Selling out Without Selling out: The Art of Tax Exempt Commerce
Can a museum or gallery engage in commerce and remain a non-profit? It depends!
An organization may engage in a trade or business as long as its operation furthers an exempt purpose and its primary objective is not the production of profits. see Goldsboro Art League, Inc. v. Commissioner, 75 T.C. 337, 343 (1980). In Goldsboro Art League, Inc., the league sold artwork (in addition to holding educational classes and exhibiting work) and retained a portion of the sale as a commission but maintain non-profit status because the court found incidental to its other activities and serve the same overall objective of art education. This is not a case where the other activities are adjunct to petitioner's sales, but, rather, where petitioner's sales activities are secondary and incidental to furthering its exempt purpose. Id.
Treasury Regulation § 1.501(c)(3)-1(e). It states “An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization’s exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513” The Regulation goes on to explain that when evaluating what constitutes the “primary purpose”, “all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes” 26 CFR § 1.501(c)(3)-1(c)(1) states “An organization will not be so regarded [as a non-profit] if more than an insubstantial part of its activities is not in furtherance of an exempt purpose”
IRS Rev. Rul. 71-395 held that that a cooperative art gallery formed and operated by a group of artists to exhibit and sell their own works does not qualify for tax-exempt status under IRC Section 501(c)(3)
Rev. Rul. 76-152 held that a nonprofit which exhibited and sold art for local artists and retained a ten percent commission did not qualify for exemption because the direct benefit to the artists could not be considered incidental.
What should you do if you are a non-profit and municipality (or the federal government) is trying to revoke your status based on the trade or businesses your organization is carrying on ? You should marshal the facts on how the trade or business is incidental to furthering your exempt purpose.