Info You Can Use: Commerciality Doctrine (What The Heck Is That?)

Hat tip to Non-Profit Law blog for providing the link to Charity Lawyer Ellis Carter’s 2009 post about the Commerciality Doctrine. As you can probably tell from the title of this entry, I wasn’t really aware of this doctrine at all, but it is actually very important in terms of an organization’s 501 (c) (3) status.

According to Ellis,

Commerciality Doctrine has evolved in the courts and is applied to determine whether an organization complies with Section 501(c)(3)’s requirement to operate exclusively for exempt purposes. A key factor indicating an organization is operating in an excessively commercial manner is that its activities are in competition with those of for-profit commercial entities.

Reading what criteria the courts use as a test for whether a non-profit organization is operating in an excessively commercial manner, I start to get a little nervous:

-pricing to maximize profits;

-generation and accumulation of unreasonable reserves;

-use of commercial promotional methods, such as advertising;

-sales and marketing to the general public;

-high volume of sales;

-the organization uses paid professional staff rather than volunteer labor;

-the organization discontinues money losing programs; and

-the organization does not receive significant charitable contributions.

Most organizations probably don’t have to worry about accumulation of unreasonable reserves and seating capacity may limit high volume of sales. If arts organizations start to adopt dynamic pricing for shows, they may have to watch how high they push prices. But a lot of non profit arts organizations have professional staffs who have replaced volunteers somewhere in their history. Even those without professional staffs use advertising, sales, marketing and discontinue money losing programs. How do you not flirt with violating your status under this criteria?

So is it actually good to keep those money losing programs around? Apparently so…

Factors evidencing the absence of a commercial purpose include the following:

-lack of competition with for-profit entities;

-below market rate pricing;

-relatively insubstantial reserves;

-lack of commercial advertising practices;

-the absence of sales to the general public;

-low volume of sales;

-use of volunteers and low-paid non-professional staff; and

-significant charitable contributions.

This list almost makes a virtue of incompetence and lack of ambition.

But the first thing I thought of after reading this list was, what about the Roundabout Theatre? How the heck have they avoided being shut down on this basis. Except for requiring as significant charitable contributions as anyone else, they are a non-profit that essentially fails on every one of these measures.

They actually may have run afoul these laws and I am just unaware of it. Plenty of commercial Broadway producers have expressed criticism about the way the Roundabout and other non-profits like Lincoln Center enjoy a competitive advantage over them. Back in 2000, long before he became chair of the NEA, Rocco Landesman wrote,

“increasingly the template of success comes from the commercial arena, which is, in the end, not dedicated to the art so much as to the audience. The uber-model for this trend is ”the American Airlines Roundabout Theater,” whose artistic director, Todd Haimes, saved a bankrupt institution by adapting contemporary, market-savvy, the-audience-is-king techniques of modern corporations. Pleasing the customers, giving them what they want in the form they expect, works for Coca-Cola –…It would, I suppose, be hyperbolic to say that Todd Haimes has had a more pernicious influence on English-speaking theater than anyone since Oliver Cromwell (and it wouldn’t be nice, either, since Mr. Haimes is a personable and honorable man)”

Now it should be noted that Landesman’s piece expressed regret that the non-profit theater movement toward a commercial orientation due to market forces has meant that little original work is created any more. Though he has “accused Haimes of running a wolfish commercial operation in the sheepskin of a publicly funded institution.”

The idea that decision making in non-profits shouldn’t be motivated by a need to compete with commercial entities is probably part of the basis for the criteria of the Commerciality doctrine. Although Carter provides an example of it, I wonder how often and strictly the Commerciality Doctrine is applied to non-profits. With cuts to arts funding at all levels and an oft repeated litany that performances should be self supporting or not occur at all, is it fair to require that non-profits ignore the pressure to support themselves with strategies that create more earned revenue?

Todd Haimes has said as much,

“I feel enormous pressure to generate income for our theater,’…`I’ll do anything within reason, as long as it goes back into the nonprofit purpose of the Roundabout,” Haimes said. “So I’m trying to be more creative.”

With a $40 million budget in 2008, $12 million in donated and needing $13 million in sales, most of us are not anywhere near Roundabout Theatre’s ability to raise scowls from commercial competitors. We do face similar pressure to perform well and might well find our ambitions causing problems for our tax status given that so many other aspects of non-profit operations are being examined.

About Joe Patti

I have been writing Butts in the Seats (BitS) on topics of arts and cultural administration since 2004 (yikes!). Given the ever evolving concerns facing the sector, I have yet to exhaust the available subject matter. In addition to BitS, I am a founding contributor to the ArtsHacker (artshacker.com) website where I focus on topics related to boards, law, governance, policy and practice.

I am also an evangelist for the effort to Build Public Will For Arts and Culture being helmed by Arts Midwest and the Metropolitan Group. (http://www.creatingconnection.org/about/)

My most recent role was as Executive Director of the Grand Opera House in Macon, GA.

Among the things I am most proud are having produced an opera in the Hawaiian language and a dance drama about Hawaii's snow goddess Poli'ahu while working as a Theater Manager in Hawaii. Though there are many more highlights than there is space here to list.

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