The Art League Is a Not for Profit Organization

By Benjamin Takis

Background

New not-profit organizations often find that the earth is not a hospitable identify. While innovation, entrepreneurship, and take chances-taking past new for-profit companies are lauded, fledgling not-profits typically struggle to proceeds the acceptance and back up of private foundations, donors and others in the non-turn a profit community. In that location is, after 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-profit can exist staggering. New non-profits are therefore oft advised to pair up with an existing organization, use a for-profit structure, or explore other alternatives earlier forming a new entity and applying to qualify under section 501(c)(3) of the Internal Acquirement Lawmaking (the "Code").

Despite these challenges, arts organizations share certain traits that can help them thrive as non-profit 501(c)(3) organizations, with fewer of the hurdles faced past other kinds of not-profits. First, while many organizations rely largely on foundation grants and private donations, arts organizations tin raise funds from ticket sales to performances, exhibits, and other events. For many kinds of organizations, these "fee-for-service" revenue sources can trigger "unrelated business income tax" or endanger 501(c)(3) condition nether the "commerciality doctrine" applied past the Internal Revenue Service ("IRS") and the courts. However, these revenue sources are generally consistent with the tax-exempt status of arts organizations. Additionally, these types of acquirement sources can more hands satisfy the "public support" tests that enable an organisation to authorize as a public charity, and thereby avoid classification every bit a individual foundation and the stringent oversight to which individual foundations are subjected.

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

501(c)(3) is a special tax status nether federal constabulary, generally available to organizations formed and operated for a charitable, educational, scientific or religious purpose, and promotion of the arts is recognized as a valid educational purpose. Treas. Reg. § one.501(c)(3)-1(d)(3)(ii), Example four (Educational organizations include "[g]useums, zoos, planetariums, symphony orchestras, and other similar organizations," provided that the organizations otherwise satisfy the requirements of department 501(c)(iii) of the Lawmaking). Withal, before embarking on the 501(c)(3) qualification process, information technology is important to advisedly consider whether the benefits of 501(c)(3) status are worth the burdens.

At that place are three legal benefits to having 501(c)(three) condition: (1) the arrangement's net revenue (after expenses) is generally not subject to revenue enhancement; (two) contributions to the organization are eligible for the charitable deduction; and (3) the organization is eligible for grants from individual foundations.

These benefits are not quite equally advantageous equally they may announced. About non-profits (including arts organizations) do not have large amounts of excess revenue – nearly struggle to earn enough acquirement to pay their expenses. Therefore, the tax exemption on cyberspace acquirement may non exist crucial. Second, while the charitable deduction is a powerful incentive for individuals inclined to requite money to non-profit organizations, information technology is yet a difficult job to convince people to give. The charitable deduction tends to be important only when an organization's Lath of Directors has a strong and committed network of high-wealth individuals. Lastly, it tin be hard to become grants from private foundations. Finding grant opportunities takes pregnant inquiry, and the grant writing process requires grooming, perseverance, and commitment.

Maintaining 501(c)(3) status can also be quite crushing. A 501(c)(iii) organization must exist run by a Board of Directors (generally 3 or more than people) in accordance with Articles of Incorporation, Bylaws, and diverse corporate policies that comply with requirements set forth under federal tax police force and land not-profit corporation constabulary. In add-on, any compensation to Directors or Officers must exist closely scrutinized to ensure that such payments are reasonable. And complex taxation filings called the Course 990 (or Form 990-EZ) are by and large required for organizations with gross acquirement exceeding $50,000 per year, and are open to public inspection. (Organizations whose annual gross receipts are unremarkably $fifty,000 or less, file a much simpler electronic form chosen the Form 990-Due north). These and other authoritative difficulties are not typically worth the problem unless 501(c)(3) condition would significantly enhance an organization'south fundraising capabilities, or at least its image in the arts community.

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

An arts organization that has thoroughly considered the benefits and burdens of 501(c)(3) status and wishes to movement forward with the qualification procedure will demand to design a program of activities consistent with 501(c)(three) status. Information technology is important to be enlightened of which types of activities are acceptable and which activities raise suspicions at the IRS, and be able to show the IRS several bona fide activities that fit squarely inside the traditional notions of a 501(c)(3) arts organisation.

The exemption under department 501(c)(iii) for arts organizations is based on the statutory exemption for "educational" organizations, so educational activities acquit pregnant 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 by conducting weekly workshops, and sponsoring public concerts by the artists. Rev. Rul. 67-392, 1967-two C.B. 191.
• An organization formed to promote public appreciation of group harmony singing by holding frequent meetings of members where they receive grooming and instruction in song harmony and opportunities to practice under trained supervision. Rev. Rul. 66-46, 1966-1 C.B. 133.
• A dance school with a regular kinesthesia, daily comprehensive curriculum, and a regularly enrolled torso of students. Rev. Rul. 65-270, 1965-2 C.B. 160.

Educational activities can also include individual didactics, or the broadcasting of instructional materials for free or for a nominal charge. See Rev. Rul. 68-71, 1968-one C.B. 249 (approving the 501(c)(3) condition of an organisation that provided career education by distributing educational publications at a nominal charge and providing costless vocational counseling services).

