How A Nonprofit Can Make Money Be Selling Art Work

Past Benjamin Takis

Background

New not-profit organizations oft observe that the world is not a hospitable identify. While innovation, entrepreneurship, and adventure-taking by new for-profit companies are lauded, fledgling not-profits typically struggle to gain the acceptance and back up of private foundations, donors and others in the not-profit community. There is, later all, but a limited supply of grants and donations to fund charitable, artistic, and educational endeavors. Furthermore, the administrative burden of forming and administering a non-turn a profit can exist staggering. New non-profits are therefore often brash to pair upward with an existing system, use a for-profit construction, or explore other alternatives before forming a new entity and applying to qualify nether section 501(c)(3) of the Internal Revenue Code (the "Lawmaking").

Despite these challenges, arts organizations share sure traits that can assistance them thrive as not-profit 501(c)(3) organizations, with fewer of the hurdles faced by other kinds of not-profits. First, while many organizations rely largely on foundation grants and private donations, arts organizations can raise funds from ticket sales to performances, exhibits, and other events. For many kinds of organizations, these "fee-for-service" revenue sources tin can trigger "unrelated business income tax" or endanger 501(c)(3) status under the "commerciality doctrine" applied past the Internal Revenue Service ("IRS") and the courts. Nevertheless, these revenue sources are mostly consequent with the taxation-exempt condition of arts organizations. Additionally, these types of revenue sources tin can more than easily satisfy the "public support" tests that enable an organisation to qualify equally a public charity, and thereby avoid nomenclature as a private foundation and the stringent oversight to which private foundations are subjected.

The Benefits and Burdens of 501(c)(3) Status

501(c)(3) is a special taxation status under federal law, generally bachelor to organizations formed and operated for a charitable, educational, scientific or religious purpose, and promotion of the arts is recognized equally a valid educational purpose. Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii), Case iv (Educational organizations include "[g]useums, zoos, planetariums, symphony orchestras, and other similar organizations," provided that the organizations otherwise satisfy the requirements of section 501(c)(3) of the Code). Yet, before embarking on the 501(c)(three) qualification process, it is of import to carefully consider whether the benefits of 501(c)(3) status are worth the burdens.

There are three legal benefits to having 501(c)(3) status: (1) the organisation'southward net acquirement (afterward expenses) is generally non subject to tax; (2) contributions to the arrangement are eligible for the charitable deduction; and (three) the organization is eligible for grants from private foundations.

These benefits are not quite every bit advantageous as they may appear. Near non-profits (including arts organizations) practice not have large amounts of excess revenue – near struggle to earn enough revenue to pay their expenses. Therefore, the revenue enhancement exemption on internet revenue may not be crucial. Second, while the charitable deduction is a powerful incentive for individuals inclined to give money to not-turn a profit organizations, it is even so a difficult task to convince people to give. The charitable deduction tends to be important only when an system'southward Board of Directors has a strong and committed network of high-wealth individuals. Lastly, it can be difficult to get grants from private foundations. Finding grant opportunities takes significant research, and the grant writing process requires preparation, perseverance, and delivery.

Maintaining 501(c)(3) status can also be quite burdensome. A 501(c)(3) system must be run by a Board of Directors (generally 3 or more people) in accordance with Articles of Incorporation, Bylaws, and various corporate policies that comply with requirements prepare forth under federal tax police and country non-profit corporation law. In addition, any bounty to Directors or Officers must be closely scrutinized to ensure that such payments are reasonable. And complex tax filings called the Form 990 (or Form 990-EZ) are generally required for organizations with gross acquirement exceeding $50,000 per year, and are open up to public inspection. (Organizations whose almanac gross receipts are usually $50,000 or less, file a much simpler electronic form called the Form 990-N). These and other administrative difficulties are non typically worth the trouble unless 501(c)(3) status would significantly enhance an organization'due south fundraising capabilities, or at least its image in the arts community.

Designing a Programme of Activities to Qualify under 501(c)(3)

An arts system that has thoroughly considered the benefits and burdens of 501(c)(iii) status and wishes to move forward with the qualification process will demand to pattern a program of activities consistent with 501(c)(three) status. Information technology is important to be aware of which types of activities are acceptable and which activities raise suspicions at the IRS, and be able to evidence the IRS several bona fide activities that fit squarely within the traditional notions of a 501(c)(3) arts organization.

The exemption nether section 501(c)(iii) for arts organizations is based on the statutory exemption for "educational" organizations, and so educational activities carry significant weight in the approval of 501(c)(3) status. Examples of educational arts organizations include:

• An system formed to promote the advancement of young musical artists past conducting weekly workshops, and sponsoring public concerts past the artists. Rev. Rul. 67-392, 1967-2 C.B. 191.
• An organisation formed to promote public appreciation of group harmony singing past holding frequent meetings of members where they receive grooming and instruction in song harmony and opportunities to practice nether trained supervision. Rev. Rul. 66-46, 1966-i C.B. 133.
• A dance school with a regular faculty, daily comprehensive curriculum, and a regularly enrolled body of students. Rev. Rul. 65-270, 1965-two C.B. 160.

Educational activities tin can also include individual education, or the dissemination of instructional materials for free or for a nominal charge. Run into Rev. Rul. 68-71, 1968-1 C.B. 249 (approving the 501(c)(3) status of an system that provided career education by distributing educational publications at a nominal accuse and providing free vocational counseling services).

