Articles of Incorporation Non Profit School of Performing Art

By Benjamin Takis

Background

New not-profit organizations often find that the world is not a hospitable place. While innovation, entrepreneurship, and run a risk-taking by new for-profit companies are lauded, fledgling not-profits typically struggle to gain the credence and support of private foundations, donors and others in the non-profit community. In that location is, later all, only a limited supply of grants and donations to fund charitable, artistic, and educational endeavors. Furthermore, the administrative brunt of forming and administering a non-profit can exist staggering. New non-profits are therefore often advised to pair up with an existing arrangement, use a for-profit structure, or explore other alternatives before forming a new entity and applying to qualify under department 501(c)(3) of the Internal Revenue Code (the "Code").

Despite these challenges, arts organizations share certain traits that can help them thrive as not-profit 501(c)(3) organizations, with fewer of the hurdles faced by other kinds of non-profits. First, while many organizations rely largely on foundation grants and private donations, arts organizations can enhance funds from ticket sales to performances, exhibits, and other events. For many kinds of organizations, these "fee-for-service" revenue sources can trigger "unrelated business income tax" or endanger 501(c)(3) status under the "commerciality doctrine" practical by the Internal Acquirement Service ("IRS") and the courts. Nonetheless, these revenue sources are generally consistent with the tax-exempt status of arts organizations. Additionally, these types of revenue sources can more hands satisfy the "public back up" tests that enable an system to authorize as a public charity, and thereby avert classification as a private foundation and the stringent oversight to which private foundations are subjected.

The Benefits and Burdens of 501(c)(three) Status

501(c)(iii) is a special tax status nether federal law, by and large available to organizations formed and operated for a charitable, educational, scientific or religious purpose, and promotion of the arts is recognized as a valid educational purpose. Treas. Reg. § one.501(c)(3)-ane(d)(3)(ii), Example four (Educational organizations include "[chiliad]useums, zoos, planetariums, symphony orchestras, and other similar organizations," provided that the organizations otherwise satisfy the requirements of section 501(c)(3) of the Code). Notwithstanding, earlier embarking on the 501(c)(3) qualification procedure, it is of import to carefully consider whether the benefits of 501(c)(3) status are worth the burdens.

There are 3 legal benefits to having 501(c)(3) status: (1) the organization's internet revenue (afterwards expenses) is generally not subject to tax; (ii) contributions to the organization are eligible for the charitable deduction; and (3) the organization is eligible for grants from private foundations.

These benefits are non quite as advantageous as they may appear. Most non-profits (including arts organizations) do non have big amounts of backlog revenue – virtually struggle to earn enough acquirement to pay their expenses. Therefore, the tax exemption on net revenue may not be crucial. Second, while the charitable deduction is a powerful incentive for individuals inclined to give coin to not-profit organizations, it is even so a hard task to convince people to give. The charitable deduction tends to be important simply when an organization's Board of Directors has a stiff and committed network of high-wealth individuals. Lastly, it can be difficult to become grants from private foundations. Finding grant opportunities takes significant inquiry, and the grant writing process requires preparation, perseverance, and delivery.

Maintaining 501(c)(iii) status can also be quite burdensome. A 501(c)(3) organization must be run past a Lath of Directors (generally 3 or more people) in accordance with Articles of Incorporation, Bylaws, and various corporate policies that comply with requirements set forth nether federal tax law and state not-profit corporation law. In add-on, any compensation to Directors or Officers must be closely scrutinized to ensure that such payments are reasonable. And complex tax filings chosen the Form 990 (or Form 990-EZ) are generally required for organizations with gross revenue exceeding $50,000 per yr, and are open up to public inspection. (Organizations whose annual gross receipts are normally $50,000 or less, file a much simpler electronic form called the Form 990-N). These and other administrative difficulties are not typically worth the problem unless 501(c)(3) status would significantly raise an organization's fundraising capabilities, or at least its image in the arts community.

Designing a Programme of Activities to Qualify under 501(c)(3)

An arts organization that has thoroughly considered the benefits and burdens of 501(c)(3) condition and wishes to move forward with the qualification process will need to design a plan of activities consistent with 501(c)(3) status. It is important to be aware of which types of activities are acceptable and which activities raise suspicions at the IRS, and exist able to show the IRS several bona fide activities that fit squarely inside the traditional notions of a 501(c)(3) arts organization.

The exemption nether section 501(c)(3) for arts organizations is based on the statutory exemption for "educational" organizations, so educational activities carry significant weight in the approval of 501(c)(three) condition. Examples of educational arts organizations include:

• An organization formed to promote the advocacy of immature musical artists by conducting weekly workshops, and sponsoring public concerts by the artists. Rev. Rul. 67-392, 1967-2 C.B. 191.
• An organization formed to promote public appreciation of group harmony singing by belongings frequent meetings of members where they receive training and instruction in vocal harmony and opportunities to practice under trained supervision. Rev. Rul. 66-46, 1966-ane C.B. 133.
• A trip the light fantastic toe schoolhouse with a regular faculty, daily comprehensive curriculum, and a regularly enrolled body of students. Rev. Rul. 65-270, 1965-2 C.B. 160.

Educational activities tin can also include individual education, or the dissemination of instructional materials for free or for a nominal charge. Come across Rev. Rul. 68-71, 1968-i C.B. 249 (approving the 501(c)(3) status of an organization that provided career education by distributing educational publications at a nominal charge and providing free vocational counseling services).

