Nonprofit news organizations have become an important part of the American journalism landscape. The Pew Research Center reports that 172 digital nonprofit outlets launched between 1987 and 2012, with at least 71% being formed between 2008 and 2012. See Nonprofit News Outlets, Pew Research Center, http://features.journalism.org/nonprofit-news-outlets/ (last visited Mar. 11, 2016). Many of those groups joined together into what is now called the Institute for Nonprofit News, a community of publishers that “shares best practices, collaborates on stories, pools resources and receives cutting-edge training in professional, organizational and business development.” By focusing on important local stories, many of these nonprofits fill information voids that exist in communities across the nation.

This guide seeks to provide readers with general advice on three important topics for tax-exempt nonprofit news organizations: advertising, sponsorships, and content-distribution agreements. (Many of the other topics involved in forming a nonprofit news operation have been covered extensively in other guides, which are described at the end of this guide.) A 2015 Knight Foundation study of 20 nonprofit news organizations found that 23 percent of revenue the organizations received derived from earned income — a category that includes income generated from advertising, events, sponsorships, training, and subscriptions. This is a five percent increase from 2011, showing that nonprofits have increasingly begun to rely on these important sources of income.

Although there are no laws at either the federal or state levels that flatly prohibit tax-exempt nonprofits from advertising, accepting sponsorship money, or entering into content-distribution agreements, engaging in these practices can result in tax liability. For instance, the net income derived from advertising and sponsorship agreements could be classified as unrelated business taxable income (which accountants and lawyers usually refer to as “UBTI,” but which we’ll just call “unrelated income”) and taxed at the corporate tax rate at both the federal and state levels. Thus, a general knowledge of the issues surrounding advertising, sponsorships, and content-distribution agreements is important for any tax-exempt nonprofit news organization thinking about engaging in one of these activities.

Funding for this guide provided by the Nicholas B. Ottaway Foundation

The nonprofit news model

There is little doubt that the American news industry is fighting to maintain its once profitable business models. Newsroom layoffs have become common and some of the nation’s historic news organizations have closed altogether. Business Insider reported in July 2009 that, in just the first six months of that year, 105 newspapers were shuttered and 10,000 newspaper jobs were lost.

A root of these problems is the struggle of many news organizations to generate adequate revenue, a fact that should hardly be surprising to avid watchers of the news industry. In the context of newspapers, advertising revenue — the source of income that newspapers historically relied upon to fund most of their newsgathering activities — is down more than 40 percent from a decade ago. Income from newspaper circulation — traditionally a lesser source of funding — has likewise waned.

This economic situation means that even as journalism remains as important as ever to local communities, it is becoming harder to sustain a viable news enterprise. Thus, in light of the current economic climate, some have encouraged news organizations to embrace the nonprofit business form, which if usually used for religious, charitable or educational endeavors.

Although there are pros and cons to every type of business form, incorporating as a nonprofit could offer benefits to those looking to start or maintain a news organization. Some include:

Tax-exempt nonprofits are generally not taxed on the income they collect. Nonetheless, as we will see below, this general rule is not always true. The net income a nonprofit derives from business activities deemed “unrelated” to the nonprofit’s purpose, such as advertising, are usually taxed at the corporate rate at both the federal and state levels.

Contributions made to tax-exempt nonprofits are generally treated as tax-deductible, a benefit that encourages others to give.

The directors, officers, and employees of nonprofits generally receive limited liability protection, meaning they are not personally liable for the nonprofits’ deficiencies. It should be noted, however, that a nonprofit’s limited liability status will not shield a journalist working for the nonprofit from personal liability for an intentional tort like defamation.

Tax-exempt nonprofits are free from the pressures associated with returning profits to their shareholders.

But there are disadvantages to the nonprofit form, which include:

Nonprofits that receive tax-exempt status under §501(c)(3) of the Internal Revenue Code are prohibited from participating or intervening in “any political campaign on behalf of (or in opposition to) any candidate for public office.” A tax-exempt nonprofit news organization that endorses a candidate for political office, a function routinely performed by news outlets, runs the risk of losing its federal tax-exempt status. The Internal Revenue Code further prohibits §501(c)(3) tax-exempt nonprofits from devoting a substantial part of their activities to attempting to influence legislation.

Tax-exempt nonprofits must be organized and operated for a specific purpose — such as a religious, charitable, scientific or educational purpose. Accordingly, the IRS may revoke the tax-exempt status of a nonprofit that operates too much like a commercial enterprise and is no longer advancing the purpose it incorporated to further. This is referred to as the commerciality doctrine.

