A group of foundation and nonprofit leaders Monday recommended that the IRS update its rules in order to enable emerging digital news start ups to gain tax-exempt status.

The Nonprofit Media Working Group, formed by the Council on Foundations and the John S. and James L. Knight Foundation, said the IRS outdated approach is undermining creation of new community-focused models for creating and delivering news and investigative journalism.

“Our main finding is that the IRS is relying on antiquated rules, rules that were created in the 60s and 70s,” said Steve Waldman, who chaired the working group. “Not surprisingly they don’t match modern realities.”

Waldman noted that many communities are losing news from traditional sources and community members and journalists are trying to fill the gaps. But significant delays (sometimes years) in approving tax-exempt status for these organizations is limiting their ability to raise money and produce journalism. "Unfortunately, the IRS posture is making things worse," Waldman said.

Among problems, the group cited: time-consuming and inconsistent processes for reviewing applications for 501c3 status, undervaluing journalism as not being educational, and inhibiting longterm sustainability of nonprofit news organizations as they experiment with earned revenue streams, which would be taxed.

Examples of theses news organizations: Texas Tribune, The Lens in New Orleans, MinnPost, and Voice of San Diego. Waldman said the IRS is overly focused on similarities between these organizations and traditional commercial operations.

The report, The IRS and Nonprofit Media - Toward Creating a More Informed Public, recommends a new approach for the IRS:

Factors indicating an organization is pursuing educational rather than private purposes might include: 

- In determining its editorial strategy, the organization uses as its primary criterion whether its content directly or indirectly furthers purposes that are educational as defined by section 501(c)(3)of the Internal Revenue Code.

- The organization provides information on important public issues or the performance of public institutions. 

- The organization has procedures in place to ensure that editorial decisions or content are notdetermined by private interests.

- Exhortations to purchase unrelated or third-party goods or services do not constitute most of theorganization’s content or communications.

- The organization has a governing board that is independent of private interests and generally representative of the community it serves. This standard has been used by the IRS for many years.We are not suggesting any changes in approach to how they make that determination.

- No part of the earnings of a tax-exempt, nonprofit media entity should inure to the benefit of any private shareholder or individual. 

- The organization must not officially endorse or oppose any candidate for public office.

In addition, the working group believes the IRS currently is considering factors that, while appropriate originally, are now obsolete when determining whether an entity is qualified for tax exempt status. Following are factors that should not be part of an IRS determination.

- The overall manner or medium, by which the editorial content is gathered, collected, displayed, or disseminated.

- Whether or not a fee or other payment is required. Any fee to access the editorial content should be reasonable and not set at a level intended to restrict public access. A tax-exempt media organization should be free to experiment with earned revenue models, as long as it simultaneously adheres to its broad educational purpose.

- Whether or not an organization is supported by grants. Tax-exempt organizations should be able to develop a diverse set of revenue sources. They should not be compelled to exhaust all traditional philanthropic income sources before generating earned revenue.

The report notes the importance of emerging nonprofit news organizations amidst cutbacks in traditional media such as newspapers:

Nonprofit media plays a crucial role in helping communities get the information they need. These organizations will need to play an even greater role in the future. It is therefore essential that tax policy not inadvertently place unnecessary or inappropriate obstacles in their path to tax-exempt status.