The Daily Caller is a media success story, a conservative news site that in seven years of existence has become one of the most called-upon outlets in White House press briefings and helped vault its co-founder, Tucker Carlson, to a prime-time hosting gig on Fox News.
Yet the website owes some of its fortune to a peculiar business structure that enables it to increase revenue while reducing its tax obligation.
Most of the roughly 50 journalists who produce content for the Daily Caller actually work for the Daily Caller News Foundation, a tax-exempt organization with 501(c)(3) status that is ostensibly separate from DailyCaller.com. The two entities share the same floor of the same Washington office, however, and virtually everything produced by the foundation — which accepted $3 million in donations in 2015, according to an IRS filing — appears on the for-profit website, which sells advertising on the articles.
In practice, the foundation functions less like journalistic nonprofits such as ProPublica or FactCheck.org, which do not have for-profit affiliates, and more like an in-house wire service for DailyCaller.com — a wire service that doesn't pay taxes on the millions of dollars that fund its work.
Tax specialists consulted by The Fix said the arrangement appears to violate the spirit of a federal law governing nonprofits. Groups registered as 501(c)(3) nonprofits “must not be organized or operated for the benefit of private interests,” according to the IRS.
“It really does look like the reason for the existence of this 501(c)(3) organization is to provide benefits to the for-profit company, and that should be a private benefit that is not acceptable,” said Linda Sugin, a law professor at Fordham University. “You can't have money going into the foundation being used for purposes that are really to support the for-profit organization.”
Nevertheless, experts said the IRS would be unlikely to come down on the Daily Caller News Foundation, partly due to political considerations. Four years ago, the IRS acknowledged that it improperly targeted conservative nonprofits for scrutiny during the 2012 election cycle. The agency would be reluctant to invite renewed accusations of bias by going after the Daily Caller News Foundation, tax specialists said.
“That this is political, in a large sense, makes it even less likely that the IRS would look at this issue,” said Philip T. Hackney, a former IRS attorney who teaches law at Louisiana State University. “There is real danger in them touching such a matter.”
Carlson, who stepped down as editor in chief of the Daily Caller when he launched a Fox News show after the election, issued a brief statement in response to a Fix inquiry: “By contractual agreement with Fox, I have no role in the management of the Daily Caller and haven't since November.” Carlson did retain an ownership stake and remains the foundation's chairman.
Neil Patel, Carlson's business partner and the foundation's president, said in an interview that he is “very comfortable” with the relationship between the nonprofit and for-profit ventures. He noted that the foundation makes its content available for free to more than 200 other publishers, including Fox News, Yahoo and MSN. Those big-name sites post foundation articles only sporadically, but Patel said he cannot control that.
“I'm not doing anything anyone else can't do,” he said, referring to the way DailyCaller.com generates ad revenue from foundation stories. “As long as what I'm doing at the nonprofit is available for free to everybody, the fact that the Daily Caller wants to use it more than others is fine. Others could take advantage of the same thing.”
Patel's legal argument is sound, according to Benjamin M. Leff, a nonprofit tax specialist at American University.
“If the organization had an exclusive arrangement under which its content was used only by the for-profit affiliate, then a strong case could be made that it was operated for the private benefit of the for-profit,” Leff said. “But the fact that it also provides its content to other publishers for free is evidence that it is not operated for the private benefit of the for-profit, even if the for-profit is the dominant user of its content.”
Lloyd Hitoshi Mayer, a nonprofit tax expert at the University of Notre Dame, added that the IRS's private-benefit standard is “very vague” and that the agency tends to crack down only on the most flagrant offenders — groups that totally abandon their charitable missions.
The mission of the Daily Caller News Foundation, according to IRS filings, is “to train up-and-coming reporters and editors, to carry out investigative reporting, and to perform deep policy reporting with a purpose of consumer awareness and education.”
To evaluate the fulfillment of those goals, the Center for Media and Democracy, which first alerted The Fix to the Daily Caller's business construct, analyzed the foundation's output for two separate weeks, one in January and one in March. The watchdog found that only 39 percent of the articles represented original reporting; the rest hardly qualified as “investigative reporting” or “deep policy reporting.”
Patel defended those stories as helping to advance the training component of the foundation's mission.
“We run a two-year fellowship program to train journalists,” he said. “A lot of them are just out of school and college journalists. You can't start them on deep-dive investigative reporting. We start them on the easier stuff and move them along as they improve.”
Patel also said there is no coordination of coverage between the nonprofit and for-profit staffs — “not formalized and not that I'm aware of.”
A media kit used to attract advertisers to the Daily Caller's for-profit news site states that foundation articles are “sent for consideration to the for-profit Daily Caller,” suggesting that some stories might not be published — perhaps because DailyCaller.com, unaware of what the nonprofit was working on, already assigned a reporter to cover the same story.
Yet the staffs seldom, if ever, duplicate one another. During the two weeks studied by the Center for Media and Democracy, all 672 articles produced by the Daily Caller News Foundation were published by DailyCaller.com.
“It's a huge rip-off for taxpayers if the Daily Caller News Foundation is receiving revenue that it doesn't pay taxes on, to produce stories that are used by the for-profit enterprise, which then makes money on the stories through ads,” said Lisa Graves, a deputy assistant attorney general in the Clinton administration who now serves as executive director of the Center for Media and Democracy.
The nonpartisan center is best known for investigations of the Koch brothers and, more recently, Environmental Protection Agency Administrator Scott Pruitt.
DailyCaller.com also includes foundation articles in its email newsletters, which represent another profit stream. Last year, for example, DailyCaller.com rented its email list to Donald Trump's presidential campaign, which used the list to solicit contributions.
The value of the deal, which has not been previously reported, is impossible to discern from Federal Election Commission filings because the campaign went through a third-party vendor. The Daily Caller, a private company, declined to say how much it collected.