Here’s what the Internal Revenue Service says:
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).
Organizations whose primary focus is literary or educational are exempt from the corporate income tax (they are also typically exempt from state property taxes, but that is a state government matter). An orchestra or museum qualifies as an educational institution, and this is not at all unreasonable: they educate the public about music and the arts.
Here is the IRS, again:
It has long been the position of the Service that “cultural” type organizations qualify for recognition of exemption under IRC 501(c)(3). S.M. 1176, C.B. 1, 147 (1919), holds that an association organized and operated exclusively for the purpose of giving musical concerts of an educational character is exempt.
Similarly, I.T. 1475, C.B. 1-2, 184 (1922), holds that a corporation organized to maintain a band for the purpose of giving free public concerts and to promote musical art is exempt as an educational organization. Example (4) of Reg. 1.501(c)(3)-1(d)(3)(ii) provides that museums, zoos, planetariums, symphony orchestras, and other similar organizations are examples of educational organizations. Building on the regulations example, Rev. Rul. 64-175, 1964-1 (Part 1) C.B. 185, holds that an organization whose main activity is producing plays and making classic plays of the theater available in cities and colleges throughout the United States by means of a permanent touring repertory theater company of the highest professional standards, qualifies for exemption under IRC 501(c)(3). Similarly, in Rev. Rul. 64-174, 1964-1 (Part 1) C.B. 183, an organization that assisted local communities in establishing their own repertory theaters was held to be exempt under IRC 501(c)(3). Also, Rev. Rul. 73-45, 1973-1 C.B. 220, holds that an organization formed to develop a community appreciation for drama and musical arts by sponsoring professional presentations such as plays, musicals and concerts qualified for exemption under IRC 501(c)(3). Promotion of jazz festivals and concerts was held to be educational in Rev. Rul. 65-271, 1965-2 C.B. 161. Educating individuals in group harmony singing was also deemed an exempt activity in Rev. Rul. 66-46, 1966-1 C.B. 133. An organization that conducted weekly workshops, sponsored public concerts, and secured paid engagements for young musicians and singers interested in acquiring concert experience was held to be exempt under IRC 501(c)(3) in Rev. Rul. 67-392, 1967-2 C.B. 191. Finally, in Rev. Rul. 79-369, 1979-2 C.B. 226, the Service held that an organization created to develop and promote an appreciation of contemporary symphonic and chamber music by recording and selling, primarily to educational institutions, new works of unrecognized composers as well as neglected works of more established composers, was exempt under IRC 501(c)(3).
I wrote about why nonprofits of all sorts are exempt from the corporate income tax here, and why it is that nonprofit opera companies and food banks receive the same tax treatment in terms of exemptions and the deductibility of private contributions here.
We might think these are good or bad public policies, but there they are.
Thank you, Michael. I stand corrected, according to that document. But, in looking at the entirety of your link, I can see that the IRS disagrees with the court’s rulings and notes that, at least in one important case, the sale of art can and should be subject to unrelated business income tax. To the IRS, the whole area of nonprofit art vs commercial art appears to be an open question, decided case by case.
Even so, the reality — that in 2023 and beyond, arts organizations have been tagged as non-essential by the public — remains. As such, if they take it upon themselves to act as charities (mitigating or eliminating a community problem) and be deemed essential to their communities, they have the best chance not to go belly-up, as so many are continuing to do. Ticket sales are still a commercial activity, and as such, a luxury. They don’t measure their charitable impact, saying that it can’t be done. And they use commercial metrics such as attendance (like the New York Yankees), positive economic impact (like Applebee’s), and national test score research (which is interesting, but not relevant to any single arts organization unless they test their students as well) to try to prove worth, all of which are specious arguments at best.
Yes, arts organizations can be 501(C)(3)s. They already are. It’s an easy designation to receive, and honestly, the IRS and the courts don’t have the time or manpower to deal with the impact. And as arts organizations, they can do exactly what they’ve been doing. Ultimately, though, it doesn’t prove worth to a public that has options in its giving choices. The proof is in the disaster whirlpool that currently is sucking so many of them down the bankruptcy drain.
When nonprofit arts organizations act as commercial ventures with some token education work, they violate the spirit of the initial act, as the IRS initially determined. They were not wrong, merely overruled by the courts, according to their own document.