IRS asserts commerciality doctrine.

• Author: Berger, Harvey J.
• Position: In taxation of nonexempt organizations

For many years, courts have applied the "commerciality" doctrine in determining whether organizations were operated in accordance with Sec. 501(c)(3). A new case indicates that the doctrine is still viable.

Facts

Airlie Foundation, DC DC, 9/24/03, involved an interesting organization that had long battled the IRS. The organization operates a conference center outside of Washington, DC. Its purpose is to conduct scientific research, primarily by sponsoring meetings of scientists, administrators, scholars and others. At one time, it had been granted exempt status. However, in 1988, the IRS revoked that status due to inurement to its founder and commercial operations. In 1993, a district court finally upheld the IRS determination, solely on the basis of inurement; see Airlie Foundation, 826 FSupp 537 (DC DC 1993), aff'd, 55 F3d 684 (DC Cir. 1995).

In 1999, the foundation reapplied for Sec. 501(c)(3) status under a new administration. The Service again held that the conference center was operated for commercial purposes and denied the application in 2002. The foundation filed for a declaratory judgment against the IRS in the case at issue.

Analysis

The court found that the IRS was correct--the foundation operated the center in a commercial manner. The foundation argued that it often subsidized the use of the center, either completely or by granting discounts and that it did not operate in the same manner as nearby commercial conference facilities. To support its contention, it showed that ha 1999, it fully subsidized 4.75% of events and partially subsidized another 12.5%. However, the facts also showed that 30-40% of the events were of a private or corporate nature. Another 20% were held by government agencies and the balance by nonprofit or educational entities. The foundation showed that its profit margins were below those of its...