From an economic perspective, struggling news organizations may receive little value from achieving tax-exempt nonprofit status. Because corporations are generally only taxed on their net profits, a for-profit news organization that fails to generate a net profit will likely not be subject to corporate tax liability.

Forming a tax-exempt nonprofit: A general overview

To become a tax-exempt nonprofit news organization, an organization would typically incorporate as a nonprofit under state law and apply for tax-exempt status at the federal level. Nonprofit news organizations seek federal tax exempt status as a charitable organization under § 501(c)(3) of the Internal Revenue Code.

To incorporate a business as a nonprofit at the state level, the organizers must file “articles of incorporation” with their state Secretary of State’s office. They must also create a set of bylaws, which govern how the nonprofit will operate. (More detailed information on these steps can be found in the links on the Resources page of this report, particularly on the Digital Media Law Project’s page.)

When creating the articles of incorporation, it is important to include language stating the purpose of the organization. In order to be recognized as a tax-exempt organization under § 501(c)(3) at the federal level, an organization must incorporate at the state level for one of the purposes specified in that section of the Internal Revenue Code, typically “religious, charitable, scientific, . . . literary, or educational purposes.” Those seeking to form a nonprofit to pursue journalistic endeavors usually attempt to incorporate for “educational” purposes. (The listing of a specific purpose in the Articles of Incorporation is a major difference between nonprofit and for-profit corporations. Many for-profit corporations usually do not list a specific purpose, instead choosing to incorporate “for any lawful purpose.”)

In examining an application for nonprofit status, the IRS first makes sure the purpose listed in the organization’s articles of incorporation is one of the exempt purposes. The IRS requires the organization to show that it actually operates in a way that furthers its exempt purpose.

Because it can take anywhere from a few months to more than a year to get tax exempt status from the IRS, some nonprofits start by finding a “fiscal sponsor” – an established nonprofit that can accept tax-deductible donations. The sponsor typically will pay bills and file business forms in its name, and often pass charges for those services to the newly established nonprofit. The Institute for Nonprofit News offers fiscal sponsorship servicesfor nonprofit news startups.

The taxation of unrelated business taxable income

As a general rule, tax-exempt nonprofits do not have to pay taxes on the income they generate while pursuing businesses that are substantially related to and further the organization’s tax-exempt purpose. For instance, tax-exempt nonprofit news organizations generally do not have to pay taxes on the charitable contributions they receive or on the income they generate from subscription fees. This income, in all likelihood, would be viewed as substantially related to the purpose that the organization incorporated to further. In the context of nonprofit news organizations, as noted earlier, this purpose is usually educating the public or some portion of it.

However, the IRS and many states will tax revenue that they classify as unrelated business taxable income. Revenue will be considered unrelated income if it derives from (1) a trade or business that is (2) regularly conducted and (3) not substantially related to the organization’s exempt purpose, according to IRS rules.

The first item concerns whether the organization is conducting an activity that constitutes a “trade or business,” a term that “includes any activity conducted for the production of income from selling goods or performing services” under Treasury Regulation §1.513-1(b). IRS Publication 598, “Tax on Unrelated Business Income of Exempt Organizations,” defines “trade or business” as “any activity conducted for the production of income from selling goods or performing services. An activity must be conducted with intent to profit to constitute a trade or business.” However, the same publication makes clear that selling advertising in an exempt organization’s newsletter or other periodical is such a “trade or business.”

Second, the business or activity must be “regularly conducted.” According to the IRS Publication 598, “[b]usiness activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.” The IRS provides the following example:

A hospital auxiliary’s operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business.

Finally, the business or activity must not be “substantially related” to an organization’s exempt purpose. A business activity fails to be “substantially related to an organization’s exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds).”

