Arts Projects: Charitable or Not?

Art palette

An organization devoted to the promotion of art may qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code (the “Code”) by emphasizing its educational exempt purpose and goal of educating the public about the arts. The difficult part of determining whether the organization would be exempt under 501(c)(3) is deciphering whether it serves primarily charitable and/or educational purposes, or whether it serves impermissible private or commercial interests.

Educational Purpose

Educational, within the meaning of 501(c)(3), relates to:

  • The instruction or training of the individual for the purpose of improving or developing his capabilities; or
  • The instruction of the public on subjects useful to the individual and beneficial to the community.

In the context of an arts organization, an educational purpose may be advanced by, among other things, instructing students to develop their capabilities as artists (e.g., art school) or by instructing the general public on a particular form of art (e.g., symphony).


The following are examples of art projects that serve an exempt purpose:

  • Producing annual festivals to provide unknown filmmakers with opportunities to display their films;
  • Making grants to needy artists in order to encourage creative arts and scholarship;
  • Sponsoring performances for a community that might not otherwise be exposed to such works; and
  • Providing workshops, sponsoring public concerts, and securing paid engagements for young musicians and singers to improve their professional standing.

Conversely, the following activities would likely not be exempt:

  • Selling works of art and distributing the proceeds to the individual artists (provided that such artists are not part of a charitable class of disadvantaged beneficiaries, whether physically, economically, or otherwise); and
  • Sponsoring, advertising, marketing, and selling films of up-and-coming or unknown writers, directors, and actors.

Private Benefit

A 501(c)(3) organization may not confer any benefit, monetary or otherwise, on any individual or entity that is not incidental, quantitatively and qualitatively, to furthering the organization’s exempt purposes. In the qualitative sense, to be incidental, the private benefit must be necessarily related to the activity that benefits the public at large. In simpler terms, one might consider whether the public benefit can be achieved to a similar degree without benefiting the private interest. If the answer is yes, then it is not incidental. Additionally, in order to be quantitatively incidental, the private benefit must be insubstantial in the context of, and balanced against, the overall public benefit. (See Private Benefit Rules).

Arts organizations should be watchful of potential private benefit issues and particularly avoid preferential treatment of directors, officers, or substantial donors (or to any of their relatives, related companies, friends, or business associates). They should also note that organizational activities resulting in payments given to individual artists, including where the organization is marketing and selling artists’ works for commission, may result in what the IRS considers prohibited private benefits.

One important factor in determining whether the interest being served is public or private is the extent and nature of the organization’s commercial activity. Although no specific amount of commercial activity is dispositive, generally the IRS will look at all of the facts and circumstances to see if the commercial nature of the activity is incidental, or substantial enough to outweigh the charitable or educational value and fail the operational test.


The Commerciality Doctrine, a product of the courts, looks at whether a nonprofit organization is operating in a manner that is too commercial for purposes of determining whether the organization is operating primarily in furtherance of an exempt purpose. Generally, in applying the Commerciality Doctrine, the IRS or courts will look to whether a nonprofit is engaging in activities that are in direct competition with for-profits entities. They will consider factors such as pricing, marketing methods, source of revenues, staffing, and use of surpluses to determine whether the activities are excessively commercial. Nonprofit arts organizations should keep these principles in mind when conducting activities, so as to not jeopardize their exempt status. (See Unrelated Business Income and the Commerciality Doctrine).

The IRS has issued a number of rulings relating to art projects that suggest, in the name of education, arts organizations can operate commercially in order to sell art or art-related items, so long as no actual artists are directly benefitted. (However, see Rev. Rule 79-369—an organization formed to create, develop, and promote an appreciation of contemporary symphony music was granted exemption even though its primary activity was to record and sell, mostly to educational institutions, relatively unknown works not produced by commercial music publishing and recording industries).

Other revenue rulings suggest that an arts organization may achieve an educational purpose so long as the programs are presented in a noncommercial manner. In a Non Docketed Service Advice Review, the IRS denied exemption to an organization that provided assistance to up and coming directors, writers, actors in producing low-budget films. Even though the organization planned to sponsor films irrespective of their commercial appeal, they also planned to solicit films through distributors, and advertise, market, and potentially sell those films later. The IRS said this failed the operational test due to “determinable commercial overtones.”

Arts organizations should be watchful of potential commerciality issues and consider, among other things, whether they are doing the following to best further their 501(c)(3) mission and not to make the most profit:

  • Selecting artists (mission-related merit-based criteria > commercial appeal);
  • Selecting artistic works (mission-related merit-based criteria > commercial appeal);
  • Selecting display and/or performance venues (maximizing public accessibility);
  • Setting the price for experiencing the artistic works (e.g., admission fee, ticket price);
  • Marketing the experiencing and/or sale of the artistic works;
  • Selecting distributors;
  • Selling the artistic works;
  • Providing supplemental educational materials in connection with the activities; and
  • Funding the activities (donative support is evidence of charitable activities).

Other Resources

Qualifying for 501(c)(3) Status as an Arts Organization (Tax-Exempt Solutions PLLC)

New Developments (6/8/16)

Hatch Concludes Review into Tax-Exempt Private Museums, Notes Concerning Findings (Senate Finance Committee, 6/2/16)

Tax Status of Museums Questioned by Senators (New York Times, 11/29/15)

Co-authored with Gene Takagi.