Member art gallery denied exemption for private benefit

Plain-English summary

An arts organization sought section 501(c)(3) exemption for public classes, exhibits, festivals, artist support, and related programming. It also operated a gift shop where member artists paid monthly fees, selected artists through peer review, set their own prices, and received most of the proceeds from their sales. The organization described sales as essential to supporting both its operations and the participating artists. The IRS concluded that the gallery substantially benefited member artists by marketing and selling their work, while any public education was secondary. It denied exemption because the organization served private interests and its sales activity was not incidental to an exempt purpose.

Ruling snapshot

• Question: Does the membership-based arts organization operate exclusively for exempt purposes when selling members' artwork is an essential activity?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 66-178, 71-395, and 76-152

Full text (IRS public release)

~ Internal Revenue Service
Department of the Treasury Date:
fm 02/27/2025
Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508
Cincinnati, OH 45201 Person to contact:

Release Date: 202521022
Release Date: 5/23/2025
UIL Code: 501.03-00.
501.33-00

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 50l(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.
Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.
We may notify the appropriate state officials of our determination, as required by IRC Section 6104( c), by
sending them a copy of this final letter along with the proposed determination letter.
You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.Irs.gov.
We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice oflntention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.
If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

                                                                                     Letter 4038 (Rev. 11-2021)
                                                                                     Catalog Number 47632S

                   Sincerely,


                   Stephen A. Martin
                   Director, Exempt Organizations
                   Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Letter 4038

                                               Letter 4038 (Rev. 11-2021)
                                               Catalog Number 47632S

~
Department of the Treasury
Internal Revenue Service
PO Box 2508
IRS Cincinnati, OH 45201

                                                                                Date: 01/08/2024

                                                                                Employer ID number:


                                                                                Person to contact:
                                                                                 Name:
                                                                                 ID number:
                                                                                 Telephone:

Legend: UIL:
B = Date 501.03-00
C = State 501.33-00
D = Date
E = number range
x percent = percentage
y percent = percentage

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 50l(a). We determined that you don't qualify for exemption under IRC Section 50l(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 50l(c)(3)? No, for the reasons stated below.

Facts
You originally formed as a Limited Liability Company on Bin the State of C, but converted to a nonprofit
corporation on D. Your Articles oflncorporation state you are organized and operated exclusively for
charitable, religious, educational, and scientific purposes, including, for such purposes, the making of
distributions to organizations that qualify as exempt organizations under IRC Section 50l(c)(3).

More specifically, you formed to provide support, education, and management skills for local artists and
artisans, instill life-long learning in adults, facilitate artistic endeavors, enrich the quality of life, and strengthen
community connections through artistic expression. To do so, you provide educational and visual arts related
programming through the following activities:

•   public art classes and demonstrations,
•   monthly rotating art exhibits,
•   an annual arts festival to celebrate visual, performance, and culinary arts,
•   exhibition space for artists to display and sell their artwork, and
•   social gatherings where people can connect and work on special arts projects.
                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K

                                                      2

Your exhibition space includes an artist gift shop where E artists offer their work for sale to the public. These
artists must enter into a membership agreement with you. Each member artist pays a monthly membership fee
as part of the agreement. Collectively, these fees cover the building rental, utilities, and operating costs. Your
member artists are selected based on the uniqueness, creativity, and perceived quality of their art via an artist
peer review group comprised of your other member artists.

Your member artists determine the sales price of their art. You track the artists 1 sales and pay them x percent of
the sales price on a monthly basis, while you keep a y percent commission to cover the costs of sales materials,
e.g., bags, tissue paper, and credit card processing fees. Many artists also volunteer to work in the shop and help
with other events.

Information obtained for your organization's website lists your member artists and provides a copy of your
membership agreement. The agreement includes detailed information on the membership fees, sales payments
made to the artists monthly, and your y percent commission. The agreement goes on to provide additional
information about discounted membership foes the shop staff receive for working in your shop.

You state that selling art is an essential part of your operations as it provides support for your organization, the
artists, and the community you serve, and allows you to operate as a supportive group for regional artists to
network, better their craft, and market their art. Additionally, you assert that the sale of artwork supports your
charitable objectives, helping you to sustain your operations, fund community programs, and provide resources
for local artists. Further, you stated that the revenue your member artists receive from the sale of their art
enables them to continue creating, honing their skills, and making significant contributions to the artistic and
cultural community in your area.

Your income is derived from admissions, merchandise sold, services performed, membership fees, and the y
percent commission on each art sale. You have no paid employees.

Law
IRC Section 501 (c )(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable, or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-l(a)(l) states that, to be exempt as an organization described in IRC
Section 50l(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Section 1.50l(c)(3)-l(c)(l) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of
such exempt purposes specified in IRC Section 50l(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(l)(ii) states that an organization is not operated exclusively for one or more
exempt purposes unless it serves a public rather than a private interest. It must not be operated for the benefit of
designated individuals or the persons who created it.

                                                                                    Letter 4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K

                                                      3

Revenue Ruling 66-178, 1966-1 C.B. 138, found that a nonprofit organization created to foster and develop the
arts by sponsoring a public art exhibit at which the works of unknown but promising artists are selected by a
panel of qualified judges for viewing and are gratuitously displayed is exempt from federal income tax under
IRC Section 501(c)(3).