Advertising income: prepare to pay taxes, but after offsetting expenses

Advertising can serve as an important way for nonprofit news organizations to cover the costs related to newsgathering. In 2013, for example, City Limits, a prominent nonprofit news organization covering New York City, generated nearly 30% of its total revenue from advertising, according to a 2013 Knight Foundation report.Under Treasury Regulation 1.513-4(c)(2)(v), advertising is defined to mean “any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed, and which promotes or markets any trade or business, or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use any company, service, facility or product. A single message that contains both advertising and an acknowledgment is advertising.”Net income generated from regularly conducted advertising usually constitutes unrelated income. “Advertising revenue generally is taxable as [unrelated income] because it is too removed from the nonprofit’s educational mission,” Columbia Law School Professor David Schizer wrote in a law review article on the topic. “Although ads furnish information, their purpose ordinarily is to sell products, rather than to inform.” Accordingly, at the federal level, nonprofit news organizations are typically taxed on the net income they derive from regularly conducted advertising at the applicable corporate tax rate, if they make more than $1,000 in a year on that advertising.Under what is referred to as the “fragmentation rule,” net income derived from advertising is taxable as unrelated income even if it is placed in a publication that, overall, furthers the organization’s tax-exempt purpose. According to Treasury regulations, the “activities of soliciting, selling, and publishing commercial advertising do not lose [their] identity as a trade or business even though the advertising is published in an exempt organization periodical which contains editorial matter related to the exempt purposes of the organization.”To clarify issues related to unrelated income in the context of news periodicals, the federal regulations provide the following example:Z [a tax-exempt nonprofit] publishes a monthly journal containing articles and other editorial material which contribute importantly to the accomplishment of purposes for which exemption is granted the organization. Income from the sale of subscriptions to members and others in accordance with the organization’s exempt purposes, therefore, does not constitute gross income from unrelated trade or business. In connection with the publication of the journal, Z also derives income from the regular sale of space and services for general consumer advertising, including advertising of such products as soft drinks, automobiles, articles of apparel, and home appliances. Neither the publication of such advertisements nor the performance of services for such commercial advertisers contributes importantly to the accomplishment of any purpose for which exemption is granted. Therefore, notwithstanding the fact that the production of income from advertising utilizes the circulation developed and maintained in performance of exempt functions, such income is gross income from unrelated trade or business [and is therefore subject to taxation]. (Treasury Regulation 1.513-1 (example 6).However, it is important to note that if a tax-exempt nonprofit has unrelated income from advertising, it will be able to deduct the expenses not only for soliciting and developing the ads, but for producing the publication generally. IRS Publication 598 explains:The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity.Furthermore, it does not follow that advertising should be avoided just because taxes may have to be paid on the net income derived from it. Richard A. Speizman, a partner in the Exempt Organizations group of the Washington National Tax practice of KPMG, echoed these sentiments in an interview for this guide. “Obviously, you would rather not pay taxes than pay taxes,” he said. “But if you are selling advertising and you have to pay taxes on that revenue and you are still making a profit then, at the end of the day, that is a good thing.”The U.S. Supreme Court explored unrelated income and the fragmentation rule in a 1986 case, United States v. American College of Physicians. The court ruled that advertisements placed in The Annals of Internal Medicine — a monthly medical journal published by the American College of Physicians, a 501(c)(3) nonprofit formed for educational purposes — were not “substantially related” to the organization’s exempt purpose and thus constituted taxable unrelated income.The court, however, rejected an approach favored by the government that would have created a blanket rule establishing that all net advertising revenue, by default, constituted taxable unrelated income. The court instead adopted an approach under which advertisements placed in periodicals issued by tax-exempt organizations are evaluated on a case-by-case basis to see if the advertisements are substantially related to an exempt purpose. The court wrote that the College of American Physicians could have controlled “its publication of advertisements in such a way as to reflect an intention to contribute importantly to its educational functions,” for instance, by “coordinating the content of the advertisements with the editorial content of the issue, or by publishing only advertisements reflecting new developments in the pharmaceutical market.” Thus, in a situation where advertisements are used to educate readers, it is possible that the tax on unrelated income may not apply. But, since most advertising is done for commercial, rather than educational purposes, it is probably the rare exception that advertising would fit with the educational mission.

