable them to receive tax deductible donations from foundations and individual donors. But a growing number of journalism non-profits found themselves waiting for a year, eighteen months, or even two years or more for an IRS determination on their applications -- all the while struggling to stay afloat with little to no funding. (Many thanks to our friends at the Investigative News Network for first calling this trend to our attention.)
Our further discussions with journalism applicants in the process indicated that the IRS was setting these applications aside for special consideration. The exact reason for this special treatment remains unknown; although it is not unheard of for the IRS to strive for consistency in handling a series of similar applications by bundling the applications for coordinated treatment, the length of the delays in this instance is unusual. It did become clear to us, however, that there is substantial confusion over the standards that the IRS applies in determining whether a news non-profit is tax exempt.
Among the questions that we heard from journalism applicants were:
- Why is the IRS telling us we can't mention journalism in our description of our organization's purpose?
- Why is the IRS talking about us proving we're an "educational" organization? Don't they recognize that journalism is by definition educational?
- Why is the IRS telling us we can't have advertising revenue at all, when they have rules stating that 501(c)(3) organizations have to pay taxes on advertising income?
- Why is the IRS so concerned about our reporting on political issues?
- Why did organization X receive its tax exemption when we're having such difficulty?
and, most often,
- Does the IRS just hate journalism?
When we first started hearing these and other questions, we didn't know the answers (although we had our doubts about that last one). We started digging, and found more than fifty years of IRS history dealing with journalism and publishing organizations, and a byzantine maze of standards developed, amended, rejected and restated over that time. It became obvious that much of the confusion and concern among journalism applicants derives from the difficulty of understanding the rules by which the IRS operates.
So, we set out to make sense out of the IRS's standards, and along the way learned the answers to many questions like those above. The Guide represents the end result of this effort. We hope that it will provide the answers that others seek as well.
(Image courtesy Flickr user S.E.B., used pursuant to a Creative Commons Attribution-NonCommercial 2.0 Generic (CC BY-NC 2.0) license)
[FN] Also known as the Citizen Media Law Project -- we're working now on the last few tweaks to our new website with our new name.