Section 501(c)(3) directs the IRS to consider whether an applicant is "organized and operated exclusively" for one or more of the eight exempt purposes set forth in the statute. Regulations promulgated by the Treasury Department state that this language creates two tests for exempt status, the "Organizational Test" and the "Operational Test." This page discusses the "Operational Test"; read about the "Organizational Test" here.
The Operational Test
Although a journalism venture seeking tax-exempt status must satisfy both the Organizational and Operational Tests, the majority of news ventures that fail to pass IRS review stumble at the latter test. Compared to the regulations governing the Organizational Test, the Treasury Regulations defining the Operational Test are deceptively simple, stating that:
An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. [FN1]
Interpreting the Operational Test's potentially contradictory use of terms such as "exclusively," "primarily" and "insubstantial," the Tax Court has held that:
The word "exclusively" has not been literally construed to mean "solely" or "absolutely without exception,"... and ... a nonexempt purpose even perhaps somewhat beyond a de minimis level has been permitted without loss of exemption[.] ... Nevertheless, there is a limit beyond which the statute may not be stretched. ... "[T]he presence of a single [nonexempt] ... purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [exempt] ... purposes." [FN2]
Unlike the Organizational Test, a journalism venture cannot satisfy the Operational Test simply by asserting that it is operating in furtherance of one or more of the eight 501(c)(3) purposes. Rather, the IRS will undertake a comprehensive review of the manner in which a venture functions to see whether it fits within the legal definition of one or more of those purposes.
In particular, a publisher cannot invoke the educational nature of its publications and expect the IRS to ignore the fact that those publications are generating significant profits. The IRS recognizes that particular activities can be undertaken in furtherance of both exempt and non-exempt purposes, and courts have held that the IRS may consider whether the non-exempt purposes of a particular activity (in particular, the generation of profits) outweigh the exempt purposes. In Fides Publishers Association v. United States, the U.S. District Court for the Northern District of Indiana held that the IRS properly denied an exemption for a publisher of religious literature; although the publisher's activity might have served an educational purpose, the court found that it was also engaging in "the publication and distribution of religious literature at a profit." [FN3] The court explained that requiring the IRS to disregard any non-exempt aspects of educational activity would permit every publisher to claim "an exemption on the ground that it furthers the education of the public." [FN4]
The Treasury Regulations also state that an organization will fail the Operational Test if its earnings "inure in whole or in part to the benefit of private shareholders or individuals," [FN5] or if it is an "action organization" (i.e., an organization involved in advocacy, lobbying, or political campaigning) [FN6]. These limitations are important, and are discussed in other sections of this Guide, but the primary stumbling block for most journalism ventures applying for tax exempt status is not that they benefit private entities or engage in political activity. Instead, 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.
1 Treas. Reg. § 1.501(c)(3)-1(c)(1) (as amended in 2008).
2 Manning Ass'n v. Comm'r, 93 T.C. 596, 603-04 (1989) (punctuation standardized) (quoting Better Business Bureau v. United States, 326 U.S. 279, 283 (1945)).
3 263 F. Supp. 924, 935 (N.D. Ind. 1967).
4 Id.
5 Treas. Reg. § 1.501(c)(3)-1(c)(2) (as amended in 2008).
6 Treas. Reg. § 1.501(c)(3)-1(c)(3) (as amended in 2008).