It is routine for nonprofit tax-exempt organizations to seek for-profit sponsors. Under a common sponsorship scenario, a for-profit entity will provide money to a tax-exempt nonprofit organization that is hosting some type of charitable event, such as a local race or annual gala. In exchange for the money, the for-profit entity will expect the organization to list it as a “sponsor” of the event. As anyone who has ever watched public television or listened to public radio can attest, sponsors can also help fund newsgathering. Indeed, in the 2015 Knight Foundation study of 20 nonprofit news organizations mentioned earlier, 10 received money from sponsorships, generating an average of $286,843 in income. The study found, in fact, that corporate sponsorships composed the largest share of total earned revenue—a category defined to include revenue generated from advertising, events, sponsorships, training and subscriptions. Under what the IRS calls the “section 513 safe harbor,” income derived from “qualified sponsorship payments” is not treated the same as advertising and does not constitute taxable unrelated income. A qualified sponsorship payment is defined as “any payment by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit.” However, a substantial return benefit, and thus tax liability, will be found to exist when the nonprofit provides a benefit other than a use or acknowledgment, such as advertising, to the sponsor that has an aggregate fair market value that exceeds two percent of the sponsorship payment. According to the IRS, a use or acknowledgement may include: [1] exclusive sponsorship arrangements; [2] logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities or company; [3] a list of the payor’s locations, telephone numbers, or Internet address; [4] value-neutral descriptions, including displays or visual depictions, of the payor's product-line or services; and [5] the payor's brand or trade names and product or service listings. However, this general rule — that sponsorship payments do not constitute taxable unrelated income — does not apply to acknowledgments in periodicals. The term “periodical,” which includes content delivered electronically, means “regularly scheduled and printed material published by or on behalf of the exempt organization.” In other words, a nonprofit newspaper or online publication that regularly publishes content would have to pay taxes, typically at the corporate tax rate, on income derived from sponsorships if they acknowledge the sponsor in the publication. To clarify, the IRS provides the following example: V, a trade association, publishes a monthly scientific magazine for its members containing information about current issues and developments in the field. A textbook publisher makes a large payment to V to have its name displayed on the inside cover of the magazine each month. Because the monthly magazine is a periodical . . . the section 513(i) safe harbor does not apply [and V’s net income from the sponsorship is taxable as unrelated income]. (Treas. Reg. 1.513-4, example 10) When it comes to online publications, what constitutes a “periodical” is not entirely clear. An IRS ruling from 2014, See PLR 201405029, sheds some light, but questions linger. In that ruling, the IRS held that a website that publishes educational information constitutes a periodical. The IRS reached this ruling even though it wrote that “a website is ordinarily not regarded as a periodical.” Important to the IRS’s decision was the fact that the nonprofit had discontinued the print version of its educational magazine in favor of publishing “essentially the same kind of content” on its website. The IRS wrote: “The website is operated similarly to that of many newspapers and magazines with an online presence, with new material published regularly and old content also readily available. Under the circumstances, the website serves the function of a traditional periodical and should be treated as such.” In light of these regulations, Speizman notes that it is important for tax-exempt nonprofit news organizations to monitor where they acknowledge corporate sponsors. “If an organization that puts out a periodical has corporate sponsors and in the lobby of its building, it lists the names of their sponsors, shows their name and marks, and has photos of the products they produce, that is probably fine because in that case the [sponsors] are sponsoring the organization,” Speizman said. “It is when the return benefits come through a periodical that the special corporate sponsorship rules do not apply.” So while it is common on public television and radio broadcasts to hear mentions of sponsors that fall just short of sounding like commercials, the IRS rulings that have been created over the years regarding periodicals can be transferred to web sites, if those sites look like the functional equivalent of a regular periodical. Nonprofit web sites should steer clear from making their sponsorship acknowledgements look like promotional spots or advertisements, unless they choose the route of paying taxes on that income.

Content-distribution agreements: income could be taxable if not tied to the nonprofit purpose

