The Digital Media Law Project formerly known as the Citizen Media Law Project, has launched a guide to help journalism organizations understand IRS processes when applying for 501(c)(3) status. You can download the Guide to IRS Decision-Making Process (PDF) here or via the website: http://www.citmedialaw.org/irs.
Recently, there has been a lot of discussion about news start-ups and existing news organizations that have applied for tax-exempt status under section 501(c)(3) status with the IRS. This tax-exempt status allows for organizations to receive tax-deductible donations from individuals and foundations and avoid payment of corporate tax. In certain cases, some journalism organizations have been able to receive this status and others have faced difficulties or delays.
Jeffrey P. Hermes, director of the Digital Media Law Project, based at the Berkman Center for Internet & Society at Harvard University wrote this Guide that provides clarity for journalism organizations seeking this tax-exempt status.
For example, the Guide explains how this tax-exempt status has eight purposes (scientific, religious, literary, public safety testing, amateur sports, educational, charitable, and prevention of cruelty to children and animals) in its statute that define the kind of organizations that are applicable under this 501 (c)(3) status. Those eight purposes also have specific legal definitions.
Specifically, organizations need to be familiar with the “organizational” and “operational” tests of the IRS that are used to consider if the organization meets one of the eight exempt purposes.
According to the Guide, for the “organizational” test, the organization must be “formally organized under the laws of a particular state…this will always involve the drafting and filing of organizational documents.” They also state that when organizations are seeking non-profit and tax-exempt status, they must also be able to prove that the organization has not been give powers to “carry on activities outside the scope of the Section 501(c)(3) purposes,” according to Hermes.
Specifically, news organizations should answer the following questions:
- Do your organizational documents state only tax-exempt purposes?
- Do your organizational documents grant powers inconsistent with tax-exempt purposes?
(To find out the answers to these questions above and how your organization can best be informed, download the Guide to IRS Decision-Making Process and see page 6.)
For the “operational” test, organizations cannot just simply state that they are operating under one of the eight purposes. The IRS will review how the organization is performing those functions to see if it meets one of the eight purposes.
According to Hermes as stated in the Guide, “the most significant issue appears to be simply showing that the organization is operated within the definition of one of the exempt purposes specified in section 501(c)(3). For journalism and publishing organizations, that almost always means establishing that the organization is being operated for an ‘educational’ purpose…”
Hermes states in the Guide that most journalism non-profits try to get this tax-exempt status by stating their purpose is “educational” which makes sense when a news organization’s goal is to inform the public.
News start-ups and journalism organizations need to be careful when using this purpose when filing for tax-exempt status. The Guide provides a clear, four-part test that the IRS uses to provide clear details on what news organizations have to think about if they decide to claim “educational” as their purpose. Specifically, the questions are:
- Is the content of the publication educational?
- Does the preparation of material follow methods generally accepted as educational in character?
- Is the distribution of the materials necessary or valuable in achieving the organization’s educational purpose?
- Is the manner in which the distribution is accomplished distinguishable from ordinary commercial publishing practices?
(To find out the answers to these questions above and how your organization can best be informed, download the Guide to IRS Decision-Making Process and see pages 11-19.)
Different from the Rest
In particular, news organizations also have to be aware of the last question from above and be able to clearly state how their operation can be differentiated from other commercial publishing practices.
The Guide states that news organizations need to be careful of their collaborations with for-profit businesses/organizations. This kind of collaboration will not disqualify them under Section 501 (c)(3) but the “IRS will deny an exemption where it cannot distinguish between the operations of a non-profit and a related for-profit,” according to the Guide.
News organizations filing for this tax-exempt status also have to be aware of the limitations that tax-exempt organizations have to participate in political activity according to the IRS. This means that the organization may not devote “substantial part” of its activities to influence legislation and cannot support or oppose candidates for public office. An organization will also be disqualified if it is deemed an “action organization” if it engages in propaganda, lobbying or political campaigns.
There are two exceptions to the limitation of lobbying activity according to the Guide that is if the organization engages in non-partisan analysis and insubstantial lobbying activity. Specifically as it relates to news organizations, “journalism outlets acting as non-partisan watchdogs or commentators on political issues will not be classed as action organizations because of that activity,” according to Hermes.
These are just a few of the highlights from the Guide that provide clarity to the complexities when applying for the tax-exempt status with the IRS.
The Guide also provides a reference chart in the appendix that details the standards for eligibility of journalism non-profits for federal tax exemption.
News start-ups and journalism organizations that are seeking to apply for 501(c)(3) status should read this Guide to be informed about the decision-making process the IRS uses. The Guide addresses many of the potential issues and complications that other news organizations have experienced when applying for this kind of status.
As Hermes mentions in the Guide, “it is important to understand that Section 501(c)(3) contains no tax exemptions that are specifically intended to benefit journalism organizations.”
News organizations seeking to apply for this tax-exempt status should make sure to be knowledgeable about the existing standards of the IRS in order to find out how and if this status will fit the news organization’s mission and goals.