Differentiating 501(c)(3) Public Benefiting Art Museums from 501(c)(7) Social Clubs

March 22, 2023

By Yuha Jung, PhD

This article compares the differences between 501(c)(3), community benefiting nonprofits, and 501(c)(7), social clubs, and applies them to discussing legal obligations in the field of art museums that are mostly 501(c)(3) tax-exempt organizations. In doing so, it critically discusses how museums must differentiate themselves from social clubs in order to afford the wider tax benefits that are given only to 501(c)(3) nonprofits. These wider tax benefits include exemption from federal income taxes^[1] and often state taxes (e.g., income tax, property tax, excise tax) as well as tax deductions enjoyed by their donors under § 170(c)(2).^[2] While this article consults the tax codes and regulations and uses empirical evidence for arguments, it includes critical and theoretical arguments of how art museums should serve diverse public to differentiate themselves from social clubs and remain worthy of tax benefits they currently enjoy. Below, the article (1) shares brief background information on the practice of art museums, (2) presents major differences between 501(c)(3) and 501(c)(7) based on the tax codes and regulations, (3) applies them to the current practice of art museums, especially regarding the “no private benefits” provision, and (4) proposes an affirmative community benefit standard to rectify any possible deviations of museum practice from being qualified as public benefiting nonprofits.

Art Museums in the United States

While there are a few examples of public (e.g., Smithsonian museums) and for-profit (e.g., International Spy Museum) museums, the majority of museums in the United States—especially art museums—are nonprofit organizations with a 501(c)(3) status.^[3] This means that most museums in this country are considered charities described under both § 501(c)(3) and § 170(c)(2), receiving most tax benefits among 29 different classifications of tax-exempt organizations described in 501(c).^[4] While there are many statutory, organizational, and operational tests charitable organizations need to satisfy in order to get maximum tax benefits afforded under both § 501(c)(3) and § 170(c)(2),^[5] they exist to ensure that they serve the wider general public in exchange for extensive tax benefits. One specific provision that this article focuses on is the “no private benefit” provision; 501(c)(3) organizations must provide wider public benefits.^[6] The extensive tax benefits afforded to charities in exchange for providing public benefits are not given to other types of nonprofits, for example, 501(c)(7) social clubs because they do not provide services to wider classes of people.

Differences between 501(c)(3) and 501(c)(7) Organizations

Section 501(a) states that “[a]n organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 501 or 503.”^[7] Under 501(c), both 501(c)(3) and 501(c)(7) organizations are qualified for tax-exemption. Section 501 defines 501(c)(3) organizations as “… organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition.”^[8] Museums fall under the educational exemption category.^[9] Section 501 defines social clubs as “organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.”^[10] Prime examples of 501(c)(7) organizations are country clubs, fraternities and sororities, and hobby clubs, which benefit their members only.

Therefore, while they are both 501(c) tax-exempt organizations, one of the main differences is who they serve, which warrants further tax benefits only afforded to 501(c)(3) organizations. In other words, 501(c)(7) organizations are not qualified for donor tax deduction because it is not described in §170(c).^[11] “The tax code treats social clubs least favorably of all mutual benefit organizations”^[12] because it serves only the members of the organization for a narrow recreational or interest purpose. A club derives exclusive “mutual benefit” among members by sharing costs, characteristics, or goods.^[13] Therefore, club goods are either excludable to nonmembers or priced higher to those who do not belong to the club.^[14] This built-in exclusiveness in membership distinguishes clubs from public benefit organizations that are open to the public. To demonstrate the stark difference between their publicness and exclusiveness, assets of public benefit organizations are distributed to other public benefit organizations when they are dissolved,^[15] whereas the assets of closing clubs can go to the members of the entity.

No Private Benefit Provision of 501(c)(3) Museums

While § 501(c)(3) does not specifically mention private benefits restrictions,^[16] it is found in the Treasury Regulation § 1.501(c)(3)-1(d)(1)(ii), which prohibits an organization from operating “for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.”^[17] No private benefits provision—unlike the no private inurement provision that only applies to people directly involved with the organization such as board members, employees, and their families—can be applicable to anyone.^[18] Lacking a public purpose and benefiting a small group of people could violate this provision.^[19]

The practice of many museums has been more like a social club, where a certain group of people feel belonging and are comfortable visiting. Many art museums in this country have been practicing exclusivity (not in a sense of being exempt for exclusive purposes but in a sense of excluding certain groups of people) that is more aligned with the practice of 501(c)(7) organizations. It is widely known and criticized that museum visitors, board, staff, and donors are homogeneous. For example, their visitors often consist of white, wealthy, older, and well-educated people.^[20] The National Endowment for the Arts’ most recent arts participation survey stated that about 27% of white adults in the US visited an art museum or gallery compared to only 17% of black adults visiting the same.^[21] The link between museum participation and higher socioeconomic status is well documented, as well.^[22] People who govern and manage them (especially upper level positions) share very similar characteristics culturally, socioeconomically, and educationally.^[23] Their collections and represented artists mimic this trend. A majority of mainstream art museum collections remain white and male with 85% of represented artists being white and 87% male.^[24]