Rev. Rul. 71-395, 1971-2 C.B. 228, found that a cooperative art gallery formed and operated by a group of
artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC Section
501(c)(3) because the organization served the private interests of its members, even though the exhibition and
sale of painting may be an educational activity in other respects.

Rev. Rul. 76-152, 1976-1 C.B. 151, found that a nonprofit organization formed by art patrons to promote
community understanding of modem art trends by selecting for exhibit, exhibiting, and selling art works of
local artists, while retaining a commission on sales less than customary commercial charges and not sufficient
to cover the cost of operating the gallery, does not qualify for exemption under IRC Section 501 (c)(3 ). The
organization is serving the private interests of those artists whose works are displayed for sale.

In Goldsboro Art League, Inc. v. Commissioner oflntemal Revenue, 75 T.C. 337 (1980), the Court found that
an organization that sold artwork in its galleries was entitled to exemption under IRC Section 501(c)(3). The
corporation contended that the primary purpose of its sales and other activities was to further the public's
appreciation of art and not to serve private interests. The Commissioner argued that since the corporation's
activities were indistinguishable from activities required in operating a commercial art gallery for profit, the
corporation was operated for a substantial commercial purpose and could not qualify for exemption despite the
presence of any number of truly exempt purposes. The Court, however, found that the purpose of the art gallery
and art market was primarily to foster community awareness and appreciation of contemporary artists and to
provide a constant flow of art for students to study art and painting techniques. The corporation's sales activities
were incidental to its other activities and served the same overall objective of art education.

Application of law
You are not described in IRC Section 501(c)(3) because you fail the operational test as described in Treas. Reg.
Section 1.501(c)(3)-l(a)(l).

You do not meet the operational test under IRC Section 501 (c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-l(c)(l). You are operating for the private
interests of your members whose art you sell. Providing a display and retail space for your members, allowing
each member to set the sales price and select the works for sale, and collecting a commission off your members'
sales serves the private interests of your members and not the public interest. Moreover, the education of the
public is secondary to the sale of artwork.

You are similar to the organization described in Rev. Rul. 71-395, because you were formed by a group of
artists and are operating an artist gift shop open to the general public, which displays and sells members'
artwork. In addition, like this organization, an artist review group chosen by you selects whose works will be
offered for sale. Consequently, like the organization in the revenue ruling, you are a vehicle for advancing your
members' careers and promoting the sale of their artwork. This serves the private interests of your members,
even though the exhibition of paintings may be an educational activity in other respects.

                                                                                   Letter 4034 {Rev. 01-2021}
                                                                                   Catalog Number 47628K

                                                       4

Unlike the organization granted exemption in Rev. Rul. 66-178, you are a membership organization consisting
of artists who select and sell members' artwork in a gift shop you operate. Therefore, you are operating for a
substantial nonexempt purpose because you serve private interests rather than the public interest, precluding
exemption under IRC Section 501 (c)(3 ).

You are like the organization denied exemption in Rev. Rul. 76-152, because the artists whose works are
displayed and sold are directly benefited by your operations. You are a membership organization consisting of
artists who select and sell members' artwork in a gift shop you operate. Your member artists set the sales prices
and receives x percent of the sale, while you retain the remaining y percent as a commission. Therefore, you
have a substantial non-exempt purpose that precludes exemption under IRC Section 501(c)(3).

You are different from the organization granted exemption in Goldsboro Art League, Inc. Unlike this
organization, the sale of artwork is a substantial part of your operations. In addition, all artists that display and
sell artworks are your members who pay fees to utilize your space to market their art. Since the sale of artwork
is an essential part of your operations, such activities are not incidental to your other activities and, therefore, do
not further exempt purposes under IRC Section 50l(c)(3).

Conclusion
Based on the information submitted, you are not operating exclusively for one or more purposes described in
IRC Section 50l(c)(3). You operate for a substantial nonexempt purpose because you serve private interests
rather than the public interest. Even though some of your activities are educational, the sale of artwork is an
essential part of your operations, and you are primarily operating to benefit your member artists. Any public
purpose for which you may operate is incidental to your primary nonexempt purpose. Therefore, you do not
qualify for federal tax exemption under Section 501(c)(3).

If you agree
If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:
• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference
• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative
• The following declaration:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

                                                                                     Letter 4034 (Rev. 01-2021)
                                                                                     Catalog Number 47628K

                                                     5

Your representative (attorney, certified public accountant, or other individual emolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

   U.S. mail:                                      Street address for delivery service:

   Internal Revenue Service                         Internal Revenue Service
   EO Determinations Quality Assurance              EO Determinations Quality Assurance
   Mail Stop 6403                                   550 Main Street, Mail Stop 6403
   PO Box2508                                       Cincinnati, OH 45202
   Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
The Taxpayer Advocate Service (T AS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

                                                         Sincerely,


                                                         Stephen A. Martin
                                                         Director, Exempt Organizations
                                                         Rulings and Agreements


                                                                                  Letter 4034 (Rev. 01-2021)
                                                                                  Catalog Number 47628K