Public exhibits or performances are also typically valid 501(c)(3) activities, provided that steps are taken to ensure that the choice of artists is disinterested (i.e. the organisation is not merely a vehicle for showing the work of founders, directors or other insiders of the organization), and provided that the artists or works are chosen for their artistic merit rather than their ability to entreatment to a mass audience. Run across Plumstead Theatre Soc'y, Inc. v. Comm'r, 74 T.C. 1324, 1332-1333 (1980), aff'd 675 F.2nd 244 (ninth Cir. 1982) (contrasting commercial theaters, which "choose plays having the greatest mass audience appeal … run the plays so long as they tin attract a crowd …[and] … gear up ticket prices to pay the total costs of production and to render a turn a profit," with 501(c)(3) theaters, which "fulfill their creative and customs obligations past focusing on the highest possible standards of performance; past serving the community broadly; by developing new and original works; and past providing educational programs and opportunities for new talent."). It helps if at to the lowest degree some of these exhibits or performances are open to the public for free.

For instance, the IRS has approved the 501(c)(three) status of the following organizations:

• An organization whose sole action was sponsoring an annual art exhibit of artists selected by a panel of qualified fine art experts. Rev. Rul. 66-178, 1966-1 C.B. 138.
• A filmmaking arrangement that organized annual festivals to provide unknown contained filmmakers with opportunities to display their films. Rev. Rul. 75-471, 1975-2 C.B. 207.
• An system that presented public jazz concerts featuring aspiring jazz composers and high schoolhouse students performing aslope established jazz musicians. Rev. Rul. 65-271, 1965-2 C.B. 161.
• A touring repertory theatre visitor that focused on works that were role of college curricula. Rev. Rul. 64-175, 1964-1 C.B. 185.

Note that the IRS views the exhibition of art much differently than the sale of art, particularly with respect to the visual arts. The IRS typically denies 501(c)(3) status to art galleries that appoint in the sale of fine art for a commission. Encounter Rev. Rul. 76-152, 1976-1 CB 151 (rejecting the 501(c)(3) status of a gallery formed to promote modernistic fine art trends past exhibiting works of mod artists and selling the works on assignment basis with the creative person setting the selling toll and the arrangement keeping a 10% committee, fifty-fifty though this commission was lower than that charged past commercial entities and the gallery planned to supplement its revenue through donations); Rev. Rul. 71-395, 1971-2 CB 228 (rejecting the 501(c)(3) status of a gallery formed and operated by approximately 50 artists for the purpose of exhibiting and selling the work of the founders).

Gallery sales activities are permitted but under very express circumstances when sales activities are sufficiently minor in comparing to educational and other valid 501(c)(3) activities. Goldsboro Art League, Inc. v. Comm'r, 75 T.C. 337 (1980) (approving the 501(c)(3) status of a gallery that engaged in some sales for commissions in improver to educational activities, based on the post-obit factors: (1) there were no other museums or galleries in the expanse, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served merely every bit an incentive to attract artists to exhibit their work; (2) works were selected by an independent jury for their representation of modern trends rather than salability; (three) the organisation demonstrated that educational activities were its priority; (4) the fine art sales were not conducted at a profit; and (5) of more than than 100 works of arts exhibited in the organisation'due south galleries, only two members of the organization had their art exhibited).

Nearly 501(c)(iii) arts organizations focus predominantly on education and/or public exhibits or performances, but other types of activities tin can exist acceptable besides. For instance, the application of grants to aspiring artists and students is a permissible 501(c)(iii) activeness, provided that procedures ensuring disinterested choice of winners are developed and scrupulously followed. See Rev. Rul. 66-103, 1966-i C.B. 134 (approval the 501(c)(three) status of system formed for the purpose of making grants bachelor to writers, composers, painters, sculptors, and scholars for projects in their respective fields which they would not otherwise be able to undertake or finish due to the lack of funds. In application grants, preference was given to persons showing distinction or promise in their corresponding fields, and the recipients promised to make their work available for the benefit of the public in ways customary and appropriate to the particular piece of work. The organization received no financial benefit from these grants).

The IRS has also approved of activities promoting the appreciation of art by less traditional ways, such every bit the recording and sale of obscure classical music pieces to educational institutions, Rev. Rul. 79-369, 1979-2 C.B. 226, and a museum'due south sale of greeting cards displaying printed reproductions of selected works from the museum'southward collection and from other art collections. Rev. Rul. 73-104, 1973-1 C.B. 263. Even so, these types of non-traditional promotional activities should exist approached with caution, as they implicate difficult issues that tin lead to unpredictable results from the IRS. Encounter e.m. Rev. Rul. 76-206, 1976-1 C.B. 154 (rejecting the 501(c)(three) status of an arrangement formed to generate community interest in classical music by urging the public to back up the classical music plan of a for-turn a profit radio station).

In summary, when applying for 501(c)(3) status, an arts system should be prepared to describe several activities like to those approved by the IRS. In that location should be at least some educational component, whether through workshops, classes, online publications or tutorials, or other means. It is helpful to show date with the public or local community through free exhibits or performances, and to focus on art that lacks mainstream commercial viability. Lastly, an organization founded or run by artists should brand sure to focus on a wide diverseness of artists rather than only its founders or members.

About the Writer: Benjamin Takis is the founder and principal attorney of Tax-Exempt Solutions, PLLC. He may be reached at btakis@taxexemptsolutions.com.

Disclaimer: This publication is provided for educational and informational purposes only and does not contain legal advice. Appropriately, you lot should non act on any information provided without consulting legal counsel. To comply with U.Southward. Treasury Regulations, we too inform you that, unless expressly stated otherwise, any tax advice independent in this publication is not intended to be used and cannot be used past any taxpayer to avoid penalties nether the Internal Revenue Lawmaking, and such advice cannot be quoted or referenced to promote or market place to another party any transaction or matter addressed in this publication.

Source: https://itsartlaw.org/2014/05/27/visiting-the-non-profit-side-on-qualifying-for-501c3-status-as-an-arts-organization/

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