Does L.A. Times qualify as a charity case?

Of all the troubled news organizations in all the land, the Ford Foundation recently gave the Los Angeles Times $1 million to hire four reporters, even though the newspaper’s parent company amassed nearly $2.4 billion in cash during its 3½-year bankruptcy.

While there can be no doubt that the foundation has the best of intentions – or that the Times will endeavor to make good journalistic use of the money – the gift raises two questions:

∷ Can a non-profit foundation appropriately give money to a for-profit company? We’ll discuss this in a moment.  

∷ Was the gift to an operating unit of the cash-rich Tribune Co. a better use of the foundation’s money than helping other applicants for Ford funding?  We’ll explore this tomorrow.  

Here’s the background: 

Reacting to the loss of nearly one out of three journalism jobs at the nation’s newspapers in the last decade, the Ford Foundation forthrightly decided to address the problem by giving $1 million to the LAT to cover ethnic and prison issues, and to give the Washington Post $500,000 to beef up “government accountability” reporting. 

The decision of a major foundation to put major bucks into major mainstream publications speaks volumes about the state of the once-powerful newspaper industry.  

But it also raises questions about whether the donation, regardless of its good intentions, lives up to the letter and spirit of the federal tax code, which empowers the Internal Revenue Service to grant non-profit status to religious, educational and other organizations that operate in the public interest without seeking to make a profit.  

The answer is yes, because the grant “is fulfilling our mission to educate the public” under Section 170(c)(2)(B) of the IRS code, said Ford Foundation spokesman Joshua Cinelli. “We essentially will firewall this grant so that it can only be used for the intended purposes.” 

But a program officer at a different journalism charity said he was “befuddled” by the gift. 

“I have tried to figure out how they can give money to someone who is not officially designated by the Internal Revenue Service as a 501(c)3  charity,” said the officer, who spoke on background so as not to offend people with whom may have to work in the future. “It’s not something we are thinking about doing.” 

A 501(c)3 organization, whose name is derived from the section of the tax code that enables it, is the most common type of non-profit organization. The organizations are important structures for funneling private donations into everything from cancer research and symphony orchestras to educational institutions and the occasional start-up news organization.  Here’s a quick look at how they work:

Gifts to 501(c)3 charities can be taken as a tax deduction by the donor.  While 501(c)3s are not allowed to make a profit, the organizations are exempt from paying taxes on any money they make.  These tax advantages are designed to promote charitable giving and to encourage so-called exempt organizations to put all of their resources into the work they do.    

The Ford gifts to the L.A. Times and Washington Post are unusual in that they benefit for-profit businesses. And that seems at odds with the IRS requirement  that recipients of charitable gifts be engaged “primarily in activities that accomplish exempt purposes specified in section 501(c)(3).”  An organization, “will not be so regarded,” continues the IRS, “if more than an insubstantial part of its activities does not further an exempt purpose.”

Even though the LAT is receiving $1 million from the non-profit Ford Foundation, “we don’t have a non-profit business model,” said spokeswoman Nancy Sullivan. “We are a for-profit company.” 

In fact, the Tribune Co., which is the parent of the newspaper, reported to a federal court in August that it has accumulated nearly $2.4 billion in cash since filing for bankruptcy in late 2008. The company filed for Chapter 11 after it was unable to pay nearly $13 billion in debt loaded on the company in an ill-advised take-over engineered by real estate speculator Sam Zell. 

Some of the cash in the TribCo’s piggybank results from the profits its newspapers and broadcast properties made while operating with Chapter 11 protection from its creditors.   And some of the cash results from interest and other payments it did not have to make to creditors as the result of the bankruptcy filing. 

Although the Post itself has been losing money all year, its parent, the for-profit Washington Post Co., generated $525 million in pre-tax profits in the last 12 months and has $688 million in cash on its balance sheet, according to Yahoo Finance. 

The reason the Ford Foundation gave the L.A. Times $1 million to hire reporters was to encourage coverage of important subjects – like ethnic communities, immigration matters and prison issues – that otherwise would not get covered, said spokesman Cinelli.  The Times, he added, was chosen over other potential recipients because of its strength and reach.     

“This is an effort to support thoughtful and meaningful journalism reaching the broadest possible audience,” he said. “In this period of transition for the traditional media, where do you do that? If it’s a zero sum game about where publishers put money in the newsroom, then those folks will do what it takes to sell papers and keep the lights on.  We know many publishers would hire extra entertainment reporters while cutting coverage of the transit and school beats. So, we wanted to do something about that.”

As luck would have it, the L.A. Times hired three new entertainment reporters within weeks of receiving the Ford Foundation grant.  “People come and go all the time,” said spokeswoman Sullivan, adding that it would be unfair to make a connection between the Ford gift and the new entertainment hires. 

While there seems to be  scant chance that the new Ford-funded reporters will undertake any direct commercial activities, their work presumably will contribute to the newspaper’s profits by helping to induce advertisers to buy space on its website or by giving consumers a compelling reason to plunk down $1 to read the newspaper. 

Cinelli said stories by Ford-funded reporters will be freely available for reuse by anyone without copyright restrictions and will have to be available for free on the newspaper's website.  But he said  Ford will have no control over what the journalists write – or whether they could get pulled off their beats to help cover breaking news.   

Given the seemingly practical impossibility of sequestering the activities of the Ford-funded reporters, can they really be isolated from the absolutely appropriate profit-making mission of the Times? 

Tomorrow: Who didn’t get funded while LAT did?