Disclaimer: this blog is based on the research and informed perspective of the Philadelphia Community Grants Examiner, who is a grant writer, not a journalist. ______________________________________________
Is the Institute for Journalism in New Media a single-member LLC or is it a nonprofit? It’s an important distinction that may affect how the Institute operates – now and in the future. As a single-member LLC, a “Limited Liability Company”, the Institute may be recognized by the IRS as tax-exempt.
It’s also important because the Institute for Journalism in New Media (the Institute) was created twice between June 19, 2015 and December 17, 2015 – as a nonprofit and then as an LLC.
Business registration files in Pennsylvania confirm this:
1. The Institute for Journalism in New Media, listed as entity type “non-profit”, entity number 4365059, based in Conshocken, was created in Pennsylvania on June 19, 2015. Filed documents show an Amendment 2 on December 15, 2015.
2. The Institute for Journalism in New Media, LLC, entity type “Limited Liability Company“, entity number 6335309, based in Philadelphia, was formed on December 17, 2015.
The creation papers for the nonprofit (4355059) indicated it would be in “perpetual existence.”
The entity is now marked “cancelled”. The name of the new entity, the Institute for Journalism in New Media, includes the limited liability company, “LLC”, in the name because it is required in Pennsylvania.
Is the Institute for Journalism in New Media, LLC, a nonprofit?
When is being “disregarded” a plus? It can be a plus that just sounds terrible.
The Institute for Journalism in New Media, LLC, may be a “disregarded entity” – not considered separate from its parent – and operate as a nonprofit.
Disregarded? How did this happen?
This past January 12, H.F. “Gerry” Lenfest, sole owner of Philadelphia Media Network (PMN) announced his donation of PMN – Philadelphia Inquirer, Daily News and Philly.com – to the Philadelphia Foundation, a community foundation, at a highly publicized event at the National Constitution Center.
The transfer of ownership had occurred on December 28, 2015 At Lenfest’s request, the Philadelphia Foundation established the Institute for Journalism in New Media to operate under TPF’s Special Assets Fund. He also announced that he would be endowing it with a $20 million gift. PMN is now a taxable subsidiary of the Institute for Journalism in New Media. Among Lenfest’s remarks:
“What we have created here for Philadelphia, through the Institute, its endowment and future grants, will allow the journalism that is so important in our region to continue in the digital age.”
This transaction came about during a particularly tumultuous period at the Philadelphia Media Network. Between June 2015 and December, Terry Eggers was named publisher in August, took over on October 1 and announced plans to consolidate the newsrooms and pending layoffs on October 30. The number of staff cuts announced November 4 took effect December 4. To reduce layoffs, the Newspaper Guild offered to find the means to buy the Daily News, but it was swiftly rejected. Several of the laid-off staff were asked to stay on until and no later than December 27.
After the announcement, few media reports mentioned an LLC. Among hundreds of media outlets, the New York Times reported that the Philadelphia publications were donated to a nonprofit institute. Fortune magazine observed the “unusual structure” with the LLC. The Atlantic reported that the three publications “took the first step toward becoming nonprofit”.
In fact, as the Philadelphia Media Network’s graphic indicates, the Institute for Journalism in New Media is a single-member LLC company which enjoys the benefits of a tax-exempt parent organization.
Here’s how being disregarded can be good:
1. For federal tax-purposes, the Institute for Journalism in New Media is a single-member LLC with a single owner, the TPF Special Assets Fund, and unless it is a corporation, it may be regarded as a “disregarded entity” to receive “the benefit of its owner’s tax-exempt status, including exemption from federal income tax, federal unemployment tax, and other federal taxes where applicable.”
2. In other words, as a disregarded entity for federal tax purposes, it is one and the same with the parent. The exempt parent treats its finances as its own. (This does not include employment in PA.)
3. The IRS has a Business Entity Classification Process – “check-the-box”. A single-member LLC can be viewed as a “disregarded entity” that is not separate from its owner – the tax-exempt parent. Unless the single-member LLC chooses to be seen as a corporation, it is seen as a partnership on the state level.
4. A single-member LLC may be a disregarded entity at its formation and still apply to be recognized as a corporation at some future date. It has flexibility.
Should H.F. “Gerry” Lenfest or the Philadelphia Foundation communicate this more clearly and concisely?
Why does the Institute only appear as an “LLC” on the graphic depicting the Philadelphia Media Network? Why not present it as a single-member LLC during the press conference or detail how it functions – or not – on the pages of Philadelphia Foundation web site?
There is no question this is a legal arrangement. There are a number of attorneys among the PMN board and the Institute, including two tax attorneys. The design itself was overseen by Richard Fox, a tax attorney, who is not on either board, was involved in designing the structure of PMN. Pedro Ramos, President/CEO, Philadelphia Foundation, is also an attorney.
It is speculation, but in their shared jubilance about the launch of this unique hybrid, did they overlook the need to create a message for the general public, one that explains the single-member LLC? It is possible to craft a simple message that explains the dreadful-sounding “disregarded” and the equally unappealing “conduit”.
Did it seem unnecessary to reach the common crowd, the hoi polloi? It’s imperative if public support in the local community counts. Philanthropists do not always recognize the need to communicate the value of their gift to everyone affected. It’s their advisors’ responsibility to guide them.
Even more relevant, the IRS made this suggestion when it issued its notice on charitable donations to disregarded entities:
“To avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity.”