Public exhibits or performances are also typically valid 501(c)(3) activities, provided that steps are taken to ensure that the selection of artists is disinterested (i.e. the system is non simply a vehicle for showing the piece of work of founders, directors or other insiders of the organization), and provided that the artists or works are called for their artistic merit rather than their ability to appeal to a mass audience. See Plumstead Theatre Soc'y, Inc. 5. Comm'r, 74 T.C. 1324, 1332-1333 (1980), aff'd 675 F.2d 244 (9th Cir. 1982) (contrasting commercial theaters, which "choose plays having the greatest mass audience entreatment … run the plays so long as they can attract a crowd …[and] … fix ticket prices to pay the total costs of production and to return a turn a profit," with 501(c)(3) theaters, which "fulfill their creative and customs obligations by focusing on the highest possible standards of performance; by serving the community broadly; by developing new and original works; and by 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 costless.

For example, the IRS has approved the 501(c)(3) status of the following organizations:

• An organization whose sole activity was sponsoring an almanac art exhibit of artists selected past a panel of qualified art experts. Rev. Rul. 66-178, 1966-one C.B. 138.
• A filmmaking organization that organized annual festivals to provide unknown independent filmmakers with opportunities to display their films. Rev. Rul. 75-471, 1975-2 C.B. 207.
• An arrangement that presented public jazz concerts featuring aspiring jazz composers and high schoolhouse students performing alongside established jazz musicians. Rev. Rul. 65-271, 1965-2 C.B. 161.
• A touring repertory theatre company that focused on works that were part of higher curricula. Rev. Rul. 64-175, 1964-i C.B. 185.

Note that the IRS views the exhibition of art much differently than the auction of art, especially with respect to the visual arts. The IRS typically denies 501(c)(3) status to art galleries that engage in the auction of fine art for a commission. Meet Rev. Rul. 76-152, 1976-1 CB 151 (rejecting the 501(c)(iii) status of a gallery formed to promote modern art trends by exhibiting works of modern artists and selling the works on consignment ground with the artist setting the selling price and the organization keeping a 10% commission, even 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) condition of a gallery formed and operated past approximately 50 artists for the purpose of exhibiting and selling the work of the founders).

Gallery sales activities are permitted only nether very express circumstances when sales activities are sufficiently small in comparing to educational and other valid 501(c)(3) activities. Goldsboro Fine art League, Inc. 5. Comm'r, 75 T.C. 337 (1980) (approval the 501(c)(3) condition of a gallery that engaged in some sales for commissions in improver to educational activities, based on the following factors: (1) in that location were no other museums or galleries in the area, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served only as an incentive to attract artists to exhibit their work; (2) works were selected past an independent jury for their representation of modern trends rather than salability; (three) the organization demonstrated that educational activities were its priority; (four) the art sales were not conducted at a turn a profit; and (5) of more than 100 works of arts exhibited in the organization's galleries, just 2 members of the arrangement had their art exhibited).

Most 501(c)(3) arts organizations focus predominantly on education and/or public exhibits or performances, just other types of activities can be acceptable likewise. For example, the awarding of grants to aspiring artists and students is a permissible 501(c)(three) activity, provided that procedures ensuring disinterested option of winners are adult and scrupulously followed. See Rev. Rul. 66-103, 1966-1 C.B. 134 (blessing the 501(c)(3) status of organization formed for the purpose of making grants bachelor to writers, composers, painters, sculptors, and scholars for projects in their corresponding fields which they would not otherwise be able to undertake or finish due to the lack of funds. In awarding grants, preference was given to persons showing stardom or promise in their corresponding fields, and the recipients promised to make their piece of work available for the benefit of the public in ways customary and appropriate to the particular work. The organization received no fiscal do good from these grants).

The IRS has as well approved of activities promoting the appreciation of fine art by less traditional means, such as the recording and auction of obscure classical music pieces to educational institutions, Rev. Rul. 79-369, 1979-2 C.B. 226, and a museum's auction of greeting cards displaying printed reproductions of selected works from the museum's drove and from other art collections. Rev. Rul. 73-104, 1973-ane C.B. 263. However, these types of non-traditional promotional activities should exist approached with caution, every bit they implicate difficult issues that can lead to unpredictable results from the IRS. Encounter e.g. Rev. Rul. 76-206, 1976-1 C.B. 154 (rejecting the 501(c)(3) condition of an organization formed to generate community interest in classical music by urging the public to support the classical music program of a for-profit radio station).

In summary, when applying for 501(c)(3) status, an arts organization should be prepared to draw several activities similar to those approved by the IRS. There should be at least some educational component, whether through workshops, classes, online publications or tutorials, or other means. It is helpful to testify appointment 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 broad variety of artists rather than but its founders or members.

Nearly the Author: Benjamin Takis is the founder and primary chaser of Revenue enhancement-Exempt Solutions, PLLC. He may be reached at btakis@taxexemptsolutions.com.

Disclaimer: This publication is provided for educational and informational purposes simply and does not incorporate legal communication. Accordingly, y'all should not act on any information provided without consulting legal counsel. To comply with U.S. Treasury Regulations, we as well inform you that, unless expressly stated otherwise, whatever tax advice contained in this publication is not intended to be used and cannot be used past whatsoever taxpayer to avoid penalties nether the Internal Revenue Lawmaking, and such communication cannot be quoted or referenced to promote or market to another party any transaction or matter addressed in this publication.

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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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