In today’s media landscape, it is common for for-profit news media organizations to publish content produced by tax-exempt nonprofits. In some instances, the tax-exempt nonprofit will give away its content for free. ProPublica, a tax-exempt nonprofit news organization, provides the best example of this model. ProPublica has entered into agreements with more than 100 publishing partners — including The Washington Post, The New York Times, and the Chicago Tribune — under which it provides investigative news stories for publication at no charge. In other instances, the tax-exempt nonprofit will sell its content to a for-profit entity. For instance, under an agreement that is no longer in effect, the Chicago News Cooperative, a non-profit news organization that is now defunct, sold the content it generated to The New York Times for publication in The Times’ Friday and Sunday editions. Nikki Usher and Michelle Layser, who wrote a law review article on the legal implications of new journalism business models, mention that “through these relationships, for-profit newspapers can acquire news content for a lower cost than would be required if the corporation were to produce it itself. Likewise, the tax-exempt organization benefits through modest sale revenues and the opportunity to more widely distribute its news content in furtherance of its exempt purpose.” Obviously, a tax-exempt nonprofit that gives away its content for free would not be subject to the tax on unrelated income as a result of the distribution agreement. Under this scenario, the content distribution agreement simply does not generate any income to be taxed. But when income is involved, the law is not clear. There appear to be no statutes, regulations, or case law addressing the issue of whether net income derived from content distribution agreements constitutes taxable unrelated income. A nonprofit news organization could certainly argue that such agreements further its educational purpose and net income derived from them should not be classified as unrelated income. However, there is not yet established precedent to provide a definitive answer on this issue. In addition to agreements discussed above, it is possible for a tax-exempt nonprofit news organization to enter into a “joint venture” with a for-profit news organization. Under such an agreement, the nonprofit and for-profit would actually join together as a separate entity to produce some type of news content (a newspaper or news website, for example). In Plumstead Theatre Society, Inc. v. Commissioner, the U.S. Tax Court approved of a joint venture between a tax-exempt nonprofit and its for-profit partners, in part, because the for-profit partners had no control over the way the tax-exempt nonprofit operated or managed its affairs. Subsequent to Plumstead, the IRS has examined joint ventures “using a test that asks whether the joint venture furthers the exempt purposes of the participating charity, and whether the structure of the joint venture permits operation of the charity for its exempt purposes and not for the private benefit of one or more non-exempt parties,” according to Duke Law School Professor Richard Schmalbeck, who wrote a law review article on financing news organizations. In other words, a joint venture should be permissible so long as the venture furthers the tax-exempt organization’s purpose, which in the context of nonprofit news organizations is usually educating the public, and the tax-exempt organization is not operated in a way that benefits a for-profit company.

The taxation of unrelated income at the state level

Like the IRS, many states tax unrelated income. Thus, a tax-exempt nonprofit that must pay taxes on unrelated income at the federal level may also have to pay taxes on unrelated income at the state level. According to Caralee Hall, a manager in the State & Local Tax group of the Washington national tax practice of KPMG, the definition of unrelated income used by states generally mirrors the federal definition. Indeed, many states directly incorporate the federal provisions regarding unrelated income into their income tax statutes. Hall suspects this is for simplicity and to increase compliance; it would be difficult for a state to enforce classification of a particular type of revenue as unrelated income, thus subjecting it to taxation, when that type of revenue is not classified that way at the federal level. However, there are a few states that choose not to subject unrelated income to income tax at all. According to Hall, those states are Delaware, Kentucky, New Jersey, Pennsylvania, Texas, and Ohio. A quick look at five states — California, the District of Columbia, Florida, Illinois, and New York — that do tax unrelated income shows the similarities between the state and federal tax systems. California generally incorporates and follows the federal rules regarding unrelated income. See Cal. Rev. & Tax. Code § 23731-23734. For instance, Cal. Rev. & Tax. Code § 23732 states, “Section 512 of the Internal Revenue Code, relating to unrelated business taxable income, applies, except as otherwise provided.” In California, a nonprofit that generates more than $1,000 in net income from unrelated income must complete and file annually Form 109. California currently taxes unrelated income at 8.84%. The District of Columbia incorporates and follows the federal rules regarding unrelated income. See D.C. Code § 47-1802.01. For instance, D.C. Code § 47-1802.01(a) states, “Except to the extent that the organizations have unrelated business income subject to tax under section 511 of the Internal Revenue Code of 1986 . . . the following organizations shall be exempt from taxation under this chapter.” Tax-exempt organizations with unrelated income are required to complete and file Form D-20 by the 15th day of the fifth month after the end of the organization’s tax year. The District of Columbia currently taxes unrelated income at 9.4%. Florida incorporates and follows the federal rules regarding unrelated income. See Fla. Stat. § 220.13(2)(h). For instance, Fla. Stat. § 220.13(2)(h)states, “‘Taxable income,’ in the case of an organization which is exempt from the federal income tax by reason of s. 501(a) of the Internal Revenue Code, means its unrelated business taxable income as determined under s. 512 of the Internal Revenue Code.” Tax-exempt organizations with unrelated income are required to complete and file either Form F-1120 or F-1120A. Florida currently taxes unrelated income at 5.5%. Illinois incorporates and follows the federal rules regarding unrelated income. See 35 Ill. Comp. Stat. 5/205. For instance, 35 Ill. Comp. Stat. 5/205(a) states, “The base income of an organization which is exempt from the federal income tax by reason of the Internal Revenue Code shall . . . be its unrelated business taxable income as determined under section 512 of the Internal Revenue Code, without any deduction for the tax imposed by this Act.” Tax-exempt organizations with unrelated income are required to complete and file Form IL-990-T. Illinois currently taxes unrelated income at the state’s income and replacement tax rates, which are respectively set at 5.25% and 2.5%. New York generally incorporates and follows the federal rules regarding unrelated income. See N.Y. Tax Law § 290(a). For instance, N.Y. Tax Law § 290(a) states, “For every taxable year or part thereof, every organization described in paragraph two of subsection (a) of section five hundred eleven of the internal revenue code of nineteen hundred fifty-four . . . carrying on an unrelated trade or business in New York shall pay a tax . . . .” Tax-exempt organizations with unrelated income are required to complete and file Form CT-13. New York currently taxes unrelated income at 9%.

