MoJo takes on the IRS – and wins.

Mother Jones started life in March, 1975, as a project of a non profit entity called the Foundation for National Progress (FNP).  Headed up by Adam Hochschild, direct marketing pro Bill Dodd, business wiz (and now Harvard professor) Richard Parker, and anti-nuke activist Paul Jacobs, the magazine flourished, growing rapidly (it had the largest circulation of any progressive magazine of the time) and being recognized with awards for its pathbreaking mix of investigative journalism and progressive culture coverage. Mark Dowie‘s piece on the exploding Ford Pinto pretty much ensured no advertising from the auto companies (the mag didn’t take another ad from Ford until 2006), and its special report on tobacco industry lobbying inside the Beltway put the kibosh on that revenue source, too.

Soon after starting, the IRS told the organization that it would probably qualify as a non profit tax exempt charitable organization, which it confirmed in a May, 1980, letter. The organization felt it had no reason to worry when it learned, in the waning days of the Carter administration (March, 1980), that  the San Francisco office of the IRS was conducting a “routine” field audit of Mother Jones and the Foundation for National Progress.

That changed with the election of Ronald Reagan in late 1980. In the spring of 1981, the IRS told Mother Jones that it had decided to revoke the non profit status of the Foundation for National Progress, because it had decided that its main activity – publication of Mother Jones – was a commercial profit making operation, hence inconsistent with the charitable and eduational goals of the FNP. And a year after that, in August 1982, the IRS responded to MoJo’s challenge to its initial determination, by shifting emphasis: the FNP, it wrote to the organization, was a tax exempt organization and could keep its 501c3 status, but Mother Jones magazine was a purely commercial enterprise and therefore not permitted to function under the FNP’s non profit umbrella.

The IRS figured that MoJo owed the feds about $390,000 in back taxes; the way the books looked on the MoJo side of things, the magazine had been operating at a loss from day one – to the tune of as much as $500,000 a year. The IRS decision, if upheld, pretty much guaranteed that Mother Jones would have to close down. As then executive editor Deidre English put it in a January 1982 article in the magazine, “In today’s economy, it is almost impossible for non-commercial magazines to exist unless they have non-profit status.” (I suppose it’s some measure of how things have changed that these days that’s true for non-commercial AND commercial magazines….)

And plenty of people were asking why Mother Jones was being singled out for this punitive action. After all, there were lots of other magazines that functioned as non profits – National Geographic, Harpers, Smithsonian, Commentary, and National Review. How come they weren’t being audited? “With mounting dismay,” editor English wrote, “we watched the once-innocuous audit become increasingly repressive under the Reagan administration.” Suspicions were that this was part of a larger campaign to “defund the Left,” especially since other left magazines, like NACLA’s Report on the Americas, Big Mama Rag out of Denver, Oakland’s People’s Translation Service, and The [New York] Guardian, were also targets of IRS action around the same time.

Okay, granted, when you publish articles with titles like “Investigating Reagan’s Brain and Other Dark Regions of the Right,” chances are if someone’s looking for a target, you’ll probably show up on their screen. But the other thing going on at the time was that the courts had pretty thoroughly undermined the legal reasoning the IRS used to figure out what qualified as “educational” and what did not. In 1980, the D.C. Court of Appeals reversed a lower court ruling, ruled in favor of Big Mama Rag, a feminist monthly, and found the IRS’ definition of ‘educational’ “unconstitutionally vague” and “in violation of the First Amendment.”  The IRS, said the court, was making its evaluation “solely on the basis of one’s subjective notion of what is ‘controversial.'”

At worst, that left the IRS open to manipulation by Reagan-era political operatives; at best, it left the decision as to which organization would be considered tax exempt and which not up to IRS field staff, who clearly had no idea what they were dealing with.

The Mother Jones case became something of a cause celebre. The story got picked up by newspapers around the country – USA Today, the Los Angeles Times, the Washington Post, the San Jose Mercury News, San Francisco Chronicle, Houston Post, Philadelphia Inquirer, Des Moines Register, Hartford Courant, and others. Representative Benjamin Rosenthal convened a congressional inquiry into the matter before the commerce, consumer, and monetary affairs subscommittee of the House Committee on Government Operations (which sadly was cut short by Rosenthal’s death).

Finally, after three and a half years, and some $100,000 in legal expenses, the IRS reversed itself. In a “technical memorandum” in mid-1983, the IRS agreed that Mother Jones was carried out “in a manner consonant with” the Foundation for National Progress’ charitable, tax exempt purpose.

The essential issue, the IRS now said, was “whether the distribution of a journal or a magazine is accomplished in a manner distinguishable from ordinary commercial publishing practices” (for you lawyers out there, this is referring to criteria in IRS Rev. Rule 67-4, 1967-1, C.B. 121). It continues:

Relevant facts would thus include . . . whether the publication was intended to generate a profit, the existence or accumulation of large profits, and whether the materials were published exclusively for sale or not.

“Large profits?” Not happening:

. . . the journal has never made a profit and, in fact, is subsidized by the organization with funds derived from other sources including contributions. .  .incidents involving articles critical of the automobile and cigarette industries with the resulting loss of advertising revenues from two industries that customarily use print media for advertising supports a conclusion that profit is not a prime motivator in publishing the journal.

Got that right.

So, the IRS at long last concluded that “‘commercial’ is not an appropriate description of the organization’s journal but, rather, that its publication is carried out in a manner consonant with the organization’s exempt purpose.”

However, this IRS decision was never published. The IRS instructed its staff and interested attorneys that the decision “may not be used or cited as precedent.” The fact is: the IRS did decide that non profit organizations can earn revenues from advertising and other “commercial” activities – without jeopardizing their non profit tax exempt status.

And that’s a lesson worth remembering as we head into the new era of non profit journalism.