Public exhibits or performances are also typically valid 501(c)(3) activities, provided that steps are taken to ensure that the selection of artists is disinterested (i.east. the system is not merely a vehicle for showing the work of founders, directors or other insiders of the organization), and provided that the artists or works are chosen for their creative merit rather than their ability to appeal to a mass audience. See Plumstead Theatre Soc'y, Inc. v. Comm'r, 74 T.C. 1324, 1332-1333 (1980), aff'd 675 F.2d 244 (9th Cir. 1982) (contrasting commercial theaters, which "choose plays having the greatest mass audience appeal … run the plays and so long every bit they tin can attract a crowd …[and] … set up ticket prices to pay the full costs of production and to return a profit," with 501(c)(3) theaters, which "fulfill their artistic and community obligations past focusing on the highest possible standards of performance; by serving the customs broadly; by developing new and original works; and by providing educational programs and opportunities for new talent."). It helps if at least some of these exhibits or performances are open to the public for gratuitous.

For instance, the IRS has canonical the 501(c)(iii) status of the post-obit organizations:

• An organization whose sole activity was sponsoring an almanac art exhibit of artists selected by a panel of qualified art experts. Rev. Rul. 66-178, 1966-1 C.B. 138.
• A filmmaking organization that organized annual festivals to provide unknown contained filmmakers with opportunities to display their films. Rev. Rul. 75-471, 1975-2 C.B. 207.
• An organization that presented public jazz concerts featuring aspiring jazz composers and loftier school students performing alongside established jazz musicians. Rev. Rul. 65-271, 1965-2 C.B. 161.
• A touring repertory theatre company that focused on works that were part of college curricula. Rev. Rul. 64-175, 1964-one C.B. 185.

Annotation that the IRS views the exhibition of art much differently than the sale of art, especially with respect to the visual arts. The IRS typically denies 501(c)(3) status to fine art galleries that engage in the sale of art for a commission. See Rev. Rul. 76-152, 1976-1 CB 151 (rejecting the 501(c)(3) status of a gallery formed to promote modernistic art trends by exhibiting works of modern artists and selling the works on consignment basis with the artist setting the selling price and the organization keeping a ten% committee, fifty-fifty though this committee was lower than that charged past commercial entities and the gallery planned to supplement its revenue through donations); Rev. Rul. 71-395, 1971-two CB 228 (rejecting the 501(c)(3) status of a gallery formed and operated by approximately 50 artists for the purpose of exhibiting and selling the work of the founders).

Gallery sales activities are permitted merely nether very express circumstances when sales activities are sufficiently minor in comparison to educational and other valid 501(c)(3) activities. Goldsboro Fine art League, Inc. five. Comm'r, 75 T.C. 337 (1980) (approving the 501(c)(three) status of a gallery that engaged in some sales for commissions in addition to educational activities, based on the following factors: (i) there were no other museums or galleries in the area, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served merely as an incentive to attract artists to exhibit their work; (ii) works were selected by an independent jury for their representation of modern trends rather than salability; (3) the organization demonstrated that educational activities were its priority; (4) the art sales were not conducted at a profit; and (five) of more than 100 works of arts exhibited in the arrangement'southward galleries, only 2 members of the organization had their art exhibited).

Most 501(c)(iii) arts organizations focus predominantly on education and/or public exhibits or performances, but other types of activities tin can be acceptable as well. For instance, the awarding of grants to aspiring artists and students is a permissible 501(c)(3) action, provided that procedures ensuring disinterested option of winners are developed and scrupulously followed. See Rev. Rul. 66-103, 1966-1 C.B. 134 (approving the 501(c)(3) status of organization formed for the purpose of making grants available to writers, composers, painters, sculptors, and scholars for projects in their respective fields which they would not otherwise exist able to undertake or finish due to the lack of funds. In awarding grants, preference was given to persons showing distinction or hope in their respective fields, and the recipients promised to make their piece of work available for the benefit of the public in ways customary and appropriate to the particular work. The arrangement received no financial do good from these grants).

The IRS has also approved of activities promoting the appreciation of art by less traditional ways, such as the recording and sale of obscure classical music pieces to educational institutions, Rev. Rul. 79-369, 1979-two C.B. 226, and a museum'due south auction of greeting cards displaying printed reproductions of selected works from the museum's collection and from other art collections. Rev. Rul. 73-104, 1973-one C.B. 263. All the same, these types of non-traditional promotional activities should be approached with caution, every bit they implicate difficult issues that tin can atomic number 82 to unpredictable results from the IRS. See e.g. Rev. Rul. 76-206, 1976-one C.B. 154 (rejecting the 501(c)(iii) condition of an organization formed to generate customs interest in classical music by urging the public to support the classical music plan of a for-profit radio station).

In summary, when applying for 501(c)(three) status, an arts organization should be prepared to draw several activities like to those approved by the IRS. In that location should be at least some educational component, whether through workshops, classes, online publications or tutorials, or other means. It is helpful to show engagement with the public or local customs through complimentary exhibits or performances, and to focus on art that lacks mainstream commercial viability. Lastly, an organization founded or run by artists should make sure to focus on a wide variety of artists rather than just its founders or members.

Virtually the Writer: Benjamin Takis is the founder and primary attorney of Taxation-Exempt Solutions, PLLC. He may be reached at btakis@taxexemptsolutions.com.

Disclaimer: This publication is provided for educational and informational purposes only and does non contain legal advice. Accordingly, you lot should non human activity on any data provided without consulting legal counsel. To comply with U.S. Treasury Regulations, we as well inform yous that, unless expressly stated otherwise, any taxation advice contained in this publication is not intended to be used and cannot exist used by any taxpayer to avert penalties under the Internal Revenue Code, and such advice cannot exist quoted or referenced to promote or market to another political party any transaction or thing addressed in this publication.

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Source: https://itsartlaw.org/2014/05/27/visiting-the-non-profit-side-on-qualifying-for-501c3-status-as-an-arts-organization/

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