Losing tax-exempt status because of too much unrelated income

A nonprofit can lose its tax-exempt status by generating too much unrelated income or by devoting a disproportionate amount of time to such endeavors. Losing federal tax-exempt status may cause a nonprofit to lose it at the state level as well, as many states condition their grant of tax-exempt status on an organization having tax-exempt status at the federal level. In an informal publication on the IRS site entitled “How to lose your 501(c)(3) tax-exempt status (without really trying),” the agency vaguely states that “earning too much income generated from unrelated activities can jeopardize an organization’s 501(c)(3) tax-exempt status.” The IRS may find that organizations with these characteristics are operating for a commercial purpose instead of the purpose it incorporated to further. For this reason, experts suggest limiting unrelated business activities to a small part of overall operations. Unfortunately, the IRS has never defined how much unrelated income constitutes too much, leaving tax-exempt nonprofits in somewhat of a precarious position. In one instance, the U.S. Court of Appeals for the Second Circuit upheld the revocation of a 501(c)(3)’s tax-exempt status after the organization generated between 29 and 35 percent of its revenue from unrelated business activities in three consecutive years. See Orange County Agric. Soc’y v. Comm’r, 893 F.2d 529 (2d Cir. 1990). In another case, the U.S. Court of Claims held that a nonprofit association was not entitled to a tax exemption for the years in which the association generated nearly 60% of its income from unrelated business activities and its employees devoted roughly 50% of their time to such income-producing endeavors. See Ind. Retail Hardware Ass’n, Inc. v. United States 366 F.2d (Ct. Cl. 1966). The court explained that the amount of time devoted to and income generated from unrelated business activities showed that the activities had become substantial and were not merely incidental ways the association furthered its exempt purpose. Id. at 295. Yet, it is important to remember that there are no hard-fast rules in this area and that the IRS evaluates unrelated income issues on a case-by-case basis. Paula Cozzi Goedert, a partner at Barnes & Thornburg LLP, a large national law firm, states that the general rule in this area “sounds worse in theory than it is actually applied in practice.” Goedert wrote: For example, an Internal Revenue Service letter ruling states that an organization was entitled to keep its tax-exempt status even though 39% of its gross receipts came from an unrelated business. Another ruling states that an organization was not entitled to keep its tax-exempt status when more than 50% of its gross receipts was from an unrelated business. The permissible percentage of gross receipts from an unrelated business is much higher than the word "substantial" implies. Michael P. Mosher, an attorney who specializes in nonprofit taxation who has published a study of unrelated income rulings, wrote in a report on his website that he “believes that unrelated business activities that generate less than 20% of the gross revenues and which do not divert substantial qualified program resources would generally not jeopardize the organization’s tax-exempt status. When such revenues exceed 20% of the gross income, the organization should carefully evaluate the operational structure and consider setting up a subsidiary to conduct such business activities.” To add another wrinkle, the IRS will occasionally apply what is called the “commensurate test” when facing questions involving unrelated income and tax-exempt status. Under this test, which is generally favorable to tax-exempt organizations that carry large amounts of unrelated income, “an organization may derive a substantial portion of its revenue in the form of unrelated business income, yet nonetheless be exempt because it also expends a significant amount of time on exempt functions,” according to Bruce R. Hopkins, who has published a book on unrelated business income. According to Hopkins, in applying the commensurate test, the IRS once permitted a charitable organization that derived 98% of its income from an unrelated business to remain tax exempt because the organization expended 41% of its time on exempt activities. Because the IRS will evaluate these issues on a case-by-case basis, it is important for tax-exempt nonprofits to consult a competent tax attorney capable of tailoring legal advice to particular needs before engaging in activities that generate unrelated income.

Other resources for forming a nonprofit news organization