This post was originally published on Forbes May 8, 2015
You will find that a lot of museums are exempt 501(c)(3) organizations. The Worcester Art Museum, which currently has a samurai theme going on is a good example. Galleries are a different story. That is what a group of artists learned when the IRS issued Private Letter Ruling 201516066. I had no luck at all in penetrating the redaction, so I am going to call the group Selling Our Own Stuff (SOOS), since that is pretty much what they are about.
SOOS is an artist's cooperative that operates an art gallery. The gallery is open free to the public on Fridays and Saturdays. SOOS provides exhibitions for the community and people can come there and learn about contemporary art. I'm thinking something like LKG Contemporary in Scottsdale
Or maybe not, but I thought that was a pretty cool video clip.
SOOS is a membership organization and had 21 members at the time of the ruling. Members pay dues and are required to work six hours per month in the gallery. Art that they hang in the gallery that is sold yields a 10% commission to SOOS. Apparently that is a pretty good deal for the artist. According to this article, gallery commissions can run as high as 50%.
Recruiting of members is by word of mouth and the website. Besides working six hours per month, members are expected to attend meetings and serve on committees. In order to be accepted as members they must produce unique interesting work of high quality. The work must be marketable and there needs to be enough produced to keep the gallery stocked.
Some Charitable Activity But Not Enough
In addition the running the gallery SOOS sponsors an annual 5K race, awards three $500 scholarships to high school students, provides community artist talks, critiques of local artist's work, school youth group tours of the gallery and workshops. They plan to begin providing art classes. When it comes to 501(c)(3), that stuff is nice, but it was not enough.
You are not like the organization in Revenue Ruling 66-178. The organization in that ruling conducted an annual exhibit, did not sell art, had artists not affiliated in any way to any gallery and charged no fees for exhibition. You have a gallery that is open to the public on a regular basis. You sell the works of member artists and retain commissions, have member artists affiliated with your gallery, and charge membership fees to a majority of the artists who wish to display their work at your gallery. Unlike the organization in the ruling, you are not formed primarily to further charitable or educational purposes, but are formed instead for the benefit of your members.
You are similar to the organization described in Revenue Ruling 71-395. You were formed by a group of artists and are operating an art gallery open to the general public which displays and sells members' artwork. One advantage of membership is listed as the ability to show works. In addition, like the organization in the revenue ruling, a committee consisting of artist members selects works that will be displayed and offered for sale. Additional members are admitted to membership by approval of the existing members. Your gallery is open free to the public on certain days and by appointment on others. Nearly all work is for sale, and you retain a commission of the original sales price of artwork that is sold. Consequently, like the organization in the revenue ruling, you are a vehicle for advancing members' careers and are promoting the sale of members' artwork. This serves the private purposes of your members, even though the exhibition of art may be an educational activity in other respects.
What Is So Great About Exempt Status?
Frankly, I think the IRS may have done the artists of SOOS a favor by turning them down. I have to preface this by saying that I don't have a lot of experience with artists, but I have a good bit of experience with not for profits and some with cooperatives. Cooperatives are a tax concept that many people are not familiar with. A corporation that is organized in the correct manner can be taxed as a cooperative.
It is a bit complicated, but essentially cooperatives can pay "patronage dividends", deductible to the corporation and taxable to the patron. As a cooperative SOOS can run as a C corporation, which is a lot easier than running as a not-for-profit. Double taxation can be avoided by well-timed patronage dividends. I suspect that trying to run as a partnership would be an administrative nightmare, as I would think there would be a good bit of coming and going.
One of the more well-known cooperatives is Ocean Spray Cranberry. I have a little familiarity with that from helping one of my partners with cranberry bogs.
Another well known company that operated as a worker-owned cooperative until 2006 is Good Vibrations
They are not a music company. They actually sell modern versions of a medical device that was invented for the treatment of hysteria.
When I checked them out, because I remembered that they were a cooperative, I discovered that they have declared May to be the month for their favored activity. It goes back to 1995 when Jocelyn Elders got fired from being Surgeon General. Brings new meaning to that song from Camelot.
They are saying it's healthy now, so have a pleasant May.