TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, August 28, 2012

Cherry: Charitable Organizations, Commercial Activity, and Social Entrepreneurship

Jaclyn Cherry (South Carolina), Charitable Organizations and Commercial Activity: A New Era. Will the Social Entrepreneurship Movement Force Change?, 5 J. Bus. Entrepreneurship & L. 345 (2012):

The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine.” It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine;” and 3) it will discuss the UBIT and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order for nonprofits to follow. Finally, this article concludes by suggesting that changes within the system are overdue. It suggests a three part analysis requiring that the IRS and courts apply the UBIT tests in coordination with, and not separate from, the “commerciality doctrine” (with a new definition of “substantial commercial activity”); second, that the “commerciality doctrine” be defined more clearly by synthesizing the courts tests from Presbyterian and Reformed Publishing and Airlie Foundation; and third, that an “intermediate sanction” type penalty be developed which would be triggered by failure to meet the above tests, before the loss of tax exempt status occurs. If nothing is done to address this issue, which may well end up being the case, then organizations will drift between the nonprofit and for-profit worlds in a very counter-productive manner for the sector and for the individuals they are created to benefit.

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