Preserving the Journalism – and the Philanthropy
The PMN structure has the potential to engage and affect nonprofits and philanthropy. Lenfest has expressed great regard for journalism in a democratic society. It is, perhaps inadvertently, reminiscent of another pillar of democracy – philanthropy and associations. When Alexis deToqueville visited American in 1831-32, he marveled at our citizens capacity for gathering a group to get things done. In Democracy in America, he wrote:
“When an American asks for the cooperation of his fellow citizens, it is seldom refused; and I have often seen it afforded spontaneously and with great good will.”
In recent years, the public’s perception of “nonprofit” has become distorted by the incorrect use of the term in many circles. Philanthropy is at risk of losing its honorable meaning. It is among many reasons that a clear, concise description would be useful – to the Institute, prospective donors and the public:
· The public has an interest in tax-exempt organizations, specifically in knowing how the PMN structure is organized – without reviewing IRS notices.
· Donors will want to know how the PMN Network is organized and how it works before making a major gift.
· Grant makers will want to know. Whether it is an independent foundation, like most large grant makers, or a private foundation, anyone who makes large gifts wants to know where their money – their investment – is going, with certainty that it will be spent as intended.
The role of philanthropy paying for journalism is still in its infancy. Some donations, even when they are extended to nonprofit entities, have raised eyebrows – Gates Foundation, for instance, a private operating foundation, has stimulated much discussion with regard to its grants supporting media projects. The Ford Foundation – which is an independent foundation – made a grant to the Los Angeles Times, a for-profit enterprise, because it reportedly complied with the federal tax code; it was fulfilling its mission to educate the public under Section 170(c)(2)(B) of the IRS code.
The Institute assumed a significant role in defining philanthropy in the 21st century when it set out to preserve journalism.
Why would a nonprofit establish a single-member LLC?
Nonprofits have been able to set up single-member LLCs for over 15 years. See IRS Announcement 99-102, 1999-43 I.R.B. 545)
Why do it? Among other reasons, in 2012, the IRS ruled that single-member LLCs can receive gifts that are regarded a charitable contribution to the “parent” 501(c)(3). A growing number of charities have chosen to set up single-member LLCs as a result. In this case, a gift to the Institute is treated the same as a gift to the TPF Special Assets Fund.
Here are some other advantages:
· A nonprofit setting up a disregarded single-member LLC – not recognized as separate from the tax-exempt nonprofit, can segregate assets and provide liability protection.
· If the tax-exempt parent organization is earning so much unrelated business income (unrelated from its charitable mission) that its nonprofit status is threatened, the single-member LLC can be treated as a corporation under the business classification – “check-the-box”. The exemption status of the parent will not be affected. (See Cassidy Brewer, Nonprofit and Charitable Uses of LLCs, Georgia State University, College of Law, March 19, 2015.).
Right now, as a charitable donation, a penny given to the Institute is the same as a penny given to the TPF Special Assets Fund as a penny contributed to the Philadelphia Foundation.
But will this change if the Institute starts earning too much money? The potential for unrelated business income may be the chief reason it’s the Institute for Journalism in New Media, LLC.
Is there a flaw in the structure?
The Institute has a broad vision, as articulated by Lenfest and Pedro Ramos, President/CEO, Philadelphia Foundation, when its inception was announced:
To successfully evolve, we must meet our readers where they are – and where they are going in the future – as well as develop fresh ways in which advertisers can reach these engaged daily readers in print and online.
Suppose the Institute’s plans to explore content-delivery explodes into a billion-dollar deal? Presumably, that would be too much unrelated business income for the tax-exempt TPF Special Assets Fund and the Philadelphia Foundation. What would it do?
- Would the Institute “check-the-box” as a corporation and pay the taxes?
- Would that affect its ability to accept charitable contributions on behalf of PMN in the future?
On the other hand, suppose the Institute’s for-profit subsidiary, Philadelphia Media Network, has a financial crisis and needs a loan? The Institute will not be making loans or making up deficits for PMN.
Since the Philadelphia Media Network was converted into a public benefit corporation in Delaware, it is a for-profit corporation “that is intended to produce public benefits and to operate in a responsible and sustainable manner.” The board for PMN is the same as the board for PMN/PBC. PMN/PBC will needs to periodically produce a statement to stockholders as to how it is achieving that end. However, as a public benefits corporation established in Delaware, it does not have to release these documents to the public nor submit to any third-party evaluations of its progress.
What about charitable contributions from grant makers and high net worth donors? How can the Institute for Journalism in New Media negotiate tax-exempt charitable contributions if it cannot produce documents describing how PMN/PBC is fulfilling its objectives as an entity intended to produce public benefits?
Is there a unintentional flaw in the PMN network structure?
Institute for Journalism in New Media – the Nonprofit
How would this have turned out had the Institute for Journalism in New Media, the nonprofit registered by Gerry Lenfest in June 2015, gone forward – not the Institute for Journalism in New Media, LLC?
A generous philanthropist, Lenfest’s good intentions are not in doubt. He articulated his position about the newspapers as a business more than once and most vigorously during union negotiations in June 2015 in a memo to PMN employees:
“I have given substantial donations over the years to charitable institutions. PMN is not a charity but rather it is a business, and as such it must be self-sustainable. I have invested in the Company without any expectation of financial rewards but rather because of my belief that these institutions are worth preserving.”
This happened to occur during the same week the Institute for Journalism in New Media was created – on June 19, 2015, as a nonprofit. It would be “cancelled” on December 15 and Institute for Journalism in New Media, LLC would be created on December 17, 2015.
Lenfest donated PMN and endowed the Institute for Journalism in New Media, LLC to preserve the journalism; will his good intentions be enough?