This point about museums acting more like clubs can be further illustrated when looking at how museum donors are also the ones who use the museum. For example, in a homeless shelter, the donors and main beneficiaries (users) of the organizational service rarely overlap. Yet in museums, some board members donate money or works of art in exchange for opportunities to network with members of their class.^[25] Additionally, if one takes a look at most museums’ membership structure that gives free admission or discounts to museum store purchases to members, nonmembers pay the regular price which is set higher for them. Social clubs must be supported by membership fees, dues, and assessments.^[26] Most museums’ governance make-up and membership structure could be seen as a characteristic of a 501(c)(7) social club rather than a 501(c)(3) charitable nonprofit.^[27]

In American Campaign Academy v. Commissioner,^[28] the court found that the taxpayer was violating the no private benefits provision when it primarily served one political party over the other, and the evidence lacked in trying to be nonpartisan. The case stated that “the administrative record and the partisan affiliation of the candidates served fail to establish that the petitioner broadly distributed its secondary benefits among political entities and candidates in a nonselect manner.”^[29] If this same logic were to apply to museums, they primarily serve a white, wealthy, and highly-educated class of people; acting more like a club, by not affirmatively reaching out to different classes of people who are currently not using their services, they are therefore possibly violating the no substantial private benefits provision. In General Counsel Memorandum 39862 (Nov. 21, 1991),^[30] even indirect or unintentional private benefits can jeopardize a taxpayer’s tax exemption status. While a charity could have a class of people who require specific service from the charity indefinitely (e.g., homeless shelter serving homeless people indefinitely),^[31] the group that primarily benefits from museum services could not be a charitable class because art museums’ exempt purposes are not to benefit white, wealthy, and educated people to be further educated through the preservation, display, and research of dominant art.

Future Directions

Are art museums then providing public benefits? Or are they representing and serving a class of people not reflecting the diversity of the public? As described above, some practices of many nonprofit art museums could be more aligned with the qualities of social clubs rather than public benefiting nonprofits, which may mean that many art museums could be violating the no private benefit implied in § 501(c)(3) and articulated in CFR § 1.501(c)(3)-1(d)(1)(ii). What can art museums do to avoid pitfalls and become more aligned with the Congressional intent of § 501(c)(3), providing public benefits to broad ranks of people in society and not just a select few? Given the long history of art museums that have been catering to certain groups of people, we know that change may require affirmative action or community benefit standards, just like those that nonprofit hospitals have adopted. While art museums do not provide imminent or otherwise critical health care to people, they nonetheless can provide “human care” that make people “human” through the preservation, appreciation, and learning of arts and culture.

The suggested community benefit standard below is designed to combat structural problems that have led to the accessibility issues of arts in the art museum sector. For example, there is an empirically positive link between diversity of arts nonprofit boards and their community and public serving activities.^[32] Paying close attention to museum board composition, therefore, has potential to change museums’ core activities and who they can attract. It is also focused on providing actual community benefits broadly, not just specific services that could be counted as benefiting a few members from the community. The benefit standards are as follows:

• Nonprofit museums should demonstrate that they provide benefits to diverse classes of people broad enough to benefit the community and operate to serve a public interest
• Establish free membership and admission options for those who are unable to pay
• Maintain a board of directors drawn from the community that is representative of the community’s broader demographics
• Maintain staff who reflect the community population
• Devote resources to further diversify its collection and programming efforts and research more equitable ways to present plural arts and cultural values
• Offer more educational services to diverse communities, including school-aged children
• Conduct ongoing program and performance evaluations for achieving continued effectiveness of services

A genuine and long-lasting change usually requires a cultural and structural change that has to come from within each museum as well as a policy change that can lead to wide-spread transformation. Without internal cultural change accompanied, policy and legal enforcement may not be sufficient. If the standard provides specific action steps that are designed to trigger structural and systemic change, we may be able to motivate museums to change from within. Berg in her article said, “We might think creatively about how to employ the current structure in a way most beneficial to the community, since, after all, community benefit is the purpose of providing tax exemptions.”^[33]

About the Author

Dr. Yuha Jung is an associate professor and director of graduate studies of Arts Administration at the University of Kentucky. She is currently pursuing a part-time JD at the University of Kentucky J. David Rosenberg College of Law. She is also an associate editor for the journal Museum Management and Curatorship and a board member for the Association of Arts Administration Educators. Her research focuses on systems theory, organizational culture, and cultural diversity in arts and culture organizations. Her recent monograph, Transforming Museum Management: Evidence-Based Change through Open Systems Theory, was published in 2022. To learn more about her qualifications and publications, visit her website and faculty page.

