Thursday, March 26, 2009
One of the sticky issues with respect to idea that newspapers should or might have to convert to nonprofit status is what to do about advertising revenue? We blogged on the recent proposal to exempt newspapers from tax a day ago. As a general matter, the fragmentation rule prevents an exempt organization from shielding its ad revenue from taxation; it is very nearly impossible to successfully assert that paid advertising is part of the exempt charitable purpose rather than a separate unrelated trade or business made possible by the charitable purpose. See, e.g., United States v. American College of Physicians,475 U.S. 834 (1986). Treas. Reg. 1.513-1(d)(4)(iv), Example 7. Now, Senator Ben Cardin (D. MD) has introduced the Newspaper Revitalization Act, which would exempt advertising revenue from taxation (and thus solve the UBIT problem for newspapers). Here is the bill:
To allow certain newspapers to be treated as described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. TREATMENT OF CERTAIN NEWSPAPERS AS EXEMPT FROM TAX UNDER SECTION 501.
(a) IN GENERAL.—Paragraph (3) of section 501(c) of the Internal Revenue Code of 1986 is amended by inserting ‘‘(including a qualified newspaper corporation)’’ after ‘‘educational purposes’’.
(b) QUALIFIED NEWSPAPER CORPORATION.—Section 501 of the Internal Revenue Code of 1986 is amended—
(1) by redesignating subsection (r) as subsection (s), and
(2) by inserting after subsection (q) the following new subsection:
‘‘(r) QUALIFIED NEWSPAPER CORPORATION.—For purposes of this title, a corporation or organization shall be treated as a qualified newspaper corporation if—
‘‘(1) the trade or business of such corporation or organization consists of publishing on a regular basis a newspaper for general circulation,
‘‘(2) the newspaper published by such corporation or organization contains local, national, and international news stories of interest to the general public and the distribution of such newspaper is necessary or valuable in achieving an educational purpose, and
‘‘(3) the preparation of the material contained in such newspaper follows methods generally accepted as educational in character.’’
(c) UNRELATED BUSINESS INCOME OF A QUALIFIED NEWSPAPER CORPORATION.—Section 513 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
‘‘(k) ADVERTISING INCOME OF QUALIFIED NEWSPAPER CORPORATIONS.—The term ‘unrelated trade or business’ does not include the sale by a qualified newspaper corporation (as defined in section 501(r)) of any space for commercial advertisement to be published in a newspaper, to the extent that the space allotted to all such advertisements in such newspaper does not exceed the space allotted to fulfilling the educational purpose of such qualified newspaper corporation.’’
(d) DEDUCTION FOR CHARITABLE CONTRIBUTIONS.—Subparagraph (B) of section 170(c) of the Internal Revenue Code of 1986 is amended by inserting ‘‘(including a qualified newspaper corporation as defined in section 501(r))’’ after ‘‘educational purposes’’.
(e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
We have previously blogged on the subject of nonprofit newspapers. I am not so sure this is a wise or even workable proposal. Anybody who has read Big Mama Rag ought to know how hard it is to distinguish "educational" from something else. Apparently, though, if the "newspaper" is "educational" in nature (presumably, the bill intends to apply to newspapers as we currently understand that term), all revenue from commercial ads will be exempt (so long as space devoted to news educational stories is greater than space devoted to advertisements). It seems to me, the bill might open the door to exempt revenue from all printed [or printable] news sources, even those on the internet -- places like Yahoo, Google and other generators of information who have caused the revenue drain on print media in the first place. In other words, the bill might logically be interpreted to exempt advertisement from all print[able] media.