Tuesday, March 29, 2011

Commerciality Doctrine Frustrations

I write on Commerciality partly because it is fresh in my mind and partly because I only now (on Tuesday afternoon) realized that I'm supposed to be blogging this week and I can write this without further research.

I often tell my Nonprofit Law students that the Commerciality Doctrine is  like a "bludger" in a game of quiddich.  For those not familiar with the Harry Potter series of books, the bludger is a small, hard ball that flies through the air knocking quiddich players off of their broomsticks when they are concentrating on other aspects of the game.  Like the Commerciality Doctrine, the bludger produces anxiety in players because it is utterly unpredictable.  No one knows when it will strike and what kind of damage it will cause.

Recently, a client of the Community Development Law Clinic that I supervise was very nearly felled by the Commerciality Doctrine.  The client was a start-up organization that wished to form a nonprofit 501(c)(3) to promote public health and good nutrition, focusing particularly on a low-income, primarily African American community in North Carolina.  The stakeholders included representatives from the community and a group of Public Health Ph.D. researchers and practitioners affiliated with a large, nearby university.  The centerpiece of their charitable plans involved launching a fast-food restaurant that would be a gathering place and classroom for their public health/education interventions, and would also model good nutrition by featuring a menu of delicious, cheap, nutritiously sound dishes.

To make a long, frustrating story short, the IRS considered the restaurant to be too commercial.  The examining officer told us that the only way to get it approved was to make it look more like a soup kitchen: no fixed prices, no fixed menu, no professional staff, and food served to anyone who walked in the door.  We replied that the stakeholders did not want to launch a soup kitchen; that this was a social enterprise that intended to be partly self-sustaining as it pursued its educational and charitable goals. We cited Presbyterian and Reformed Publishing Co. V Commissioner for the proposition that profit-generating activities -- even those that appear similar to commercial activities -- are permissible if they are in furtherance of a charitable goal.  The officer's response was "yea, but that's about books, and we're talking about food."

In the end, when it became clear that we would appeal an adverse decision, we arrived at a compromise whereby the examining officer would grant c3 status and the new organization would, among other things, post suggested donations rather than fixed prices.

What does this experience prove?  The Commerciality Doctrine is nonsensical and probably unconstitutional.  In a world of social enterprise, we need new laws.



Federal – Executive, Federal – Judicial, Food and Drink | Permalink

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It's extremely easy to form a for-profit subsidiary and drop the business into it. That makes it easy to avoid the bludger.

Posted by: Harvey Dale | Mar 30, 2011 4:40:05 AM

Not a new story, to be sure, but I'm wondering, in light of all the discussions regarding Flexible Purpose Corporations, B-Corp and L3Cs, would any of these new hybrid (or perhaps an "old" hybrid, like a cooperative structure) have helped address this issue?

Why, for example, couldn't the venture have been created as a "low profit" LLP and then received PRI investments from local foundations? Could an affiliated c3 have been created to carry out the mission function linked with a for-profit, (perhaps, again, low profit!) food enterprise?

I don't have the specific answer here, but am curious as to your thoughts on this since it seems to be a recurring issue for SEs of various sorts...

Many thanks!
Jed Emerson

Posted by: Jed Emerson | Apr 7, 2011 3:23:16 AM

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