Additional Readings

• E. Alex Kirk, The Billionaire’s Treasure Trove: A Call to Reform Private Art Museums and the Private Benefit Doctrine, 27 Fordham Intell. Prop. Media & Ent. L.J. 869 (2017). Available at: https://ir.lawnet.fordham.edu/iplj/vol27/iss4/4
• John, Leila, Museums and the Tax Collector: The Tax Treatment of Museums at the Federal, State, and Local Level, University of Pennsylvania Journal of Business Law, (2013), Available at https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1442&context=jbl
• Muir, Elisha, “Museums and the Tax Code: A Fraught Friendship” (2019). Thesis. Rochester Institute of Technology, Available at https://scholarworks.rit.edu/cgi/viewcontent.cgi?article=11292&context=theses
• Takis, Benjamin, Art Law Visiting the Non-profit Side: On Qualifying for 501©(3) Status as an Arts Organization Center for Art Law (2014), Available at: https://itsartlaw.org/2014/05/27/visiting-the-non-profit-side-on-qualifying-for-501c3-status-as-an-arts-organization/
• Social Clubs, IRS, Available at: https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs

1. I.R.C. § 501(c)(3). ↑
2. I.R.C. § 170(c)(2). ↑
3. Roland Kushner & Randy Cohen, National Arts Index 2016: An Annual Measure Of The Vitality Of Arts And Culture In The United States: 2002-2013, at 43 (2016), https://www.americansforthearts.org/sites/default/files/NAI%202016%20Final%20Web%20Res.042216.pdf. ↑
4. David Brennen, Darryll Jones, Beverly Moran & Steven Willis, The Tax Law of Charities and Other Exempt Organizations 3 (4th ed. 2021). ↑
5. See Brennen, supra note 4, at 4. ↑
6. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). ↑

7. I.R.C. § 501(a). ↑

8. I.R.C. § 501(c)(3). ↑
9. Treas. Reg. § 1.501(c)(3)-1. ↑
10. I.R.C. § 501(c)(3). ↑
11. I.R.C. § 170(c)(2). ↑
12. See Brennen, supra note 4, at 653. ↑
13. Richard Cornes & Todd Sandler, The Theory of Externalities, Public Goods and Club Goods (1986). ↑
14. Roland Kushner & Arthur E. King. Performing Arts as a Club Good: Evidence from a Nonprofit Organization. 18 J. Cult. Econ. 15, 16 (1994). ↑
15. Treas. Reg. § 1.501(c)(3)-1(b)(4). ↑
16. See Brennen, supra note 4, at 331. ↑
17. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). ↑
18. See Brennen, supra note 4, at 331-32. ↑
19. Easter House v. United States, 12 CI. Ct. 476, 490 (1987). ↑
20. See generally Betty Farrell & Maria Medvedeva, Demographic Transformation and the Future of Museums (2010); David Fleming, Positioning the Museum for Social Inclusion, In Museums, Society, Inequality, at 213 (Richard Sandell, ed., 2002); Richard Sandell, Museums as Agents of Social Inclusion, 17 Museum Management and Curatorship, 401 (1998). ↑
21. NEA (National Endowment for the Arts). U.S Patterns of Arts Participation: A Full Report from the 2017 Survey of Public Participation in the Arts 36 (2019). https://www.arts.gov/sites/default/files/US_Patterns_of_Arts_ParticipationRevised.pdf; Notice that this accounts for visits to art museums or galleries, which include for-profit galleries. ↑
22. See NEA, supra note 21, at 36; Catherine D. D. Bowman, Adrianna Adkins, Brooke L. Owen, Kyle J. Rogers, Edgar Escalante, Judd D. Bowman, Brian C. Nelson & Alison Stoltman, Differences in visitor characteristics and experiences on episodic free admission days, 35 Museum Management and Curatorship 265 (2019); See Farrell & Medvedeva, supra note 20, at 14. ↑
23. See generally Farrell & Medvedeva, supra note 20; See generally Fleming, supra note 20. ↑
24. Chad M. Topaz, Bernhard Klingenberg, Daniel Turek, Brianna Heggeseth, Pamela E. Harris, Julie C. Blackwood, C. Ondine Chavoya, Steven Nelson & Kevin M. Murphy, Diversity of Artists in Major US Museums, 14 PLOS ONE 1 (2019) ↑
25. Alexandra Olivares & Jaclyn Piatak. Exhibiting Inclusion: An Examination of Race, Ethnicity, and Museum Participation, 33 Voluntas 122 (2022); See generally Francie Ostrower, Trustees of Culture Power, Wealth, and Status on Elite Arts Boards (2002). ↑
26. Social Clubs, Internal Revenue Service, (Aug. 18, 2021), https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs. ↑
27. See Kushner & King, supra note 14, at 16. ↑
28. American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). ↑
29. Id., 1077. ↑
30. GCM 39862 (IRS GCM), 1991 WL 776308. ↑
31. Publication 3833 (Rev. 12-2014), https://www.irs.gov/pub/irs-pdf/p3833.pdf. ↑
32. Young-Joo Lee, Nonprofit Arts Organizations’ Pursuit of Public Interests: The Role of Board Diversity, 12 Nonprofit Policy Forum 563 (2021). ↑
33. Jessica Berg, Putting the Community Back into the Community Benefit Standard, 44 GA. L. REV. 430 (2010). ↑