Starting and Managing a Nonprofit Organization: A Legal Guide

By Bruce R. Hopkins | Go to book overview

CHAPTER
TWENTY-THREE
Commerciality, Competition,
Commensurateness

Three bodies of law concerning nonprofit organizations have one thing in common: they are vague. These groupings of law are the commerciality doctrine, the rules concerning competition with for-profit businesses, and the commensurate test. There is almost nothing in the statutory law or the tax regulations on these points. The federal courts are developing most of the law in these areas, although state courts have also had something to say about the competition issue.


COMMERCIALITY DOCTRINE

The commerciality doctrine, to date, has been applied by the courts only with respect to public charities. (The IRS occasionally asserts that the doctrine is applicable to taxexempt social welfare organizations.) The general concept is that a charitable organization that operates in a commercial manner is an organization that is not entitled to tax exemption. The IRS, however, is showing a propensity to apply the doctrine also when assessing whether an exempt organization is engaged in an unrelated business (see Chapter 13).


(a) Nature of the Doctrine

The commerciality doctrine, while not crisply defined, is essentially this: A nonprofit organization is involved in an inappropriate activity (a nonexempt activity in the case of a tax-exempt organization) when that activity is engaged in in a manner that is considered to be commercial in nature. An activity is a commercial one if it has a direct counterpart in, or is conducted in the same manner as is the case in, the realm of forprofit organizations. As discussed subsequently, one court has developed criteria for determining commerciality in this setting.

The commerciality doctrine is born of the fact that U.S. society, being a democracy (see Chapter 1), is composed of three sectors: the business (for-profit) sector, the governmental sector, and the nonprofit sector. The United States is essentially a capitalist society; thus, the business sector is, in several ways, the preferred sector. While the courts see entities in the business sector as being operated for private ends (e.g., profits to shareholders), with the overall result an economy beneficial to society, the nonprofit sector is seen as being operated for public ends (the general good of society).

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