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

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.