Internal Revenue Service
Revenue Ruling
Rev. Rul. 76-152
1976-1 C.B. 151
Section 501
IRS Headnote
Art gallery. A nonprofit organization formed by art patrons to promote
community understanding of modern art trends by selecting for exhibit,
exhibiting, and selling art works of local artists, 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
section 501(c)(3) of the Code; Rev. Rul. 71-395 clarified.
Full Text
Rev. Rul. 76-152
Advice has been requested whether the nonprofit organization described
below, which otherwise qualifies for exemption from Federal income tax
under section 501(c)(3) of the Internal Revenue Code of 1954, is operated
exclusively for educational purposes.
A group of art patrons formed an organization to promote community
understanding of modern art trends. As its sole activity, the organization
selects modern art works of local artists for exhibit at its gallery and
for possible sale. The gallery is open to the general public.
A modern art work of any local artist is eligible for consideration for
exhibition. If selected, the artist's work is displayed on a consignment
basis with the artist setting the selling price. The artists have no
control over the organization or its selection process.
The organization retains a ten percent commission on sales. The commissions
are substantially less than customary commercial charges and are not
sufficient to recover the cost of operating the gallery. The organization
attempts to make up operating deficits by soliciting contributions from the
general public.
Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
educational purposes.
Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations provides that
an organization is not organized and operated exclusively for educational
purposes unless it serves a public rather than a private interest.
Section 1.501(c)(3)-1(d)(3) of the regulations provides that the term
"educational" relates to the instruction of the public on subjects useful
to the individual and beneficial to the community. Museums are included in
the examples of educational organizations which, if they otherwise meet the
requirements of section 501(c)(3) of the Code, may qualify under this
section.
Rev. Rul. 66-178, 1966-1 C.B. 138, holds that an organization that fosters
and develops the arts by sponsoring a public art exhibit at which the works
of unknown but promising artists are gratuitously displayed may qualify for
exemption under section 501(c)(3) of the Code. The organization does not
sell or offer the displayed works for sale.
Rev. Rul. 71-395, 1971-2 C.B. 228, on the other hand, holds 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 under
section 501(c)(3) of the Code.
As is the case in Rev. Rul. 71-395, the artists in the subject case are
being directly benefited by the exhibition and sale of their works, with
the result that a major activity of the organization is serving the private
interests of those artists whose works are displayed for sale. Since ninety
percent of all sales proceeds are turned over to the individual artists,
such direct benefits are substantial by any measure and the organization's
provision of them cannot be dismissed as being merely incidental to its
other purposes and activities. The fact that the artists have no control
over the selection of their works for display does not change this
conclusion.
Accordingly, the organization is not operated exclusively for educational
purposes and thus does not qualify for exemption from Federal income tax
under section 501(c)(3) of the Code.
Rev. Rul. 71-395 is clarified.
